3 Dec 2019
KENYA: New Finance Law Enacted
Income from sales on digital platforms in Kenya will now be subject to tax, one of a number of changes introduced under The Finance Act, 2019.
Uhuru Kenyatta, President of the Republic of Kenya, has officially signed the Act into law, which amends various existing tax regulations in the country. The new Act comprises a number of specific sections that deal with income tax; value-added tax; excise duties; tax procedures; and miscellaneous fees and levies. Published in the Official Gazette on 7 November 2019, the bulk of its provisions come into effect from that date, with a few deferred until 1 January 2020.
The law has implications for foreign companies trading with or investing in Kenya. Income arising from sales generated on a ‘digital platform’ – defined as a platform that enables the direct interaction between buyers and sellers of goods and services through electronic means – will become eligible for tax. The relevant cabinet secretary has been tasked with drafting the regulations and designing the mechanisms for such taxes.
Shipping is also affected by the new legislation. The tax on demurrage and other penalties are now included in the taxable income of shipping lines embarking cargo from Kenya, at a rate of 2.5%. According to a KPMG analysis, this small amount is likely to be greeted with relief by export and import players, as it follows the related withdrawal of 20% withholding tax on demurrage. There may be some implementation challenges, given that the tax is expected to be paid by non-resident ship owners and may therefore require tax representation in Kenya for it to be accounted for.
The Act also clarifies the status of withholding tax (WT) on reinsurance. Previously, it was unclear whether WT was applicable on re-insurance premiums paid to non-residents. The new law has now introduced an obligation to withhold tax on such premiums, except on those paid in respect to aircraft. Other sectors that have had WT lifted include security services, transportation of goods, advertising, and marketing services. The previously grey area of whether exempt income, such as dividends and interest on infrastructure bonds, was not subject to tax has now also been confirmed as exempt.
Capital gains tax accruing from the transfer of property because of a transaction involving the restructuring of a corporate entity is also broadly exempted, which should lower the cost of doing business through consolidation or mergers and acquisitions.
Value added tax (VAT) has also seen some changes, with exemptions on plant, machinery and equipment used in plastics recycling plants; electric accumulators and accessories; supply of various foodstuffs; components for the manufacturing of motherboards; musical instruments and equipment for educational purposes; and some solar equipment, upon the recommendation of the cabinet secretary for energy.
The new law also reduces withholding taxes on VAT from 6% to 2%, but the government has increased import declaration fees and the railway development levy up to 3.5% and 2% respectively, which is likely to add to the costs of importing goods. Procedures for foreigners to open bank accounts have also been simplified.