Tax RetreatAugust 2019

2

• Key tax policy changes

Direct tax changes

Finance Bill 2019

Income Tax Bill

Transfer pricing

Indirect tax measures

Contents

2

3

Finance Bill 2019Direct Tax Measures

3

4

Issues Details

Capital Gains Tax • To be increased from 5% to 12.5%.

• Property transferred as part of group restructuring to be automatically exempted from CGT where such reorganization does not involve transfer to a third party.

• Exemptions also available for transfers that arise due to legal or regulatory requirement or Government directive or compulsory acquisition by Government.

• Transfers deemed to be in the public interest may be exempted upon approval by the CS for the National Treasury.

Taxation of digital economy

• Renewed emphasis on the taxation of the digital economy.

• Income chargeable to tax defined to include income accruing through a digital marketplace.

• We expect further guidelines relating to taxation of digital transactions.Compensating Tax • Clarification that a distribution of any income that is exempt under the Income

Tax Act is exempt from compensating tax.

Finance Bill 2019

5

Issues Details

Taxation of demurrage charges

• Clarification that the taxable income of a non-resident owner of ship, which docks at any port in Kenya includes demurrage charges. The charges will be taxable through the self-assessment mechanism.

30% rebate on electricity

• The framework on the implementation of the 30% rebate on total electricity costs by manufacturers that was introduced through the Finance Act 2018 has now been developed.

Exemptions • The Bill proposes to amend the Income Tax Act in order to exempt the following incomes from taxation:

o The income of Investee companies of Real Estates Investment Trusts (REITs).

o The income of the National Housing Development Fund.

Reduced corporate tax rate (15%) – plastic recycling plants

• A company operating a plastics recycling plant to be liable to a reduced corporate tax rate of 15% for the first 5 years from the year of commencement.

Finance Bill 2019

6

Issues Details

Repeal of Section 72D • Repeal of Section 72D of the Income Tax Act, which stipulated a 20% penalty for non-payment of tax after the due date.

• This clarifies that the 5% penalty introduced through the Finance Act 2018 to apply going forward.

Withholding tax changes • Scope of qualifying services subject to withholding tax set to be expanded to include: Security, cleaning and fumigation, catering services offered outside hotel premises, transportation of goods excluding air transport services, sales promotion, marketing and advertising services.

• Reinsurance premiums paid to non-resident persons to be liable to 5% withholding tax.

• Demurrage charges paid to non-resident ship operators to no-longer be subject to withholding tax – to be taxed under self assessment.

• Management or professional fees, interest and royalties paid by a PE to its head-office to be liable to withholding tax to the extent that they are deductible for corporate tax purposes under a double taxation agreement (DTA).

Finance Bill 2019

7

Issues Details

Personal taxes • Turnover tax (3% payable monthly) re-introduced on the turnover of resident persons not exceeding KES 5 million p.a. Not applicable to companies, rental income, management or professional fees and income subject to final withholding tax. Presumptive income tax (introduced through the Finance Act, 2018) will continue to apply to such income but will be an advance tax available for set-off against the turnover tax payable.

• Youths registered under the “Ajira Digital Program” will be required to pay a registration fee of KES 10,000 for the next three years and will be exempt from income tax during this period.

• The affordable housing relief to be computed at 15% of the employee’s contribution. The previous base of 15% of the employee’s gross emoluments has been repealed.

Finance Bill 2019

8

Issues Details

Requirement for PIN • A person can now apply to the Commissioner to be exempted from obtaining a PIN to undertake the transactions specified in the First Schedule of the Tax Procedures Act (including opening of a bank account).

• It is now a requirement to have a PIN in order to qualify for the following registrations:

o Registration and renewal of membership by professional bodies and other licensing agencies; and

o Registration of mobile cellular pay bill and till numbers by telecommunication operators.

Penalties and interest • For purposes of recovery and collection of tax, withholding tax will be considered to be a tax of the withholder – and the amount will be liable to penalties and interest.

• The base for computing late filing penalty to be reduced by any tax paid and withholding tax credits.

• Tax shortfall penalty to apply only where the shortfall is as a result of deliberate omission.

Finance Bill 2019

9

Issues Details

Objection decision • Commissioner allowed additional period to issue objection decision where further information is requested from a taxpayer after filing an objection. The 60 days to run from the date the additional information is received.

Listing under GEMssegment

• SMEs that list under the Growth and Enterprise Market (GEMS) segment at the NSE to be granted amnesty for penalties and interest covering the period preceding the date of listing. Payment of principal tax and full disclosure of assets, income and liabilities for preceding 2 years required.

Tax representatives • Travel prohibition orders may be issued against a tax representative where the Commissioner is of the view that a tax is or will become payable by a company for which he is a tax representative.

Finance Bill 2019

10

Issues Details

Income Tax Bill • The CS indicated that the Bill is currently at advanced stages of legal drafting and will be tabled in Parliament soon. Some of the changes expected are:

o Taxation rates – Tax of 35% could be introduced on taxable income above KES500m;

o Changes on the taxation of a branch;

o Limitation on the carry forward of tax losses;

o Deductibility of certain expenses;

o Thin capitalization rules;

o Taxation of dividends e.g. the 12.5% participation exemption to be increased to 25%

o Computation of capital allowances – reduction in some rates and application of straight line basis;

o Taxation of per diems and ESOPs;

o Termination compensation and non-cash benefits;

o Taxation of bonuses and overtime;

o Definitions to provide clarity and extension of scope; and

o Income of non-resident telecommunication companies

Finance Bill 2019

11

Transfer pricingDoris Gichuru

11

12

Issues Details

Master file • Key information about the group's global operations including a high-level overview of a company’s business operations along with important information on a company’s global transfer pricing policies with respect to intangibles and financing.

Local file • Information and support of the intercompany transactions that the local company engages in with related parties.

Country-by-Country Reporting (CbCR)Template

• Key financial information on all group members on an aggregate country basis with an activity code for each member.

New documentation guidelines: a 3-tiered approach

13

Issues Details

Adoption of CbCR • Adopted by Nigeria, South Africa, Gabon and proposed in Kenya

• Sharing of information by revenue authorities

Anti-avoidance measures • Transactions with both related and third parties in low tax or tax free-jurisdictions to be subject to TP (Kenya)

6th TP method• 6th TP method (UN model & recommended by ATAF)

• Nigeria, Zambia and Kenya have introduced a 6th Method for commodity transactions

Stiffer TP penalties • TP Penalties in Kenya, Tanzania and Nigeria

o Penalty of 2% of the value of the controlled transaction for failure to maintain contemporaneous TP documentation

Recent developments in Africa post BEPS

14

Issues Details

Other changes • Restrictions on deduction of related party payments

o Rwanda service fees limited to 2% of revenue

o Nigeria royalties limited to 5% of EBITDA

ATAF • Involvement at the OECD on BEPS actions and the role of developing countries

• Developed model TP rules/ regulations and audit guide for African revenue authorities

Recent developments in Africa post BEPS

15

Indirect tax measuresLilian Kubebea

15

16

VAT

16

17

Issues Details

Withholding VAT (WHVAT) reduced rate

• Proposal to reduce the rate of WHVAT from 6% to 2%. Likely impact includes the following:

o Curbing cases of accumulating WHVAT credit, and

o Better cash flow management for affected taxpayers.

Imported services scope expanded • Proposed inclusion of non-registered persons under the purview of imported services

• VAT law needs to be harmonised for this proposed change to work

• Does this take away the need to appoint a tax representative for non-resident’s supplying services to non-registered persons in Kenya?

Digitally supplied supplies • Clarification that the charging section of the VAT law also covers supplies made through digital market places

• We view this as a clarification as digitally provided supplies are still chargeable to VAT even without this proposed change

Finance Bill, 2019

18

Issues Details

List of exempt suppliesexpanded/altered

• Proposal to introduce the following items in the exemption schedule:

o Inputs for electric accumulators and separatorso Agricultural pest control products – Initially exempt, became

taxable through Finance Act, 2018o Locally manufactured motherboardso Inputs for the manufacture of motherboardso Plant, machinery and equipment used in the construction of a

plastics recycling planto Exempt tractors to no longer include road tractors for semitrailers.

Zero-rating denatured ethanol • Proposal to zero-rate the supply of denatured ethanol.

Finance Bill, 2019

19

Issues Details

Alteration of the VAT refunds formula

Regulation on export of services amended

• Regulation 13 has been amended so that it is no longer critical to look at the location of the payer for services in determining whether they qualify as exported

• The initial reading of the regulation was very restrictive and did not conform to international best practice.

The Value Added Tax (Amendment) Regulations, 2019

20

Excise duty

20

21

Issues Details

General penalty • Introduction of a general penalty not exceeding KES 2 million for offences where no penalty is specified in the Act.

Inflationary adjustment • Amendment of the effective date for inflationary adjustments from 1 July to 1 October of every year.

Other fees charged by financial institutions

• Insurance premium or premium based commissions exempted from excise duty to be restricted to those specified in the Insurance Act or Regulations.

Excise duty on betting activities • Introduction of excise duty on betting activities at 10% of the amount of money placed by a person for an outcome in a betting transaction.

• The time of supply for betting transactions to be the time when a person wagers or stakes money on the platform provided by a bookmaker.

Increase in excise duty rates • Increase of excise duty rates on cigarettes, wines and spirits by 15%.

Excise duty on plastic shopping bags

• Removal of excise duty on plastic shopping bags.

Finance Bill, 2019

22

Issues Details

Changes to excise duty on motor vehicles

• Increase in excise duty on motor vehicles of a capacity between 1500cc and 2500CC (Diesel engines) and 3000cc (petrol engines) from 20% to 25%.

• Increase in excise duty on petrol engine motor vehicles of a capacity exceeding 3,000cc and diesel engine powered motor vehicles exceeding 2500 cc from 30% to 35%.

• Reduction of excise duty on Fully-powered electric motor vehicles from 20% to 10%.

Finance Bill, 2019

23

Other changes

Legal Notice 109 of 2019

• Specific excise duty rates adjusted by the average monthly inflation rate for the financial year 2018/2019 of 5.15% effective 1 July 2019

• Legal Notice 109 dated 9 July 2019.• Questions on the implementation date?

Implementation of EGMS phase II

• Phase II to cover bottled water and non-alcoholic beverages• KRA conducting public participation before planned roll out on 1 Sept 2019• Court of Appeal matter on legality of EGMS Regulations still pending

Excise Duty Regulations 2019

• Drafted for comments by the public

24

Customs

24

25

Customs Changes

EAC Gazette 2019

• Stay of application on various goods to protect local industries.

• Duty remission on various inputs to reduce cost of manufacturing.

• Changes to exemption provisions relating disabled persons.

The Standards (Verification of Conformity to Kenya Standards of Imports Order), 2018

• Requirement to obtain CS approval before goods imported without a CoC are inspected in Kenya.

• Destination penalty increased from 15% to 20%.

Comprehensive review of the EAC CET

• Agreed criteria on classification of goods i.e. Finished goods, Intermediate goods, raw materials and capital goods and goods for differentiated categorization

• Decision to adopt a 4 band structure – 30% or 35% under discussion

• Proposal to do away with stays of application

• Deadline for finalization of the review set for 30 October 2019

26

Customs Changes

Comprehensive review of the EACCMA and EACCMR

• Experts have agreed on proposed changes made by Partner States including inter alia:

• Regulations on advance rulings, Single Customs Territory

• Review of various penalties and fines

• Requirements on licensing of clearing agents

• Deadline for finalization of the review set for September 2019

Updates of TFTA

• TFTA Agreement signed by 22 Countries

• 14 ratifications required for the TFTA to take force.

• So far only Kenya, Egypt, Uganda, SA and Rwanda have ratified the Agreement

Updates on AfCTA

• Entered into force on 1 May 2019 upon ratification by 22 countries

• So far 27 countries have ratified the Agreement

• 54 countries have signed the Agreement

• Trading under AfCTA expected to commence on 1 July 2019

27

Miscellaneous Fees and Levies

27

28

Miscellaneous Fees and Levies

Finance Bill, 2019

• Refund of anti-adulteration levy paid on kerosene used for manufacture of paints and resins.

• Reduction of IDF on raw materials and intermediate goods imported by approved manufacturers from 2% to 1.5%.

• Increase in IDF on imported goods from 2% to 3.5%.

• Increase in RDL on imported goods from 1.5% to 2% except for raw materials and intermediate goods imported by approved manufacturers.

• Introduction of export levy on tanned or crust hides and skins at 10%.

Miscellaneous Fees and Levies Regulations

• New IDF Form introduced

29

Questions & answers

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms.

Deloitte provides audit, consulting, financial advisory, risk management, tax and related services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries and territories, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte’s more than 286,200 professionals are committed to becoming the standard of excellence.

© 2019. For more information, contact Deloitte Touche Tohmatsu Limited.