Overview of Kenya Finance Bill 2021/2022

On 5th May 2021, the Finance Bill 2021/2022 was published by the CS, National Treasury. The Bill proposes several amendments to various taxes and duties.

The proposed changes will affect the following Acts;

  1. The Income Tax Act,
  2. The Value-Added Act,
  3. The Excise Act,
  4. The Tax Procedures Act,
  5. Miscellaneous Fees and Levies Act.

In contrast to last year’s bill, the Finance Bill 2021 aims to streamline a raft of new taxes that were introduced in 2020. A breakdown of the same is shown below;

The Income Tax Act

The Finance Act of 2021 has introduced new definitions in the Act as follows;

Definition of Control

The Finance bill proposes to widen the definition of the word “Control” as follows;

  • A person is deemed to exercise control if they hold at least 20% of the voting rights in a company, directly or indirectly. Previously, this has been at 25% as provided under the Income Tax Act.
  • When a loan advanced by a person constitutes at least 70% of the total asset of another person, then the lender shall be deemed to have control. This however excludes a loan from a financial institution.
  • Where a guarantee for indebtedness
  •  Includes at least 70% of the total indebtedness of the other person, then the guarantor shall be deemed to have control over the other party. This excludes guarantee from a financial institution.
  • A person owns or has the exclusive rights over the intellectual property on which another person is wholly dependent on for their manufacturing or goods processing, articles or business carried on by other person.
  • A person that supplies at least 90% of the sales to another person, influences the price or any other condition for the sales of the other person shall be deemed to exercise control.

Currently, the Income Tax Act does define control in relation to a corporate body to mean the holding of shares or voting power of 25% or more.

Permanent Establishment

The Bill expands the meaning of Permanent Establishment to include;

  • A fixed place of business where business is wholly or partly carried on and includes a place of management, a branch, an office, a factory, workshop, a mine, an oil or gas well, a quarry or any other place of extraction or exploitation of natural resources, a warehouse for business providing storage facilities to others, a farm, a plantation or other place where agricultural, forestry plantation or related activities are carried on and a sales outlet.
  • A building site, construction, assembly or installation project or any supervisory activity connected to the site or project, but only if it continues for a period of more than 183 days.
  • The provision of services by a person through employees or other personnel engaged for that purpose, but only where the services or connected business in Kenya, continue for a period of or exceeding in aggregate 91 days in any 12-month period commencing or ending in any year of income concerned. This shall also include the consultants providing services on behalf of non-residents.
  • An installation or structure used in the exploration for natural resources that continue for a period of not less than 91 days.
  • A dependent agent of a person who acts on their behalf in respect of any activities which that person undertakes in Kenya including habitually concluding contracts, or playing the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the person.

A PE shall not include;

  • The use of facilities solely for the purpose of storage or display of goods belonging to an enterprise.
  • Maintenance of a stock of goods belonging to an enterprise solely for the purpose of storage or display.
  • Maintenance of a stock of goods belonging to an enterprise solely for the purpose of processing by another enterprise.
  • Maintenance of a fixed place of business solely for the purpose of purchasing goods or collecting information for the enterprise.
  • Maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity.
  • Maintenance of a fixed place of business solely for any combination of using it solely for storage purposes or for purpose of carrying on any other activity

Currently, the Income Tax Act defines a Permanent Establishment to mean a fixed place of business in which that person wholly or partly carries on business, a building site, or a construction or assembly project, which has existed for six months or more shall be deemed to be a fixed place of business. In relation to individuals, a dependent agent of a person who acts on their behalf in respect of any activities which that person undertakes in Kenya

Charge of tax on digital income

The Finance Bill proposes that income (digital service) tax shall be charged on income accrued from a business carried out over the internet or an electronic network including through a digital marketplace.

The Bill is also redefining Digital Marketplace to mean an online platform that enables users to sell or provide services, goods or other property to other users. Currently, a digital marketplace is a platform that enables the direct interaction between buyers and sellers of goods and services.

Deadline for Submitting returns and Paying Digital Service Tax

The Bill proposes to clarify the deadlines for submitting digital service tax. A person subject to Digital service tax shall submit and pay the tax due to the Commissioner on or before the 20th day of the month following the end of the month in which the digital service was offered.

This reaffirms the position as provided by the Income Tax (Digital Service Tax) Regulations of 2020. Currently, DST is payable at the time the payment of the service is made to the service provider.

Limiting DST to non-residents persons

The Finance Bill also proposes to limit the persons subject to Digital Service Tax to the non-residents only. Currently, DST is applicable to both resident and non-residents.

Thin Cap Rules

The Bill also proposes that thin capitalization shall apply to the gross interest paid or payable to related persons and third parties in excess of 30% of EBITDA (Earnings before Interest, Taxes, Depreciation & Amortization). This shall apply to;

  1. Interest on all loans
  2. Payments that are economically equivalent to interest.
  3. Expenses incurred in connection with raising the finance.

Provided; an amount of deemed interest where the person is controlled by a non-resident person alone or together with not more than 4 other persons and where the company is not a bank or a financial institution licensed under the Banking Act.

Currently, thin cap applies on the interest payments in proportion to the extent that the highest amount of all loans held by the company at any time during the year of income exceeds three times the sum of the revenue reserves and the issued and paid-up capital of all classes of shares of the company. This is except for the extractive sector which is capped at the ratio of 2;1.

Country-by-Country Reporting for Multinational Enterprises (CBC reporting)

The Bill proposes to introduce country by country reporting through Section 18B in the Income Tax Act. Currently, there is no country-by-country requirements for the multinationals operating in the country.

The Bill defines multinational enterprise group to include two or more enterprises which are resident in different jurisdictions including an enterprise that carries on business through a permanent establishment or through any other entity in another jurisdiction.

An ultimate parent entity is an entity that is resident in Kenya, not controlled by another entity and owns or controls a multinational enterprise group.

An ultimate parent entity of a multilateral enterprise group shall submit to the Commissioner a return describing the group’s financial activities in Kenya and in all other jurisdictions where the group has taxable presence, not later than 12 months after the last day of reporting financial year of the group.

The return shall contain group’s aggregate information including amount of revenue, profit or loss before tax, income tax paid and accrued, stated capital, accumulated earnings, no. of employees and tangible assets (other than cash & cash equivalent) in each jurisdiction in which the group operates.

This changes the dynamics on how multinational enterprises groups with branches and Permanent Establishments have been operating in the country. This will enable KRA to comprehensively perform a transfer pricing risk assessment and other risks associated with profit shifting for group enterprises.

Tax Losses Carried Forward Indefinitely

The Bill proposes to amend the period of carrying forward tax losses from a period of 10 years to an indefinite period. This is until a company fully utilizes the losses.

Tax Rebates for employers engaging graduates on apprenticeship programs

The Bill proposes to extend the tax rebates to employers who also engage graduates from technical and vocational education and training institutions. Currently, employers who are eligible for these rebates are those who engage at-least 10 university graduates on apprenticeship program of 6 to 12 months.

Straight Line basis for Capital Allowance

The Bill proposes that the deduction on Investment allowance is done in equal instalments after the first year of use. Currently, the Second Schedule of the Income Tax Act provides a deduction of the balance of investment allowance after the first year of use on a reducing balance for the subsequent years.

Investment Allowance to All Electricity Producers

The Bill proposes to amend the definition of manufacture under the Second Schedule by deleting ‘through the national grid’. This means all companies in the business of generating and distributing electricity both off-grip and through the national grid shall qualify for investment allowance.

Currently, the Act defines manufacture to include transformation and distribution of electricity through the national grid.

Withholding Tax Rates for the Extractive Sector

See the tabulation below;

Description Current Rate Proposed Rate
Withholding Tax on service fee paid by contractors to non-resident sub-contractor in respect of mining or petroleum operations 5.625% 10% Effective from 1st July, 2021
Withholding tax on service fee paid by a licensee to a non-resident subcontractor in respect of mining or petroleum operations 5.625% 10% Effective from 1st July, 2021
Withholding tax on service fee paid by a contractor to anon-resident person in respect of management, training or professional fees. 12.5%   10% Effective from 1st July, 2021

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