TAX HIGHLIGHT THE FINANCE ACT 2018

Transcription

1 TAX HIGHLIGHT THE FINANCE ACT 2018 OCTOBER 2018

2 INTRODUCTION The Finance Act, 2018 was assented to by the President on 21st September The Act introduces various taxation measures in support of the Big Four Agenda which is government s main focus for the fiscal year 2018/2019. Through the Big Four Agenda, the Government targets to boost manufacturing activities, enhance food and nutrition security, achieve universal health coverage and support the construction of at least 500,000 affordable houses by Following the mandatory public participation and after deliberation of the Finance Bill 2018 (the Bill ) in Parliament, the Bill was sent to the President for assent. The President sent back the Bill to Parliament with a memorandum proposing certain changes, all of which were contentiously adopted by the National Assembly on 20th September 2018 and the Finance Act was passed into law on 21st September The main tug of war between the National Assembly and the Executive arose from the initial decision by the National Assembly to extend the exemption of VAT on petroleum products by another two years, an initiative which was not acceptable to the Executive due to the effect that it would have had on the budget estimates. Based on the Provisional Collection of Taxes and Duties Order, 2018 made by the Cabinet Secretary of the National Treasury and published on 21st June 2018, a number of the tax provisions in the Finance Act, 2018 have an effective date of 1st July However, in a ruling delivered by Justice Okwany in Petition No 253 of 2018, it was held that..the Finance Bill 2018, or any parts or provisions thereof, including on taxation, cannot be implemented before the Bill becomes the Finance Act after it goes through the parliamentary legislative process laid out in the Constitution for approval and adoption by Parliament, and assent by the President. Accordingly, any tax provision whose effective date is prior to 21st September 2018 could be challenged on the basis that it creates a tax obligation in retrospect. It remains to be seen the position that the Kenya Revenue Authority will take with respect to periods prior to the enactment of the Finance Act. We now highlight the key amendments introduced by the Finance Act, Tax Highlight The Finance Act 2018

3 INCOME TAX DIVIDEND INCOME The Income Tax Act is amended to provide that the following transactions will be considered to be a payment of dividend: (a) cash or assets distribution to or for the benefit of a shareholder or any person related to the shareholder; (b) discharge from any obligation measurable in money which is owed to a company by that shareholder or related person; (c) an amount used by a company in any manner for the benefit of the shareholder or any related person to that shareholder; (d) where the company settles any debt owed by a shareholder or any person related to that shareholder to any third party; and (e) where an amount representing additional taxable income or reduced assessed loss of a company by virtue of any transaction with the shareholder or related person to such shareholder resulting from an adjustment. Effective date: 1st July 2018 Analysis: This amendment increases the number of transactions that would be considered dividends to include distributions and payments made to persons who are related to the shareholder. It is noteworthy that these transactions are not limited to instances where the distribution or payments have been made on behalf of the shareholder to related parties. This therefore creates an interesting new dynamic where a company will need to keep track of transactions that it undertakes with persons related to its shareholders. The simple write-off of a debt could be construed to be payment of a dividend and subject to withholding tax. A person related to a shareholder is also not defined and can lead to an extremely wide interpretation. TAXATION OF DIVIDEND DISTRIBUTED OUT OF UNTAXED PROFITS Taxation of dividends that are distributed out of untaxed profits shall be subjected to corporation tax at the rate of 30%. This replaces the compensating tax mechanism which was not only complex but could potentially subject dividends to tax of up to 42% of the dividend that is paid out. Effective date :1st January 2019 Analysis: Companies will no longer be required to create and maintain a Dividend Tax Account for purposes of payment of Compensating Tax. Although the revised formula is straight forward, no guidance has been provided on how the credits from the compensating tax mechanism will be transitioned to the new taxation model as this could potentially create challenges for tax payers. This new formula however still penalizes dividends paid out by companies that do not pay tax on account of tax incentives. If a company cannot pay out dividends because it has claimed tax incentives, then it undermines the Government s efforts to use tax incentives to spur growth in the economy as investors will realize that any incentives will be clawed back when they attempt to pay out dividend TAXATION OF DEMURRAGE CHARGES PAID TO NON-RESIDENT SHIP OPERATORS The Income Tax Act is amended to provide for withholding tax to be deducted on the gross demurrage charges paid to non-resident ship operators at the rate of 20%. Demurrage charges has been defined to mean the penalty paid for exceeding the period allowed for taking delivery of goods, or returning of any equipment used for transportation of goods. Effective date: 1st July Analysis: While this is a new provision and essentially introduces taxes on demurrage in Kenya, the KRA had previously argued that demurrage amounts to payment for the use of the ship operators equipment and sought to subject it to withholding tax at the rate of 15% applicable for lease of equipment from non-resident persons. The introduction of a contrary definition of demurrage charges is likely to frustrate any attempt to tax demurrage charges paid before the effective date of this provision. TAXATION OF INSURANCE PREMIUMS PAID TO NON-RESIDENT INSURANCE PROVIDERS The Income Tax Act is amended to provide for withholding tax at the rate of 5% to be deducted on the gross insurance premium paid to non-resident insurance companies not having a permanent establishment in Kenya. The withholding tax will however not apply to insurance premiums paid for insurance of aircraft. Effective date: 1st July Analysis: This amendment is aimed at making local insurance business more competitive and to encourage persons to take covers that are available in Kenya. 03

4 TAXATION OF CAPITAL GAINS FROM TRANSFER OF PROPERTY BY INSURANCE COMPANIES The Income Tax Act is amended to clarify that gains arising from the transfer of all property by an insurance company other than property connected to life insurance business shall be subject to Capital Gains Tax. INTRODUCTION OF PRESUMPTIVE TAX TO REPLACE TURNOVER TAX The provisions of the Income Tax Act relating to turnover tax have been repealed and replaced with presumptive tax. Presumptive tax will apply to all resident persons whose turnover from business does not exceed Kshs 5,000,000 during a year of income and who are issued or are liable to be issued with a business permit or trade licence by a County Government. The presumptive tax rate shall be 15% of the amount payable for the business permit or trade licence, and shall be due at the time of payment or renewal of the permit or license. It will also be a final tax. Presumptive tax shall however not apply to income derived from management and professional services, rental business or incorporated companies. A person liable for this tax may elect, by notice in writing to the Commissioner to be exempted from the imposition of presumptive tax and instead be subject to tax based on the other provisions of the Income Tax Act. Effective date: 1st January Analysis: This amendment is aimed at promoting tax compliance in the informal sector by entrepreneurs and businessmen following the failure of the turnover tax regime to capture this sector. The presumptive tax payable will be significantly lower than the income tax payable by an employee in formal employment and may need to be reconsidered to ensure that the burden of tax is shared fairly as per Article 201 of the Constitution of Kenya. TAX INCENTIVE FOR ELECTRICITY COSTS BY MANUFACTURERS The Income Tax Act is amended to provide for tax allowable deduction equal to 30% of the electricity cost incurred by manufacturers. This deduction will be in addition to the normal allowable deduction for electricity expense and is subject to conditions set by the Ministry of Energy. Effective date: 1st January Analysis: This is an incentive for the manufacturing industry, and is in effect a subsidy on electricity costs. Eligibility is subject to conditions to be set by the Ministry of Energy. Manufacturers may want to follow up to ensure the conditions are issued timeously and that they get an opportunity to provide their input. REDUCED TAX RATES FOR COMPANIES ENGAGED UNDER A SPECIAL OPERATING FRAMEWORK ARRANGEMENT WITH THE GOVERNMENT The Income Tax Act is amended to allow a company engaged in business under a special operating framework arrangement with the government to pay tax at a rate to be specified in the arrangement. Effective Date: 1st January 2019 Analysis: This move by the Government is geared towards facilitating investments by targeted investors by providing special fiscal incentives. This provision however gives the government wide and unfettered powers to amend the tax rate without the input or oversight of the legislature which may be abused. TAXATION OF WINNINGS The Tax Laws (Amendment) Act reintroduced WHT on winnings at the rate of 20% effective 1st July It amended the definition of the term winnings to mean the positive difference between payout made and stakes placed in a given month, for each player, payable to punters by bookmakers licensed under the Betting, Lotteries and Gaming Act. The Finance Act, 2018 has again amended the definition of winnings to include winnings of any kind and that a reference to the amount or payment of winnings shall be construed accordingly. The effect of this new definition is that WHT will now be imposed on the gross winnings payable by all sectors governed by the Betting, Lotteries and Gaming Act, that is: Betting, Lotteries, Gaming and Prize Competition. The law has also been amended to provide that the tax on winnings shall be paid into the Sports, Arts, and Social Development Fund. Effective Date: 1st July 2018 Analysis: The definition under the Tax Laws (Amendment) Act, restricted the taxation of winnings to net winnings in the betting sector. The amendment under the Finance Act, 2018 has the effect of imposing the WHT on gross winnings. 04 Tax Highlight The Finance Act 2018

5 VALUE ADDED TAX VAT ON FUEL This tax proposal was, by far, the elephant in the room in the process leading to the enactment of the Finance Act. The exemption of VAT on petroleum products lapsed on 1st September 2018 after which these products became subject to VAT at the rate of 16%. The Finance Act, 2018 has however reduced the rate of VAT applicable to these products to 8%. Effective Date: The later of the date of assent of the Finance Act 2018, or the date of gazettement of the Supplementary Appropriation (No.2) Act, It is should however be noted that the Energy Regulatory Commission has already released new pump prices, effective 21st September 2018, reflecting the 8% VAT on fuel, though the Supplementary Appropriation (No.2) Act, 2018 has not been gazetted. Analysis: There was public outcry against the introduction of VAT on fuel products due to the expected resultant increase in the cost of living. The government in response not only reduced the rate to 8% but also reduced the taxable value by excluding excise duty, fees and other charges. VAT STATUS OF VARIOUS SUPPLIES With effect from 1st July 2018, the following changes were made to the 1st Schedule (Exempt supplies) and 2nd Schedule (Zero rated supplies) to the Value Added Tax Act: a. Goods and services that are no longer exempt from VAT plant and machinery classified under Chapters 84 and 85 of the East Africa Community Common External Tariff Guide, that are not for use in the manufacture of goods garments and leather footwear manufactured in an Export Processing Zone at the point of importation into Kenya the supply of maize (corn) four, cassava flour, wheat or meslin flour and maize flour containing cassava flour by more than 10% in weight-these are instead covered under zero-rated supplies transportation of cargo to destinations outside Kenya b. Goods and services that are now exempt from VAT wheat, meslin and barley seeds specialized equipment for the development and generation of wind and solar energy goods used to equip specialized hospitals, subject to eligibility guidelines to be issued by the Cabinet Secretary responsible for health fodder products for animal feeding made from Tariff Nos , and of the East Africa Community Common External Tariff Guide equipment used in construction of grain storage facilities alcoholic or non-alcoholic beverages supplied to the Kenya Defense Forces Canteen Organization goods and services imported or purchased locally for direct and exclusive use in the implementation of projects under a special operating framework arrangement with the Government hearing aids parts imported or sourced locally for assembly of computers subject to approval by the Cabinet Secretary for Treasury upon recommendation by the Cabinet Secretary responsible for matters relating to information technology postal services provided including supply of postage stamps, rental of post boxes or mail bags one personal motor vehicle, excluding buses and minibuses of seating capacity of more than eight seats, imported by a public officer returning from a posting in a Kenyan Mission abroad and another vehicle for his or her spouse, to specified conditions c. Goods and services that are now zero rated the supply of maize (corn) flour, cassava flour, wheat or meslin flour and maize flour containing cassava flour by more than 10% weight various medicaments of tariff no , , and of the East Africa Community Common External Tariff Guide 05

6 EXCISE DUTY The following changes to the Excise Duty Act shall take effect on 1st July 2018: INFLATIONARY ADJUSTMENT The Commissioner shall make an inflationary adjustment of the specific rate of excise duty once every year instead of after every two years as previously provided. The adjustment shall be undertaken at the beginning of every financial year. Excise duty rates are therefore likely to increase every year. Effective Date: 1st July 2018 Analysis: KRA had published The Excise Duty Act (Adjustment of Rates for Inflation) Schedule, 2018 (LN.NO. 164 OF 2018) in the Kenya Gazette on 13th July The Legal Notice was however annulled by the National Assembly on 29th August 2018 for not meeting requirements stipulated in the Statutory Instruments Act, 2013 SUSPENSION OF LICENCES The procedure for suspension of a licence by the Commissioner has been amended to provide for circumstances where the Commissioner may suspend a licence without notice to include cases in which the licensee has engaged in tax fraud, has been found in possession of, or using counterfeit stamps on excisable goods or has been found in possession of goods bearing counterfeit stamps. Effective Date: 1st July 2018 Analysis: This provision purportedly denies the licensee the right to be heard to offer any objection or defence before their license is suspended. PENALTIES FOR OFFENCES Introduction of a minimum monetary policy The penalty for manufacturing excisable goods in Kenya or importing certain excisable goods that require excise stamps without obtaining a licence will be the higher of KShs 5,000,000 or double the excise duty payable. Effective Date: 1st July 2018 Analysis: The amendment has set a minimum penalty payable for failure to hold a licence when undertaking certain activities in an effort to ensure compliance. b. Forfeiture of goods, plant or materials to the Commissioner Any plant, excisable goods or materials in respect of which an offence has been established in relation to certain offences under the Excise Duty Act shall be forfeited to the Commissioner. These offences are in relation to specified licensing offences including-failure to acquire a licence, failure to conspicuously display a licence, failure to notify the Commissioner when a licensee ceases to carry on the activity for which the license is issued, and removal of excisable goods from the place designated for affixing stamps before the affixation of stamps, among others. Effective Date: 1st July 2018 Analysis: Forfeiture of plant, excisable goods or materials would be excessive for some of the minor offences such as failure to display a licence. For the significant offences, the Excise Duty Act has other monetary penalties which are sufficient. EXCISE DUTY ON SPECIFIC COMMODITIES The following new rates shall apply effective 1st July 2018 increase of excise duty rate on private passenger motor vehicles whose engine capacity exceeds 2500cc for diesel powered vehicles and 3000cc for petrol powered vehicles from 20% to 30% excise duty on water has been limited only to bottled water or similarly packaged waters increase of excise duty on illuminating kerosene from Kshs. 7,205 to Kshs. 10,305 per 1,000 litres introduction of excise duty of Kshs. 20 per kg on sugar confectionary (sweets) and chocolate increase of excise duty on fees charged for money transfer services by cellular phone service providers from 10% to 12% increase of excise duty on fees charged for money transfer services by banks, money transfer agencies and other financial service providers from 10% to 20% of the excisable value; and increase of excise duty on other fees charged by financial institutions from 10% to 20% Analysis: These amendments reflect a general increase in tax rates and shows that the Government is clearly looking more to excise duty for revenue generation. The proposed robin-hood 06 Tax Highlight The Finance Act 2018

7 EXCISE DUTY tax of 0.05% of any transfers of any amount exceeding KShs. 500,000 by banks, money transfer agencies and other financial service providers, which the government sought to introduce, was rejected by parliament GOODS EXEMPT FROM EXCISE DUTY The following excisable goods shall be exempt from Excise Duty effective 1st July 2018 alcoholic or non-alcoholic beverages supplied to the Kenya Defence Forces Canteen Organization goods imported or purchased locally for use in the implementation of projects under special operating framework arrangements with the Government one personal motor vehicle, excluding buses and minibuses of seating capacity of more than eight seats, imported by a public officer returning from a posting in a Kenyan Mission abroad and another vehicle for his or her spouse, subject to conditions contained in the Excise Duty Act 07

8 TAX PROCEDURES ACT The following changes to the Tax Procedures Act shall take effect on 1st July 2018: EXTENSION OF TIME TO SUBMIT A TAX RETURN The Tax Procedures Act is amended to provide for a time limit within which an application for late submission of a tax return can be made. The application must be made at least 15 days before the due date for the monthly return and at least 30 days before the due date with respect to annual return. The Commissioner must respond to this application no later than five days before the due date, and where no notification is received, the application shall be deemed to have been granted. Only one extension may be granted to an applicant in respect of a tax period and the applicant shall not be liable to pay penalties in relation to late submission of returns once granted the extension. However, the extension will not alter the due date for payment of taxes EXTENSION FOR AMNESTY PERIOD FOR TAXABLE INCOME OUTSIDE KENYA A tax amnesty was introduced in fiscal year 2016/2017 for taxpayers who earned taxable income outside Kenya for any year of income ending on or before the 31st of December This amnesty only applied where the tax was declared for the year 2016 and the taxpayer submits the returns and accounts relating to the year 2016 on or before 31st December The Finance Act, 2017 subsequently extended the timeline for filing from 31st December 2017 to 30th June The Tax Procedures Act has now been amended to further extend the deadline for declaring taxable income relating to foreign sources and repatriating the same back to Kenya in order to enjoy tax amnesty from 30th June 2018 to 30th June Further, the amnesty period has been extended to cover up to 31st December To encourage uptake of the amnesty provisions, funds repatriated will be exempt from the provisions of the Proceeds of Crime and Anti-money Laundering Act or any other Act relating to reporting and investigation of financial transactions. This exemption, however, will not extend to proceeds from terrorism, poaching or drug trafficking. Analysis: The exemption of the funds from the provisions of the Proceeds of Crime and Anti-money Laundering Act or any other Act relating to reporting and investigation of financial transactions is a surprising move and undermines the Government s efforts to fight corruption and money laundering. PENALTIES AND INTEREST the penalty for late payment of value added tax and excise duty has been included in the Tax Procedures Act and will be 5% of the tax payable or KShs 10,000, whichever is higher the penalty for late payment of any other tax for persons other than individuals has been set at 5% of tax payable or KShs 20,000, whichever is higher the penalty for late payment of any other tax for individuals has been reduced from KShs 20,000 to KShs. 2,000 or 5% of the tax payable, whichever is higher the penalty for late payment of taxes by any person has been set at 5% of the tax due and payable the Commissioner now can remit or waive penalty or interest of any amount below KShs 1,500,000 without seeking prior approval of the Cabinet Secretary. Analysis: Bringing all the penalties under the Tax Procedures Act provides clarity and ease of administration 08 Tax Highlight The Finance Act 2018

9 OTHER AMMENDMENTS MISCELLANEOUS FEES AND LEVIES ACT a) The Government has introduced an anti-adulteration levy on all imported illuminating kerosene at the rate of Kshs. 18 per litre of the import value of the product. Effective date: 1st October Analysis: The intention is to curb the adulteration of diesel with kerosene as the levy brings the cost of kerosene at par with that of diesel. b) The Government has also introduced an exemption from import declaration fee and railway development levy on goods imported fro implementation of projects under special operating framework arrangement with the Government. Effective date: 1st July 2018 CONTRIBUTION TO THE NATIONAL HOUSING DEVELOPMENT FUND The Employment Act has been amended to introduce a mandatory requirement for employers and employees to contribute to the National Housing Development Fund. The employer and employee s contribution shall each be at a rate of 1.5% of the monthly basic salary but the total contribution shall not exceed Kshs 5,000. Employers are required to remit the contributions by the ninth day of the following month. A penalty of 5% of the contributions shall be payable by the employer for late remittance of contributions to the fund. The contributions are to be used to finance the purchase of a house under government s Affordable Housing Scheme for employees who qualify. However, for employees who do not qualify to purchase a house under the scheme, they have various options for the transfer of the funds upon expiry of 15 years or upon retirement. Effective date: This provision will take effect upon the gazettement of regulations prescribing the requirements for qualification to the scheme. Analysis: This provision had been criticized as being unfair and unconstitutional since it places the burden of this tax only on persons employed in the private sector. STAMP DUTY ACT The Stamp Duty Act is amended to provide for exemption from stamp duty for the following: instruments executed for purposes of collection and recovery of tax instruments relating to the business activities of licensed special economic zone enterprises, developers and operators. Effective date: 1st October 2018 BETTING, LOTTERIES AND GAMING ACT The Betting, Gaming, Lotteries and Prize Competition taxes payable by operators was increased to 35% last year vide the Finance Act, The rate has now been reduced to 15% and the law has introduced late payment penalty and interest for these taxes at the rates of 5% and 1% per month respectively. Effective date: 1st July Analysis: The reduced tax rate is a welcome reprieve to players in this industry who had from the very onset objected to the tax in the basis that it was punitive and excessive. 09

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