INCOME TAX BILL, 2018

Transcription

1 INCOME TAX BILL, 2018 ALERT ALGERIA BOTSWANA ETHIOPIA GUINEA KENYA MADAGASCAR MALAWI MAURITIUS MOROCCO MOZAMBIQUE NIGERIA RWANDA SUDAN TANZANIA UGANDA ZAMBIA REGIONAL OFFICE: UAE ASSOCIATE FIRM: SOUTH AFRICA

2 A New Dawn The Income Tax Bill, 2018 The long awaited Income Tax Bill, 2018 (the Bill) has been released for public participation. The Bill proposes to overhaul the Income Tax Act, (CAP.470) (the ITA) and makes massive changes to the current regime. The National Treasury has indicated that it is in the process of reviewing the ITA with the aim of simplifying compliance and aligning it to international best practice within the Kenyan business context. The National Treasury has also indicated that the review of the ITA is in line with the Government s Big Four Agenda to enhance the growth of the economy. The National Treasury has welcomed contributions from stakeholders and members of the public on or before 24 May We are in the process of reviewing the Bill and therefore a more comprehensive review of the new proposed regime will follow. In the meantime we have set out below a highlight of the key changes that are proposed to be introduced by the Bill. The content of this alert is intended to be of general use only and should not be relied upon without seeking specific legal advice on any matter INCOME TAX BILL 2018 PAGE 2

3 Imposition of income tax The Bill has retained a source based taxation system, contrary to the wide expectation that the Government would seek to introduce a worldwide or remittance based taxation system. The sources of income previously set out under section 3 (2) of the ITA remain largely similar to those set out under the new section 5 (2) of the Bill. The key highlights include: Thin capitalisation rules: A reduced debt to equity ratio of 2:1 has been proposed for foreign controlled 1 companies. This will affect the deductibility of both realised foreign exchange losses and interest; Compensating tax: Compensating tax as it exists in the ITA is proposed to be abolished. Instead, a new tax of 30% will be levied in any instance where a company pays a dividend to its shareholder out of profits that have not been taxed. It is not clear how this provision will be applied in practice, for instance where capital gains have been taxed at a rate lower than 30%; Dividends: The definition of dividends has been expanded to cover any instances where a shareholder derives a benefit from a company, including situations where loans are paid off by a company on behalf of the shareholder or where a company s taxable income is reduced or taxable losses are increased as a result of a transaction with a shareholder; Furthermore, where a dividend received by a resident company that holds directly/ indirectly more than 25% of the shares of the underlying company shall be exempt from tax. The threshold of 25% has been increased by the Bill from 12.5%; Repatriated income: The Bill proposes to bring to tax at the rate of 10% any notional repatriated income of a non-resident person who carries on business in Kenya through a permanent establishment in Kenya. The notional repatriated income is calculated as the difference between the net assets at the beginning of the year less the net assets at the end of the year, taking into regard the profit after tax for the relevant year. It is unclear how this provision is intended to apply in practice, as it may unintentionally capture a diminution in value of net assets unconnected with a repatriation of assets; 1 The Bill proposes to modify the concept of control whereby a person is said to be in control of a company where they hold more than 20% of the voting rights of the company. The concept of control has also been expanded to include indebtedness, power to appoint more than 50% of the board of directors/members of a company, intellectual property rights and influence on supply of goods, prices or markets. INCOME TAX BILL 2018 PAGE 3

4 Presumptive tax: A new development for individuals engaged in business is the introduction of a presumptive tax at a 15% rate of the single business permit fee issued by a County Government. Ascertainment of total income As a general issue, the Bill proposes to combine the current sections 15 and 16 of the ITA which deal with allowable and disallowable expenses, into one under section 24 of the Bill. Key changes to this part of the Bill include: While the carry forward period for tax losses has been retained at ten years, a further extension can be obtained for a further period of no more than 2 years with the approval of the Cabinet Secretary on the recommendation of the Commissioner; Curiously, tax losses are lost where there is a change of more than 50% in the shareholding of the loss carrying company or where there is a change in business activity (in whole or in part) which gave rise to the losses; The beneficiaries of the estate of a sole proprietor who had tax losses at the time of his death, can now inherit the tax losses in such proportion as may be dictated by the will or the process of succession; Transactions designed to avoid tax liability: While a general anti-avoidance provision exists under section 23 of the ITA, demonstration of a justifiable commercial purpose would have rendered the provision inapplicable. Under the Bill, a new section 34 seeks to introduce a broader anti-avoidance provision which will capture any transaction entered into with the intention (including an ancillary intention) to reduce or avoid the liability to tax; Non-distribution of dividends: The Bill proposes to empower the Commissioner to direct that an amount of not less than 60% of the accounting profits of a company be distributed as a dividend to the shareholders where the Commissioner is of the opinion that such profits can be so distributed without prejudice to the requirements of the company s business and where the company has not made such distribution within a period not exceeding 12 months. Rates, deductions, set-off and double taxation relief The Bill proposes a number of changes for rates of tax. Notably: A new higher rate of tax of 35% is proposed to be introduced for any individuals earning more than KES 9 million per annum (KES 750,000 per month); The Capital Gains Tax rate is proposed to be increased from 5% to 20%. However, indexation is proposed to be introduced; The current Export Processing Zone corporate tax rate of 0% has been increased to 10% for the first 10 years; INCOME TAX BILL 2018 PAGE 4

5 Double tax relief: The Finance Act, 2014 introduced a restriction on utilising double tax relief except where more than 50% of the underlying ownership was held by individuals resident in the other DTA Contracting State. This provision has now been enhanced in line with recent OECD recommendations and international tax developments which now seek to restrict double tax relief to only those entities that meet a new substance test, in addition to the 50% underlying ownership test. Please refer to Appendix I which sets out key changes in rates of tax. Exempt income Any exemption granted under the current ITA will remain in force for a period not exceeding 3 years from the commencement of the Bill. The Bill is silent on whether a new application would have to be made after the 3 years. Investment allowance The Bill proposes to introduce an investment allowance which will replace the various existing capital allowances, such as industrial building deduction, investment deduction, wear and tear deduction and farm-work equipment deduction. Notable changes in the capital allowance rates include: a. The 150% investment deduction allowance is proposed to be abolished with a standard rate of 100% for equipment used in the process of manufacture; b. The 100% hotel investment allowance is proposed to be granted over a 5 year period with 60% granted in the first year of use and 40% over the next 4 years; and c. 10% per annum on commercial buildings from the current 25% per annum. Please refer to Appendix II which sets out the key changes in investment deductions. Capital Gains Tax The Fifth Schedule to the Bill proposes to introduce the following changes to the Capital Gains Tax (CGT) regime: Introduction of Indexation System: An indexation system based on the Consumer Price Index (the CPIA) (as published by the Kenya National Bureau of Statistics) is proposed to be introduced. However, it should be noted that for properties acquired before 1 January 2015, the Bill provides that the CPIA shall therefore be for December It is unclear whether the inflation adjustment shall be limited to 2014 onwards regardless of the period when the property was acquired. INCOME TAX BILL 2018 PAGE 5

6 CGT Exemptions: It is noteworthy that restructuring transactions by private entities will only be exempt from CGT where such restructuring is undertaken pursuant to a legal or regulatory requirement, as a result of directive or compulsory acquisition by the Government or in the public interest and approved by the Cabinet Secretary for Finance. Further, the Bill also proposes to grant an exemption from CGT in respect of property transferred to a Real Estate Investment Trust (REIT), a very welcome move which is expected to promote uptake of REITs in the property market. Payment date: The Bill has proposed that the due date for payment of CGT should be on or before the date of the transfer is effected at the Lands Office. This is a peculiar proposal given the fact that a similar provision in the ITA has been declared unconstitutional by the High Court. Taxation of cross-border transactions The Bill seeks to replace the provisions of section 18(3) of the ITA and the Income Tax (Transfer Pricing) Regulations 2006 with a new Eighth Schedule on Taxation of Cross Border Transactions. The key aspects to be noted are as follows: Transactions between resident companies and non-resident companies (including unrelated entities) situated in preferential tax regimes (defined as regimes that have tax rates of less than 16% or which do not have effective exchange of information arrangements or do not allow access to banking information or lack transparency) to be on an arm s length basis; There is a requirement for country-by-country reporting by any ultimate parent entity which is not the ultimate parent of a multinational enterprise that is resident in Kenya; and Loans and transactions undertaken by a capital-rich entity which undertakes low level functions in Kenya and which does not control the financial risks associated with the funding activities, shall not be allocated the profits associated with those risks but instead shall be entitled to no more than a risk-free return. Any person engaged in transactions which are subject to the provisions of the Eighth Schedule must keep contemporaneous documentation available for submission to the KRA upon request. Failure to provide documentation will result in a penalty of 2% of the value of the transactions involved in addition to other taxes and penalties; INCOME TAX BILL 2018 PAGE 6

7 General penalty enhanced The general penalty has been enhanced from KES 100,000 to KES 1 million and the term of imprisonment increased from 6 months to 3 years. Legislative process The Bill will go through various legislative processes commencing with public participation through public hearings, followed by debate by the National Assembly through various House committees and plenary readings. It shall thereafter be subjected to a vote by the whole House of the National Assembly and, if approved, shall be sent to the President for Presidential Assent. Typically, this process takes anywhere between 3 months to 9 months, depending on the parliamentary calendar. Conclusion It should be noted that the Bill is still under review and will no doubt be amended in the coming weeks and months following the public participation and parliamentary processes. The draft Income Tax Bill can be accessed on We believe that the National Treasury has taken an important new step in the modernisation of Kenya s tax legislation. We shall continue to provide you with updates as this process continues. INCOME TAX BILL 2018 PAGE 7

8 APPENDIX I Key Changes to the Rate of Tax No. Item ITA Current Rate Bill Rate Comment 1 Individual tax rates A new higher tax rate is proposed to be introduced for persons earning over KES 9 million per annum 2 Non-resident person with a PE in Kenya 30% 35% 37.5% 30% However, where the income is in excess of KES 500 million the applicable rate will be 35% 3 Export Processing Zone Enterprise (EPZ) Rates not applicable to for the first 10 years from date of Exempt 10% EPZ entities first operation; and licensed before for the next 10 years 25% 15% enactment of the Bill 4 Commission or fee paid to any person for the provision of insurance business: brokers; and 5% 5% all others. 10% 5% INCOME TAX BILL 2018 PAGE 8

9 No. Item ITA Current Rate Bill Rate Comment 5 Capital gains tax 5% 20% However, indexation is proposed to be introduced. 6 Interest or discount from bearer instruments or other sources bearer instrument other than a Government bearer bond of at least two years government bearer bond of at least two years duration and other sources bearer bonds with a maturity of ten years and above 7 Rental income for non-resident persons (charged on the gross rent) 25% 15% 15% 15% 10% 15% 30% 20% 8 REIT investment income paid to resident persons; REIT investment income paid to non-resident persons rate dependent on whether payment is interest or dividend in nature 5% 10% INCOME TAX BILL 2018 PAGE 9

10 APPENDIX II Key Changes to Investment Allowances Item ITA Current Rate Bill Rate Buildings 1 Commercial buildings 25% 10% 2 Hotel building 10% 60% in the first year of use and the remaining 40% over a period of four years 3 Building used for manufacture 100% 100% in the first year of use 4 Petroleum gas storage facilities 150% for liquefied petroleum storage facilities with a minimum capital investment of KES 4 billion 60% in the first year of use and the remaining 40% over a period of four years 5 Educational buildings 50% 10% per annum in equal 6 Hospital buildings - 100% Machinery 7 Machinery (including power generation equipment) used for manufacture 100% 100% 8 Hospital equipment 100% 9 Ships or aircrafts 12.5% 60% in the first year of use. 10 Residual value in respect of ships or aircrafts 25% 50% per annum in subsequent years in equal 11 Earth-moving equipment 37.5% 25% per annum in equal INCOME TAX BILL 2018 PAGE 10

11 Item ITA Current Rate Bill Rate 12 Computer and peripheral computer hardware and software, calculators, copiers and duplicating machines 30% 25% per annum in equal 13 Furniture and fittings 12.5% 10% per annum in equal 14 Telecommunications equipment 20% 10% per annum in equal 15 Filming equipment by a local film producer licensed 100% 50% per annum in equal by the minister responsible for communication 16 Other machinery - 10% per annum in equal Other Items 17 Purchase or an acquisition of an indefeasible right 5% 10% per annum in equal to use fibre optic cable by telecommunication operator. 18 Farmworks 100% 100% INCOME TAX BILL 2018 PAGE 11

12 THE TEAM Should you have any queries or need any clarifications with respect to the Income Tax Bill, 2018, please do not hesitate to contact Daniel Ngumy, Kenneth Njuguna or the Tax team at Daniel Ngumy Partner Kenneth Njuguna Senior Associate E: E: INCOME TAX BILL 2018 PAGE 12

13 Anjarwalla & Khanna 3rd floor, The Oval Junction of Ring Road Parklands & Jalaram Road Westlands Nairobi, Kenya T info@africalegalnetwork.com