Proposal title. Date. Budget 2015/2016. Economic and Tax focus

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1 Proposal title Date Budget 2015/2016 Economic and Tax focus

2 ont 2015 Economic outlook Business and Personal Taxation 1.1 Global Economic Outlook African Economic Outlook EAC Economic Outlook Kenyan Economic Outlook Sectoral Analysis Economic Outlook for 2015 and Beyond Proposed Budget Estimates Proposed Expenditure 2015/ Expenditure Allocation Proposed Expenditure Financing 9 2.1Capital Gains Tax Taxation of gains on property other than investment shares Tax loss Utilization Period Definition of training fees clarified Income from residential property Residential rental income tax Withholding tax on rent Tax amnesty for landlords Specified sources of Income Film Industry Payments made to actors and crew members Capital Deduction Rebate to employers with apprenticeship programs Capital Deductions Rates of taxes Corporation Tax rate Winnings from bookmakers The extractive Industry Taxation of Subcontractors 14

3 ents Indirect taxes 3.1 Value Added Tax Definitions Lodging of VAT claims Withholding VAT agents Change of VAT status List of exempt supplies expanded to include: Zero-rated supplies expanded to include Previously exempt supplies now taxable Customs and International Trade Amendments in relation to the EAC Common External Tariff (CET) Increases in CET rates Decrease in CET rates Stay of application of CET rates Duty Remission Harmonization of Export Duty on Hides and Skins Excise Duty Miscellaneous Bill, Tax modernization 4 Tax modernization 23 Financial Sector Amendments 5.1 Banking Act (Cap.488) Annual Licensing Minimum Core Capital Central Bank Act Insurance Act (Cap. 487) Minimum core capital Investment provisions Insurance agents Supervisory power of the Regulator 27 Miscellaneous provisions 61 Retirement Benefits Act Amendment of the Proceeds of Crime and Anti-Money Laundering Act Amendment to the Consumer Protection Act Exemption of Stamp Duty for Asset Transfer to REITs Road Maintenance Levy Fund Act 29 Regional Highlights 7.1 Uganda Tanzania Rwanda specific amendments 31

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5 2015 Economic Outlook

6 1.1 Global Economic Outlook Iceland Finland Norway Sweden Estonia Russia Canada Denmark Latvia Lithuania United States of America Bahamas Mexico British Virgin Islands Cayman Islands Dominican Republic Belize Jamaica Guatemala Honduras Barbados Aruba El Salvador Nicarogua Curacao Tobago Panama Trinidad Costa Rica Venezuela Ecuador Colombia Peru Bermuda Guyana Suriname French Guiana Ireland Neth. U. K. Poland Belarus Germany Isle of Man Jersey Belgium Czech Ukraine Guernsey Luxemburg Slovakia Kazakhstan Austria Hungary Moldova France Switz. Slovenia Romania Italy Serbia Montenegro Bulgaria Georgia Uzbekistan Spain Macedonia Albania Armenia Portugal Turkey Azerbaijan Greece Malta Cyprus Syria Tunisia Lebanon Iraq Afghanistan Morocco Israel Jordan Kuwait Pakistan Algeria Bahrain Western Libya Egypt Qatar Sahara U. A. E. Saudi Arabia Mauritania Mali Oman Niger Senegal Chad Sudan Gambia Djibouti Guinea Nigeria Bissau Ivory Ghana South Ethiopia Coast Sierra Leone Sudan Cameroon Liberia Somalia Equatorial Uganda Guinea Congo Gabon Kenya Democratic Republic of Congo Rwanda Seychelles Burundi Tanzania India Maldives Sri Lanka Mongolia China Laos Thailand Cambodia Vietnam Brunei Malaysia Indonesia South Korea Taiwan Philippines Japan Northern Mariana Islands Guam Brazil Comoros Bolivia Paraguay Chile Argentina Uruguay Angola Zambia Malawi Zimbabwe Mozambique Namibia Madagascar Mauritius Botswana Reunion Swaziland South Africa Lesotho Australia Fiji New Zealand In 2014, the Global economy expanded by 3.3% similar to the revised growth recorded in Major economies and different economic blocs registered divergent levels of economic growth as reported below: The United States of America s economy recorded a growth of 2.2% in 2014 compared to 1.7% in Improved growth rate was supported by expansionary monetary policy, high exports and increased domestic consumption. The Euro area GDP grew by 0.8% in 2014 compared to 0.4% recorded in The rebound is attributable to accommodative monetary policy, slowdown in fiscal consideration and eased inflationary pressure due to low oil prices. United Kingdom recorded an improved growth of 3.0% in real GDP in 2014 compared to 1.7% in This was largely driven by robust private consumption and strong business investment. Japan recorded a decelerated growth of 0.4% in 2014 compared to a growth of 1.5% in The slower growth was partly attributed to decreased domestic demand arising from an increase in consumption tax from 5.0% to 8.0% implemented in Emerging Economies of Brazil, Russia, Indonesia, India, China and South Africa (BRIICS) recorded a slower growth in GDP growth of 3.4% in 2014 compared to a growth rate of 4.5% in The slower growth rate was mainly attributed to weak external demand and weak private investment in Brazil, Russia and South Africa. Despite stagnant growth in global economy, economic activity in sub Saharan Africa was robust with the GDP estimated to have grown by 5.1% in 2014 compared to 4.4% in This was supported by increased external demand and strong growth in public and private investment. It is expected that in 2015 most developed and developing economies will experience improved growths subject to continued recovery of financial markets in EURO area, improved oil prices and expansion in world trade. More specifically, the world economy is projected to grow by 3.5% in 2015 according to the Kenyan Economic Survey. 1 Budget 2015/2016 Economic and Tax focus

7 1.2 African Economic Outlook EAC Economic Outlook Western Sahara Cape Verde Senegal Gambia Guinea Bissau Mauritania Morocco Mali Algeria Burkina Faso Ghana Guinea Togo Equatorial Guinea Sierra Leone Liberia Sao Tome Côte d Ivoire Gabon Congo Niger Libya Nigeria Central African Republic Cameroon Benin EY office No EY office,but support available Tunisia Egypt Chad Sudan Eritrea Angola Democratic Republic of Congo Burundi Zambia Zimbabwe Namibia Botswana South Africa South Sudan Ethiopia Kenya Rwanda Tanzania Swaziland Lesotho Uganda Djibouti Malawi Mozambique Somalia Seychelles Comoros Madagascar Mauritius Reunion Real GDP in the East Africa Region increased by 5.8% in 2014 compared to a 5.3% growth in The growth was supported by improved agricultural production coupled with strong domestic demand as well as infrastructural investments. The last three years EAC economies growth rates are reported below: Average GDP 0 On average Africa recorded a growth of 4.5% in 2014 compared to a growth of 4.0% recorded in Domestic demand, foreign direct investment, infrastructure and increased continental trade in manufactured goods led to improved Africa s economic growth. Kenya Tanzania Uganda Rwanda Burundi Average GDP 2013 Average GDP 2014 EAC Most Africa economies experienced low inflationary pressures due to low oil prices and declined food prices. These developments, together with prudent fiscal policies, led to reduced interest rates. However, in some other countries where fiscal policy was weak and exchange rate expanded, the monetary policy tightened to stem inflationary pressure. The Africa economy growth is expected to expand to 5% in The expansion will be supported by increased external and internal demand, expansion in public and private investment and low inflation. The positive outlook is, however, subject to some risks among them; large fiscal deficits in some countries and tighter global financial conditions, uneven global recovery and domestic security-related risks. The Africa economy growth is expected to expand to 5% in Budget 2015/2016 Economic and Tax focus 2

8 EAC region inflation dropped to an average of 5.6 %in 2014 from 6.4 % reported in 2013 mainly on account of reduced food and fuel prices. The region s current account deficit as a percentage of GDP worsened to 12.4 % in 2014 compared to 11.8 % in The future of EAC region looks promising due to interregional infrastructural development especially in road, railway and ICT. Further, continued integration is expected to increase economic activities in the Partner States. Consequently the EAC region is projected to register real growth of 6.2% in 2015 with Tanzania expected to record the highest growth of 7.0%. Macroeconomic Statistics for EAC Countries, 2014 Indicator Kenya TZ Uganda Rwanda Burundi Population (Mns) GDP at Constant Prices(US$ Bns ) Real GDP growth Inflation (%) Current A/C Balance (% of GDP) Sources: Economic Surveys 2015 & Oxford Economics data Budget 2015/2016 Economic and Tax focus

9 1.2.2 Kenyan Economic Outlook Selected Macroeconomic Indicators Galla Turkana Luhya Lou Nairobi Somali Inflation: Average overall annual inflation increased modestly, from 5.7% in 2013 to 6.9% in This was however within Central Bank s target. The modest increase in the rate of inflation was attributed to increase in the cost of several foods and non-food items, which outweighed notable falls in the cost of electricity and petroleum products. Masai Mijikenda Kenya s economy expanded by 5.3% in 2014, compared to a growth of 5.7% reported in The growth was attributed to increased domestic consumption and rapid growth in capital investment. The major drivers of the economy were agriculture, forestry and fishing (14.5%); Building & construction (11.1%); wholesale and retail trade (9.8%); education (9.7%); and finance and insurance (9.1%). During the year, the main macroeconomic indicators remained relatively stable. Despite the Kenya Shilling depreciating against the US dollar, Sterling Pound and Euro it held firmly against the other major trading currencies. Despite the drop in prices of fuel, electricity and some food commodities, inflation rose slightly but remained within the Central Bank (CBK) target. The Balance of Payments position improved mainly on account of proceeds from the sale of the Eurobond. However, the current account deficit worsened due to deterioration in trade deficit. Exchange Rate: The Kenyan Shilling depreciated by 0.9 per cent against major world currencies as reflected in the overall Trade Weighted Index (TWI), which deteriorated from in 2013 to in 2014 associated with depreciation of the Shilling against the currencies of major trading partners. The Shilling was weak against the Sterling Pound, US Dollar, UAE Dirham, Euro and Chinese Yuan though the Shilling gained against the SA Rand, Japanese Yen and Indian Rupee. Within the EAC, the Kenya Shilling strengthened against the Tanzanian Shilling by 7.4%. However, it depreciated against the Rwandese Franc and Ugandan Shilling by 3.1% and 1.7% respectively in Interest Rate: As a way of enhancing the transmission of monetary policy signals through commercial banks lending rates, the government introduced the Kenya Banks Reference Rate (KBRR) and Annual Percentage Rate (APR) frameworks in July During 2014, the interest rates recorded mixed movements with the Central Bank Rate (CBR) standing at 8.5% throughout the year. The 91-day Treasury bill rate dropped to 8.58% in December 2014 from 9.26% in January On the other hand, the interbank interest rate dropped from 10.43% in January 2014 to 8.08% in July 2014 before hitting an all month high of 11.79% in August 2014 and consequently falling to close at 6.91% in December Budget 2015/2016 Economic and Tax focus 4

10 The average weighted commercial lending interest rates gradually declined from 17.03% to 15.99% supported by the introduction of Kenya Banks Reference Rate (KBRR) and Annual Percentage Rate (APR) frameworks in July The slight decline in interest rates implies a decrease in cost of borrowing by consumers in the local financial markets, which has a positive effect on overall domestic consumption (and demand). The monthly trend of average lending, inflation and 91-day Treasury bill rates in 2014 is detailed in the graph below: Day Tbill Interbank rates Central bank rates Sectoral Analysis The table below reports Sectors Share to the GDP & Contribution to GDP Growth: Industry Agriculture, Forestry & Fishing Manufacturing Electricity and water supply % Share of Sector to the GDP Sources of Growth % 27.30% 20.80% 14.5% 10.7% 10.0% 10.90% 7.10% 2.00% 1.40% 2.70% 2.60% % 9 0 Capital Market Activities: There was an increase in number of traded shares by 7.4% to 8.1 billion compared to an increase of 38.7 % recorded in The total number of shares traded increased by 7.4% to 8.1 billion in 2014 compared to an increase of 38.7% recorded in Total number of deals made in the equity market increased by 28.8 per cent to 548,991 in 2014 against the increase of 24.6 per cent in The value of shares traded grew by 38.5 per cent to KSh 216 billion in 2014 compared to a growth of 81.4 per cent in Total Bond turnover also increased from KSh 452 billion in 2013 to KSh 506 billion in Mining and Quarrying Wholesales & Retail Trade Hotels & Restaurants Building & Construction Transport and Communication Financial Intermediation Real Estate, Renting & Business services Education 0.80% 0.80% -1.50% 2.30% 8.10% 8.20% 11.00% 9.80% 1.20% 0.90% -1.30% -4.70% 4.50% 4.80% 4.6% 11.10% 9.30% 9.50% 10.4% 13.40% 6.60% 6.70% 8.10% 9.10% 4.10% 4.10% 6.00% 8.50% 5.30% 5.20% 7.50% 9.70% Health and Social Services 1.60% 1.70% 2.30% 2.40% Source: KNBS, Economic Surveys 2015 & Oxford Economics Data Budget 2015/2016 Economic and Tax focus

11 Agriculture: The sector recorded a decelerated growth of 3.5% in 2014 compared to 5.2% recorded in 2013 by recording an increase in value added from KSh billion in 2013 to KSh billion in In 2014, there was decline in maize production to 39 Million Bags from 40.7 Million bags produced in However, the negative effects were offset by increase in other food commodities like irish potatoes and pulses. Hotel & Restaurant: The hotel and restaurant sector contracted to 17.2% in 2014 compared to a contraction of 4.6% recorded in This is associated to external shocks associated to insecurity and travel advisories. Transport and Storage: The sector recorded an accelerated growth of 5% in 2014 compared to a growth of 1.2% reported in The improvement in growth is associated with increased demand for transportation of cargo due to increased trade activities as well as a general increase in commuter services. However, air transport sub-sector suffered a major setback following the effects of Ebola epidemic in West Africa coupled with adverse travel advisories by some major tourist source countries. In 2014, there was an improvement in railway freight with a further decline in passenger traffic. The increase in freight tonnage was attributed to enhanced cargo transportation capacity through additional wagons acquired during the year. While a decline in passenger traffic is attributed to the stoppage of passenger transport services along the Nairobi- Kisumu route. Information, Communication and Technology: As a result of increased uptake of ICT services, particularly usage of data and stability in the growth of voice services, ICT sector remained robust in 2014 with a growth rate of 13.4% against a growth of 12.3% recorded in There was sustained internet usage mainly supported by lower prices of data bundles and access to affordable internet enabled mobile phones and subsequent increase in internet users. In 2014, the number of internet users grew by 23.0% to 26.2 million from 21.3 million in Mobile telephony market recorded a steady growth in 2014 with 18.2% expansion in capacity and 7.4% increase in connections. However, there was a further decline in fixed telephone capacity by 11% in 2014 attributed to decommissioning of a number of exchanges. Implementation of the digital migration saw quadrupling of the number of TV stations with the entry of 36 digital TV stations with analogue stations remaining unchanged at 14 stations.

12 Manufacturing: Manufacturing sector recorded a slowed expansion of 3.4% in 2014 compared to 5.6% realised in Despite the slowed expansion, the sector benefited from an improved economic environment associated with supply of cheaper and stable electricity, controlled inflation and strong domestic demand. There was suppressed external demand of industrial non-food and processed fruits and vegetable products, beverages, printing and production of recorded media contracted partly on account of reduced domestic demand while manufacture of sugar declined due a reduction in cane delivery. Production of leather and related products declined partly due to increased competition from imports. To ensure enhanced growth in the manufacturing sector and its consequent positive contribution to the GDP, the following factors are key and should be monitored: there should be low cost and adequate supply of labour and energy, availability of raw materials, enhanced access to credit, infrastructure development and increased efficiency of machinery and equipment. These factors will help in the reduction of the cost of production that is weighting negatively on sector. Financial sector: The Financial sector recorded an 8.3% growth in 2014 compared to 8.1% in This positive growth was driven by increased uptake of loans and advances, increased earnings from fees and commissions and government securities. There were a number of improvements and innovations in the financial sector. Full file credit information sharing was introduced in February 2014 while the CBK introduced Kenya Banks Reference Rate (KBRR) in July 2014 with the aim of enhancing transparency in credit pricing within the banking industry. There was also the implementation of Annual Percentage Rate (APR) framework in the third quarter 2014 geared toward a credit pricing mechanism where consumers are able to compare different bank loan costs.

13 1.3 Economic Outlook for 2015 and Beyond The positive outlook of the global economy is expected to impact positively to Kenya s economic growth. With most of the macroeconomic indicators projected to remain stable and supportive of growth, the country s economy is projected to grow by 6.2 % in Equally, increase in allocation of development budget to counties is expected to spur further economic growth. Further, projected economic growth and development will be supported by continued expanded infrastructure development and capacity that will enhance regional and global competitiveness, improved business environment, balanced regional development and competitive sound financial sector. Further, the government needs to focus on enhancing productivity of the various inputs and processes involved in the economic production processes. The focus has to be on addressing supply constraints in the different sectors of the economy and to adopt policies that exploit and enhance domestic inter-linkages in the economy and further boost productivity growth Proposed Budget Estimates 2015/ Proposed Budget Estimates 2015/2016 The total proposed expenditure in 2015/16 is estimated KSh 2 trillion which comprises of KSh billion for recurrent expenditure, KSh 721 billion for development expenditure; KSh billion as transfers to County Governments and KSh billion for Consolidated Funds Services Expenditure Allocation Energy and Infrastructure with an allocation of 18% has been allocated the largest share of the expenditure. This is due to the on-going construction of standard gauge railway. This has been followed closely by education sector which has been allocated 15% of the proposed expenditure. More details on how planned expenditure is as summarised in the chart below: Sectoral allocation Other allocations 32% National Security 5% Health 3% Governance, Justice, Law & Order 7% Education 15% Agriculture, Rural Urban Development 4% Environment water &Natural resources 3% Public Administration & International relations 11% Social Protection, Culture & Recreation 1% Energy & Infrastructure 19% Source: The National Treasury-Budget Policy Statement Budget 2015/2016 Economic and Tax focus 8

14 1.4.3 Proposed Expenditure Financing For the 2015/16 fiscal year, the Government projects total revenue amounting to KSh trillion (which represent 20.7% of the GDP). Of the projected total revenue, KSh trillion will be generated from ordinary revenue (representing about 19.2% of GDP) and KSh trillion will be appropriation in Aid and railway development levy. The Income tax forms the most significant proportion of the ordinary revenue in 2015/2016 whose contribution is projected to be KSh billion. The second largest revenue contributor is expected to be VAT with a projected contribution of KSh billion in 2015/2016. The figure below presents revenue projections for 2015/2016. A-in-A 23% Value Added Tax 23% Income TAX 46% The railway levy fund of 1.5% on all home-bound imports (for Kenyan domestic market) is projected to grow from KSh 22.9 billion in 2014/2015 to KSh 25.7 billion in 2015/2016. Import Duty 6% Excise Duty 2% Excise Duty 11% Other Taxes 6% Investment income 1% 9 Budget 2015/2016 Economic and Tax focus

15 Business and Personal Taxation Budget 2015/2016 Economic and Tax focus 10

16 2.1 Capital Gains Tax Taxation of gains from investment shares Gross consideration payable to both a resident and non-resident person in respect of a transaction relating to securities listed on any security exchange approved under the Capital Markets Act has been brought under the ambit of withholding tax. The withholding tax rate applicable is 0.3% of the transaction value. However, only transactions with non-resident investors seem to have been covered through amendments in the Finance Bill which is silent on the rate applicable to residents. We expect this to be addressed before the Bill is signed into law. Stockbrokers are charged with the responsibility of collecting and remitting tax to the Commissioner. Currently, gains from investment shares are subject to Capital Gains Tax at a rate of 5% on the excess of transfer value over adjusted costs. This proposal is aimed at simplifying the tax ascertainment process. The adjusted and incidental cost will not be deductible since the tax will be on gross proceeds which may lead to taxation of loss making counters. Effective date: 1st January Taxation of gains on property other than investment shares The Eighth Schedule of the ITA is to be amended to exclude the following transfers from the ambit of capital gains tax: Transfer of land where value is not more than three million shillings. Currently, the transfer value was capped at thirty thousand shillings Transfer of agricultural property having an area of less than fifty acres if the property is situated outside a municipality, gazetted township or an area declared by the minister, by notice in the Gazette, to be an urban area for the purpose of this Act. Currently, the acreage is capped at one hundred acres. Administration of an estate of a deceased person within two years of the death of the deceased or after finalisation of a court case regarding such estate. Transfer of property between spouses, or former spouses or their immediate family (children of the spouses or former spouses) as part of divorce settlement or bona fide separation agreement Capital gains tax will however be applicable on compensation for property acquired by Government for infrastructure development. This is currently exempt from Capital Gains Tax. Capital Gains Tax is to be payable on or before the date of application for transfer of the property is made at the relevant Lands office. The above amendments seek to harmonize the tax law to the prevailing economic and social conditions in addition to expanding the tax net to increase revenue collection, as well as streamline the collection of the tax with the other government fees upon transfer of property. Effective date: 1st January Budget 2015/2016 Economic and Tax focus

17 2.2 Tax loss Utilization Period The period within which a taxpayer must utilize their tax loss utilization had been limited to the year the loss occurred and the subsequent four years. This change was introduced in January The Finance Bill had attempted to amend this by empowering the Commissioner to extend the loss utilization period to ten years. However, the amendments as proposed still maintain the utilization period to 4 years with tax payers still being required to apply to the Minister (through the Commissioner) for any further extensions. We expect the correct amendments to be introduced before the Finance Bill is signed into law. The increase in the loss utilization period is aimed at boosting investment in the capital intensive industries such as power generating companies, manufacturers and hotel operators that accrue tax losses in the earlier years of operation. Effective date: 1st January Definition of training fees clarified The definition of training fees has been clarified through a proviso which specifically state that training fees does not to include, fees paid for educational services provided by a prepprimary, primary or secondary school; a technical college or university; an institution established for promotion of adult education, vocational training or technical education. Though implied in the previous definition, this proviso has eliminated any controversy that may arise as a result of divergent interpretation. Effective date: 1st January Income from residential property Residential rental income tax Landlords earning an annual gross rental income of ten million shillings or less will be required to pay residential rental income tax at a reduced flat rate. The Finance Bill however does not provide the applicable tax rate. The Treasury Cabinet Secretary in his speech allured to a 12% tax rate on such income. We expect this to be included in the guidance rules issued by KRA or through an amendment in the Finance Act. However, a person may make an election in writing to the Commissioner of Domestic Taxes to be excluded from this tax, in which case the net rent income would be taxable at the normal rates. The commissioner is to prescribe. Effective Date: 1st January Withholding tax on rent A resident person making rental payment for occupation of immovable property will be required to deduct and remit withholding tax on this payment. The Commissioner has been empowered to appoint agents who will be required withholding tax on rent paid to resident landlords. Currently, only rental payment made to a non-resident person for occupation of property is subject to withholding tax. Collection of income from residential property has been marred by a number of administrative challenges. This measure is therefore aimed at bringing this income into the tax bracket. This is aimed at accelerating collection of tax on rental income. Effective date: 1st January 2016 Budget 2015/2016 Economic and Tax focus 12

18 2.4.3 Tax amnesty for landlords The Finance Bill has also proposed to introduce a tax amnesty to landlords for undeclared/under-declared rental income. The amnesty provisions will apply to rental income earned in 2013 and prior years (including penalties and interest thereof), as well as any penalty and interest in respect to rental income earned in 2014 and The amnesty is however on condition that the individual landlord files the self-assessment returns or amended returns for 2014 and 2015 by 30 June In this regard, the landlord is required to pay tax as indicated in the filed return. If a landlord is not able to provide documentation in support of a given expenditure relating to rental income, he is allowed to deduct 40% of the expenditure. This is also aimed at encouraging landlords to register as tax payers, thus expanding the tax net as well as ensuring collection of tax revenue. Effective date: 1st January Specified sources of Income Increase in number of specified sources of income from six to seven. The Finance Bill, 2015 seeks to correct an error since currently the actual items listed as specified sources of income are seven and not six as indicated in the leading tax provisions. 2.6 Film Industry The taxation changes in this film industry are aimed at spurring growth of the industry as well as harnessing latent talents of the youth Payments made to actors and crew members Payments made by producers approved by the Kenya Film Commission to non-resident actors, crew and supporters of appearance or performance of an activity for the purpose entertaining the audience included in the list of payments exempt from withholding tax. Effective date: 1st January Capital Deduction Capital expenditure on buildings in use for training of film producers, actors and crew to be granted Industrial Building Allowance at a rate of 100%. Currently, the applicable rate is 50%. Effective date: 1st January Rebate to employers with apprenticeship programs Employers to be eligible for tax rebate if they engage at least ten university graduates for a period of six to twelve months during any year of income. The amount of rebate is to be stipulated by the Cabinet Secretary through issuance of regulations. The move is targeted at improving the quality of the skilled manpower in the country. Effective date: 1st January Budget 2015/2016 Economic and Tax focus

19 2.8 Capital Deductions Investment deduction of 150% on building and machinery installed outside the municipality of Nairobi, Kisumu or Mombasa of value not less than 200 million scrapped. In essence, the applicable investment deduction on investments outside the mentioned municipalities shall be at the standard rate of 100%. Investment deduction on purchase of a new and previously unused power driven ship increased to 100% from 40% and the tonnage of qualifying ships reduced from 495 tons to 125 tons. Effective Date: 1st January Rates of taxes Corporation Tax rate Company introducing its shares through listing at the Nairobi Securities Exchange will enjoy a reduced rate of 25% rather than the standard rate of 30%. Currently, the preferential rate of 25% can only be enjoyed by companies which have listed at least 20% of its issued share capital The extractive Industry Taxation of Subcontractors Fees payable to subcontractors in mining operations will be subject to withholding tax at a rate of 5.625% down from 20%. This harmonizes the tax treatment of payments to subcontractor in the mining and petroleum exploration operations. In addition, training fees payable by contractors to be subject to withholding tax at 12.5% down from 20%. This is aimed at harmonizing tax treatment of the players in the extractive industry and stimulates Foreign Direct Investment in the Sector. Finally, investment income in respect of rehabilitation fund is exempt from taxation. Effective Date: 1st January 2016 This is to encourage companies to list in the securities exchange to spur capital markets growth Winnings from bookmakers Payment to both resident and non-resident Bookmarkers to attract withholding tax at a rate of 7.5%. Effective Date: 1st January 2016 Budget 2015/2016 Economic and Tax focus 14

20 Indirect Taxes

21 3.1 Value Added Tax Effective date for all VAT amendments in the Finance Bill, 2015 is 12th June Definitions Definition of supply of imported services revised by deleting the words or a non-registered person. This clarifies a non-registered person has no obligation to account or pay VAT on imported services. Duty-free shop defined to mean a bonded warehouse licensed by the Commissioner of Customs for deposit of dutiable goods on which duty has not been paid and which have been entered for sale to passengers departing to places outside Kenya Lodging of VAT claims The Finance Bill 2015 proposes to limit the time of lodging VAT claims to 12 months from the date the tax becomes due and payable Withholding VAT agents Withholding VAT agents will now include any person appointed by the Commissioner to withhold VAT. Effective 19 September 2014, only Government Ministries, Departments and agencies were mandated to withhold VAT Change of VAT status List of exempt supplies expanded to include: Aircraft engines (tariff number ) and parts for aircraft engines (tariff number ). Aircraft parts of heading 8803, excluding parts of goods of heading 8801 (Balloons and dirigibles; gliders, hang gliders and other non-powered aircraft). New pneumatic tyres, of rubber used by aircraft (tariff No ). Taxable goods imported or purchased and taxable services for direct and exclusive use in the implementation of official aid funded projects upon approval by the Cabinet Secretary responsible for the National Treasury. This excludes motor vehicles. Plastic bags biogas digesters. Parts imported or purchased locally for the assembly of primary laptop tablets, subject to approval by the Cabinet Secretary for the National Treasury on recommendation by the Cabinet Secretary responsible for matters relating to Information Technology. Goods and services for use by the Kenya Film Commission subject to approval by the Cabinet Secretary to the National Treasury. Goods and services for direct and exclusive use in the construction and infrastructural works in industrial and recreational parks of one hundred acres or more approved by the Cabinet Secretary for the National Treasury upon recommendation by the Cabinet Secretary responsible for Industrialization Zero-rated supplies expanded to include: Goods purchased from duty free shops by passengers departing to places outside Kenya. Services in respect of goods in transit. Importation of Right Hand Drive (RHD) vehicles purchased by returning Kenyan residents in replacement of a similar owned Left Hand Drive (LHD) motor vehicle that was owned for at least 12 months. This provision is subject to the following conditions: The person providing proof of ownership, over 12 month use and disposal of the previously owned LHD vehicle before changing residence. The RHD vehicle to be imported shall be similar to the previously owned LHD vehicle in make, engine rating and year of manufacture; and this provision shall only apply to residents returning from countries that operate LHD motor vehicles. Budget 2015/2016 Economic and Tax focus 16

22 Previously exempt supplies now taxable Medicaments of tariff number Infusion solutions for ingestion other than by mouth put up in measured doses or in forms or packaging for retail sale Other medicaments (excluding goods of heading 3002, 3005, or 3006) consisting of two or more constituents which have been mixed together for therapeutic or prophylactic uses, not put up in measured doses or in forms or packings for retail sale. 3.2 Customs and International Trade Amendments in relation to the EAC Common External Tariff (CET) Various amendments to the East African Community Customs Management Act (EACCMA), 2004 vide the EAC Gazette No.9 of 2015 have been introduced. Some of the amendments will affect all member states of the EAC whereas others affect individual countries or more than one but not all member states. The amendments are effective 01 July Increases in CET rates Amendments affecting all member states (Kenya, Uganda, Tanzania, Rwanda, Burundi) Product From To HS Codes Sugar USD 200/MT or 100% whichever is higher USD 460/MT or 100% whichever is higher , , Rice USD 200/MT or 75% whichever is higher USD 345/MT or 75% whichever is higher Tariff heading 1006* Plastic tubes for packaging toothpaste and cosmetics 10% 25% Iron and steel products 10% 25% , , , , , , , , , , , , , , , , Note: * - Some countries to stay application of these rates Decrease in CET rates Product From To HS Codes Gas cylinders Exemption regime 0% Budget 2015/2016 Economic and Tax focus

23 3.2.4 Stay of application of CET rates The respective EAC member states will stay application of the CET rates agreed upon by the Council of Ministers on certain products as follows: Kenya Product To apply Instead of HS Codes affected Paper and paper board products 25% 10% , , , Other, electronic integrated circuits 25% 10% Made up fishing nets 25% 10% Towers and lattice masts 25% 10% Oil or petrol and intake air filters for internal combustion engines 25% 10% Other prefabricated buildings 25% 10% Iron and steel products 25% 10% , Iron and steel products 10% 0% , Bridges & Bridge sections, equipment for scaffolding, shuttering, propping or pit propping 25% 0% , Screws and bolts 25% 10% Smart cards 25% 10% Aluminium milk cans 25% 10% Aluminium alloy in sheets 10% 25% Gas cylinders 25% 0% Rice 35% or USD 200/MT 75% or USD 345/MT , , Hot rolled bars and rods of alloy steel 25% 10% , Other bars and rods of alloy steel 25% 10% , , , , Budget 2015/2016 Economic and Tax focus 18

24 Rwanda Road tractors for semi-trailers 0% 10% Motor vehicles for transport of goods with gross vehicle weight between 5 to 20 tonnes Motor vehicles for transport of goods with gross vehicle weight exceeding 20 tonnes Buses for transportation of more than 25 persons Buses for transportation of more than 50 persons 10% 25% % 25% % 25% % 25% Import of 70,000MT of sugar 25% 100% , Rice 45% 75% or USD 345/MT , , Stay of application of the EAC CET on goods imported for use by the Armed Forces Shop (AFOS) Stay of application of EAC CET on the equipment used by telecommunication firms in Rwanda at a rate of 0%. (list of items as per LN. No. EAC/32/2015) Tanzania Buses for transportation of more than 25 persons 10% 25% Import of 100,000MT of sugar between April & June 50% 100% , Paper 25% 10% , , , , , , Iron and steel products 25% 10% , Stay application of the EAC CET on goods imported for use by the Armed Forces Canteen Organization (AFCO) 19 Budget 2015/2016 Economic and Tax focus

25 Uganda Road tractors for semi-trailers 0% 10% Motor vehicles for transport of goods with gross vehicle weight exceeding 5 tonnes but not exceeding 20 tonnes Motor vehicles for transport of goods with gross vehicle weight exceeding 20 tonnes 10% 25% % 25% Maternity (Mama) kit 0% 25% Organic surface active agents 0% 10% - 25% , Iron and steel products 25% 10% , Wire of iron or non-alloy steel, plated or coated with zinc Other sulphates, alums, peroxosulphates 25% 10% % 10% Iron and steel products 10% 0% , Burundi Road tractors for semi-trailers 0% 10% Motor vehicles for transport of goods with gross vehicle weight exceeding 5 tonnes but not exceeding 20 tonnes Motor vehicles for transport of goods with gross vehicle weight exceeding 20 tonnes 10% 25% % 25% Budget 2015/2016 Economic and Tax focus 20

26 3.2.5 Duty Remission Reduced import duty rates for the following products under the duty remission scheme: Products affected in all member states Kenya, Uganda, Tanzania, Rwanda, Burundi Product From To HS codes Wood splints for the manufacture of matches 10% 0% Nylon yarn and synthetic twine for manufacture of fishing nets 10% 0% Acrylic polymers for manufacture of paints 10% 0% Groats and meal of wheat (Semolina) 25% 0% Glucose and Glucose syrup 10% 0% Stayed application of the conditions on duty remission for motor cycle assembly for one year as outlined in LN. EAC/39/2013 of 30/06/2013. Products affected in Kenya, Uganda & Tanzania Wheat Grain 35% 10% Rwanda Wheat Grain 35% 0% Remission of duty on various raw materials and industrial inputs imported by manufacturers as listed in LN. No. EAC/35/2015 Uganda Barley 25% 10% Odoriferous mixtures of a kind used as a raw material in the food or drink industry 10% 0% Remission of duty on various raw materials and industrial inputs imported by manufacturers as listed in LN. No. EAC/36/2015 Burundi Remission of duty at the rate of 0% on raw materials and industrial inputs by manufacturers as listed in LN. No. EAC/37/2015 5th Schedule to the EACCMA (Exemptions Regime) Added: - Prison Services in all Partner states to import duty free goods Removed: - Gas cylinders Harmonization of Export Duty on Hides and Skins The EAC countries have harmonized export levies on hides and skins at 80% of FOB value or USD 0.52 per kg, whichever is higher. 21 Budget 2015/2016 Economic and Tax focus

27 3.3 Excise Duty The Kenyan Excise duty provisions have always been enshrined in the Customs and Excise Act. With the introduction of a separate Customs Act (EACCMA) the Government intends to overhaul the Customs & Excise Act. The Cabinet Secretary for Finance tabled a Excise Duty Bill 2014 last year which received several public comments. During this year s budget the Excise Duty Bill 2015 was tabled to parliament by the Cabinet Secretary. Once enacted it will come into operation on a date to be set by the Cabinet Secretary. Several changes are proposed in this bill. Key proposals are as follows: Move from use of both ad-valorem and specific duty rates to generally specific duty rates The specific rates of duty on excisable goods will be adjusted for inflation at the beginning of every financial year Removal of certain goods which do not have harmful effects from the list of excisable goods (i.e. Cosmetics goods) Introduction of new items on the list of excisable goods( Electronic cigarettes and its cartridges, some types of motor cycles The table below highlights key proposed changes and duty rates: Goods Description Current Duty Rate Proposed Duty Rate Fruit Juices 7% Shs. 10 per litre Food Supplements 7% 10% Waters and other non-alcoholic beverages 7% Shs. 10 per litre Beer, Cider, Perry and mixtures of fermented beverages with non-alcoholic beverages and spirituous beverages of alcoholic strength not exceeding 10% Shs. 70 per litre Shs. 100 per litre Wines Shs. 80 or 50% Shs 150 per litre Spirits Shs 120 or 35% Shs 175 per litre Electronic Cigarettes N/A Shs 3000 per unit Motor vehicles less than 3 years from date of first registration 20% Shs 150,000 Motor vehicles over 3 years old 20% Shs 200,000 Motor cycles other than motor cycles ambulances N/A Shs 10,000 per unit Plastic shopping bags 50% Shs. 120 per Kg Cigars, cheroots, cigarillos containing tobacco or tobacco substitute 130% Shs 10,000 per Kg 3.4 Miscellaneous Bill, 2015 Miscellaneous Fees and Charges Bill to be enacted as the legal instrument for collection of Export Levy, Import Declaration Fee (IDF) and Railway Development Levy (RDL). IDF rate is proposed to reduce from 2.25% to 2%. Budget 2015/2016 Economic and Tax focus 22

28 Tax modernization As part of reforming the general tax administration regime, the following changes are have been made and/or proposed: Tax Appeals Tribunal Act, The Bill proposes that for a period of one year from the date of the Tribunal s first sitting, it may extend the period of a hearing up to sixty days should there be sufficient grounds to do so. The bill further proposes that the Tribunal shall hear and determine appeals relating to a tax decision made before its first sitting within a period of one year from the date of this first sitting. Income Tax Bill expected to be completed by 30 September Tax Procedures Bill has been released. Bill tabled in parliament aimed at simplifying tax administration processes and also promoting consistency and efficiency in the tax laws as well as facilitating compliance and effective collection of taxes under the ambit of Income tax, VAT and Excise Duty. 23 Client name Proposal title

29 Client name Proposal title 24

30 Financial Sector Amendments Effective date for all financial sector amendments in the Finance Bill, 2015 is 1st October Budget 2015/2016 Economic and Tax focus

31 Budget 2015/2016 Economic and Tax focus 26

32 5.1 Banking Act (Cap.488) Annual Licensing The Banking Act provides that every institution intending to transact banking business, financial business or the business of a mortgage finance company in Kenya shall, before commencing that business, apply in writing to the Central Bank for a license. The license is valid for a period of 12 months, and must be renewed annually. The Finance Bill 2015 seeks to remove the requirement of annual licensing and instead empower the Central Bank of Kenya (CBK) to issue non-renewable perpetual licences. This is aimed at facilitating compliance with the risk based supervision model in line with best international practice. The CBK will continue to monitor banks using the risk based approach and to carry out inspections on periodic basis while retaining powers to withdraw the license at any time Minimum Core Capital The Banking Act requires that every institution shall maintain a minimum core capital of at least one billion for banks or a mortgage finance company. In order to strengthen the banking sector, there is a proposal to increase the minimum core capital for banks from KShs 1 Billion to Kshs 5 Billion by December This will ensure that the banks are not only able to participate in financing the large projects envisaged in Vision 2030 but also ensure that the banks are able to withstand financial shocks and crisis Central Bank Act It has been proposed that a Central Bank of Kenya Bill, 2015, be tabled in Parliament. The Bill will comprehensively review the Central Banking law and aligning it with the international best practice. The Bill has been submitted to the Commission of Implementation of the Constitution for further inputs before it is presented to the National Assembly. This is in line with the requirement of the Constitution Nairobi International Financial Centre Authority (NIFCA) There is proposal to have the NIFCA fully operational in 2015 to help deepen and strengthen the financial sector. Besides, to help safeguard Kenya s economy against financial instability, the CBK is set to strengthen the prudential oversight framework and effectively manage risk associated with rapid credit growth, rising cross boarder operations and expansion of banks activities into holding groups. 5.2 Insurance Act (Cap. 487) MinimumCore capital The Insurance Act provides that no person shall be registered as an insurer unless the paid up capital is at least; Three hundred million Kenya shillings for general insurance business; One hundred and fifty million Kenya shillings for life insurance business; Four hundred and fifty thousand Kenya shillings for composite insurance business; and Eight hundred Kenya shillings for a reinsurer, divided into three hundred million Kenya shillings for long term business and five hundred million Kenya shillings for general business. 27 Budget 2015/2016 Economic and Tax focus

33 There is a proposal to amend the minimum core capital requirement as follows; In the case of general Insurance business, the higher of six hundred million shillings; risk based capital determined from time to time; or 20% of the net earned premiums of the preceding financial year; In case of long term insurance business, the higher of four hundred million shillings; or risk based capital determined by the Authority from time to time; or 5% of the liabilities of the life business for the financial year. In case of reinsurance business (general business), the higher of one billion shillings; or risk based capital determined by the Authority from time to time; or 20% of the net earned premiums of the preceding financial year; In case of reinsurance business (long term business), the higher of five hundred million shillings; or risk based capital determined by the Authority from time to time; or 5% of the liabilities of the life business for the financial year Insurers registered before the commencement of the schedule are required to comply with the amendment by the 30th June, There is a proposal to move to a more principle based investment framework where insurance companies will be required to prepare and submit investment policies and will be subject to broad prescribed investment guidelines. The authority is to specify the investment guidelines. This investment framework will bring the insurance industry in harmony with the framework already pertaining in the retirement benefits and collective investment sectors. In addition, the proposal will enable the insurers respond to economic changes Insurance agents The insurance Act requires that before an insurance agent is registered as an agent, he/she must be recommended by an insurance company on satisfaction that the applicant has the knowledge and experience necessary to act as an agent. There is a proposal to drop the above requisite and allow Insurance Regulatory Authority (IRA) to license agents so long as they have qualified for award of Certificate of Proficiency (COP) which is a requirement for licensing as an insurance agent. This will expand the insurance penetration and create the much needed employment Supervisory Power of the Regulator The Finance Bill proposes to increase the supervisory role of the Authority by amending the clauses which directly mentioned the Minister with the Authority. The amendment is aimed at strengthening the insurance sector Investment Provisions The investment provisions in the Insurance Act are rules based and are not in compliance with international core principles of insurance supervision. Budget 2015/2016 Economic and Tax focus 28

34 Miscellaneous provisions Effective date for the following sector amendments in the Finance Bill, 2015 is 1st October Budget 2015/2016 Economic and Tax focus

35 6.1 Retirement Benefits Act Under this Act, the Cabinet Secretary proposes to improve financial transparency and accountability in Retirement Benefit Schemes by reducing the period of preparation of annual audited accounts from 6 months to 3 months. 6.2 Amendment of the Proceeds of Crime and Anti-Money Laundering Act The Finance Bill extends the mandate of the Financial Reporting Centre (FRC) in the following respects: Not only identification of the proceeds of crime and the combating of money laundering to now cover the financing of terrorism. To receive and analyze unusual or suspicious transactions and information disclosed pursuant to the Prevention of Terrorism Act, To require reporting institutions to report on their compliance with the Act, from which the FRC is mandated to provide appropriate direction. The mandates of the Director of the FRC have also been increased: To report not just suspicious transactions but also those that appear to involve the proceeds of crime, money laundering or financing of terrorism. To instruct any reporting institution to provide other or additional information or take appropriate steps to facilitate an investigation by providing documents. 6.3 Amendment to the Consumer Protection Act The Bill proposes to allow the National and County governments to be charged a prepayment charge or penalty where they enter into an agreement in the position of a principal borrower or guarantor or where the borrower is a public entity. 6.4 Exemption of Stamp Duty for Asset Transfer to REITs The transfer of the beneficial interest in assets into Real Estate Investment Trusts (REITs) trustees authorized under the Capital Markets Act, to be exempted from stamp duty, as an incentive for investment in real estate. This exemption also applies to any transfer of units in REITs done before 31st December Road Maintenance Levy Fund Act Out of the Road Maintenance Levy Fund, three shillings per litre of petroleum sold is to be paid to the Road Annuity Fund established under the Public Finance Management Act, Budget 2015/2016 Economic and Tax focus 30

36 31 Budget 2015/2016 Economic and Tax focus

37 Regional Highlights Budget 2015/2016 Economic and Tax focus 32

38 33 Budget 2015/2016 Economic and Tax focus

39 7.1 Uganda Business Tax Presumptive tax regime threshold increased from UGX 50m to UGX 150m. Presumptive tax payers are not required to file returns to UR.A Debt to equity ratio increased from 1:1 to 1 : 1.5. Petroleum and mining sector licensees to register for VAT during exploration and development stages. Value Added Tax (VAT) VAT threshold increased to UGX 150m from UGX 50m. The threshold for persons that use a cash basis accounting system increased from UGX 200m to UGX 500m. Excise Duty The following excise duty amendments were introduced:- Confectionaries and Furniture - 10%. Motor Vehicle Lubricants 5%. Excise duty on international calls form the northern corridor countries of EAC has been removed. Non-tax revenue Mandatory payment of tax for all Public Services Vehicles (PSVs) and goods motor Vehicles at the time of renewal of annual licences introduced. Passport fees have been increased by UGX 30,000 and a special passport at UGX 300,000 has been introduced to obtain a passport expressly within 24 hours. Other tax measures Environmental levy on used passenger motor vehicles increased from 20% to 35% for motor vehicles of 5-10years and 50% of those above 10 years. The government has ratified the following agreements; EAC Agreement for the avoidance of double taxation and prevention of fiscal evasion. The agreement for the establishment of ATAF (African Tax Administration Forum) on mutual assistance in tax matters. The OECD convention on Mutual Administrative Assistance. Tanzania Customs Duty Export levy on raw skins increased from 60 percent to 80 percent of FOB value or Tshs. 600 per kilogram to USD 0.52 whichever is greater. Amendments to the Tanzania Investment Act, CAP, 38 as follows:- Removal of PVC pipes and HDPE under HS code from the list of capital goods ; Removal tax exemptions provided by Tanzania Investments Center on trailers for transportation; Business Tax Restoration of Skills and Development Levy (SDL) exemption on the agricultural sectors. Introduction of tax on gaming in prize at the rate of18 %. Introduction of principal license fee for operating the sports betting and slot machines. Introduction of registration of gaming sports equipment. Other tax measures Increase charges on diesel fuel, petroleum fuel, kerosene and toll charges. Introduction of railway development levy of 1.5 percent of CIF value. Rwanda specific amendments Business Tax Rwanda Cooperative Agency (RCA) to register close to 5,000 cooperatives in the next year. Rwanda Revenue Authority (RRA) to introduce an electronic billing machine which will be responsible for computing all relevant taxes. Customs Duty Import duties on imported fuel for the Oil strategic reserves to be introduced. Other tax measure Rwanda will stay the application of fuel and Infrastructure Development levy for a period of one year. Budget 2015/2016 Economic and Tax focus 34