Tax Alert Finance Bill, 2018 July 2018 Introduction The Finance Bill, 2018 (the Bill) was published on 19 June 2018. It contains changes that the Cabinet Secretary, National Treasury proposed during the Budget reading on 14 June 2018. The Bill proposes to amend the following Tax Laws: Income Tax Act (ITA), Value Added Tax (VAT) Act, Excise Duty Act, Tax Procedures Act (TPA), Tax Appeals Tribunal Act (TAT) and the Miscellaneous Fees and Levies Act, 2016. In this Alert, we provide an analysis of the changes proposed by the Bill. All the proposed changes come into effect on 1 July 2018 unless stated otherwise in the Alert. In this bulletin... Income tax amendments 2 Value Added Tax 4 Excise Duty 6 The Miscellaneous Fees and Levies Act, 2016 8 Employment taxes and other employee statutory deductions 9 Conclusion and Contacts 10 www.pwc.com/ke
Income tax amendments One of the notable observations is that the Bill seeks to fast track some proposals that were contained in the Draft Income Tax Bill, 2018 ( ITB ) by amending the current Income Tax Act (ITA). a) Demurrage charges and insurance premiums paid to non-residents to attract withholding tax The Bill proposes to amend the ITA and subject demurrage charges charged by transporters (and in particular non-resident ship owners) to withholding tax at 20%. Difficulties may arise in respect of identifying the person whose obligation it is to withhold tax due to the operating model of such businesses. Further, the Bill proposes to introduce withholding tax at the rate of 5% on gross premiums paid to non-resident insurance companies except insurance premium paid for insurance of aircraft. While it could spur growth of local insurance companies, there may be some limitations in the capacity of local insurance companies having to cover risks associated with certain sectors such as marine and extractive industries. In addition, this may impact the insurance business in Kenya negatively since it will lead to increase in cost when local insurance companies reinsure with non-residents re insurance companies. b) Deemed dividends Borrowing from the ITB, the Bill has expanded the definition of deemed dividends to include: i) Any cash or asset distributed or transferred to the shareholders or any person related to shareholders; ii) Any obligation measurable in monetary terms discharged from a shareholder or any person related to the shareholder by the company; iii) Any amount used by the company in any manner for the benefit of a shareholder or any person related to the shareholders; iv) Any debt owed by a shareholder or any person related to the shareholder to any third party that is settled by the company; and, v) Transfer pricing adjustment which results in additional taxable income or reduced assessed loss to the company by the virtue of any transaction with the shareholder or a related person to the shareholder. Once the provision becomes law, companies would need to scrutinise transactions between themselves and shareholders and any person related to the shareholders to avoid such transaction being deemed as dividends by the tax authority. c) New method of computing compensating tax The Bill has repealed the Section 7A of the current ITA and proposes a new simpler method of computing compensating tax. The Bill proposes to subject any untaxed gains or profits which are distributed by a company to tax at the resident corporate tax rate of 30%. However, the Bill appears to have removed the requirement of maintaining the dividend tax account by a resident company that allows for the calculation of the extent to which distributions arose from untaxed profits. 2 Finance Bill 2018
Income tax amendments (cont d) Further, it is silent on what constitutes untaxed gains or profits; therefore it is unclear whether dividends received from subsidiaries, both resident and non-residents company, will be treated as untaxed gains or profits for the purposes of computing compensating tax. The above provision comes into operation on 1 January 2019. d) Introduction of presumptive tax In a move to widen the tax net and capture the informal business sector, the Bill seeks to introduce presumptive tax which will be applicable to a resident person whose turnover does not exceed five million shillings during a year of income. It will be tied to renewal of the Single Business Permit and the rate of tax will be 15% of the cost of the business permit or trade licence issued by the County Government. The due date for payment of presumptive tax shall be at the time of payment of the business permit or trade license or renewal of the same. Presumptive tax will not be applicable to incorporated companies, rental businesses and persons offering management and professional services. The above provision comes into operation on 1 January 2019. e) Additional tax deduction on electricity cost The Bill proposes to provide a deduction of thirty percent of the total electricity bill by manufacturers from corporate profit in addition to normal deduction subject to the conditions to be set by the Ministry of Energy. This is in a bid to reduce the cost of electricity which is one of the cost drivers in the manufacturing sector. The additional deduction is intended to mitigate the high cost of production. The above provision comes into operation on 1 January 2019 and will be subject to the conditions set by the Ministry of Energy. It is hoped that it will be clarified as to whether costs of electricity internally generated by a company (off grid) would be subject to the enhanced deduction. f) Tax incentives to entities operating under a special operating framework arrangement with the Government The Bill seeks to grant the Government leeway to negotiate special corporate tax rate for businesses under a special operating framework arrangement. If properly implemented, such tax incentives can be used by the Government to attract investments into priority areas under the Big Four Agenda such as the affordable housing, manufacturing sector and critical infrastructure projects. The above provision comes into operation on 1 January 2019. g) Gains from disposal of property by a general insurance business The Bill has now clarified that gains arising from transfer of property under the general insurance business will be taxed as capital gains. h) Tax collected from winnings to be directed to Sports, Arts and Social Development Fund The Government seeks to channel all the withholding tax collected by the Commissioner from winnings to the Sports, Arts and Social Development Fund. 3 Finance Bill 2018
Indirect Taxes Value Added Tax Introduction The Bill has proposed a raft of changes in the VAT treatment of various supplies. The proposed changes, which are set to come into effect from 1 July 2018, will have significant impact on the taxpayers dealing in the affected supplies. Notably, the Bill proposes to expand the tax base for mobile cellular services to include excise duty payable on these services. Other changes include a move to exempt supplies which were previously zero rated for VAT purposes. We highlight below the changes proposed in the Bill. Boost to Kenya s economic backbone - the Agricultural Sector The Agricultural sector is a major contributor to achieving food and nutrition security for all Kenyans as envisaged in the Big 4 agenda. In a bid to boost the sector, the Bill seeks to extend the exemption on construction of grain storage to include not only materials used but also equipment for construction of such facilities. This is meant to ensure that constructions costs are reduced encouraging preservation of food harvested. Similarly, in a bid to reduce the cost of animal feeds, the Bill proposes to exempt raw materials for production of the finished animal feeds. Further, in a bid to boost food production and encourage agriculture, it is a welcome move to include wheat, meslin and barley seeds for sowing in the list of exempt items. Limiting exemptions under plant and machinery Effective 1 July 2018, the exemption on plant and machinery has been restricted to those used to manufacture goods. Prior to this restriction, the exemption covered all plant and machinery of Chapter 84 and 85. In our view, although this restriction may be noble to avoid general abuse of the earlier open ended exemption, there may be a need for the Government to reconsider this restriction. This is in light of the fact that besides manufacturing, there are other sectors such as agriculture that may be dependent on heavy mechanisation and would benefit from exemption of other plant and machinery under Chapter 84 and 85. Boost to local textile and footwear industry The Bill proposes to withdraw the VAT exemption on garments and leather footwear manufactured in an Export Processing Zone (EPZ), on importation into Kenya. This exemption that was introduced 2 years ago may have had the undesired consequences of rendering locally manufactured garments and leather footwear, outside of an EPZ, to be uncompetitive. Communication to cost more The Bill proposes to increase the VAT base for the supply of mobile cellular services to include 10% excise duty on the services. This will result into a higher tax cost on mobile cellular services. Mobile cellular service providers will need to evaluate whether to pass the additional tax burden to consumers of such services thus rendering call rates, SMS and other mobile cellular services more expensive. Where the service providers opt not to increase prices for these services, they may have to absorb the costs themselves thus reducing their own revenues. Enhancing ICT penetration The Bill proposes to exempt parts imported or purchased locally for the assembly of computers. This is an extension of the earlier exemption on parts imported or purchased locally for the assembly of primary school laptop tablets. This is a welcome move as it has the potential of encouraging local manufacturing and job creation for the youth. Solar equipment now defined We note that under the current Act, there is a general exemption on specialised solar equipment 4 Finance Bill 2018
Indirect Taxes (cont d) and accessories including solar water heaters. However, the term specialised equipment has not been defined in law and has been a subject of many disputes between taxpayers and the Revenue Authority. The Bill now proposes to restrict this exemption to specialized equipment for the development and generation of solar and wind energy only. This proposal excludes solar water heaters that are currently included in the VAT Act. The implication of the proposed change is that solar bulbs or lights, solar water heaters and other accessories will be now taxable at 16%. Zero rating of transportation of cargo to destinations outside Kenya The Bill proposes to delete the provision that exempts transportation of cargo to destination outside Kenya. This is on the premise that such services should be treated as being an export of services which is taxable at 0%. In our view, this is a welcome move by the government to clear the contradiction that has existed in the VAT legislation creating uncertainty in the transport sector. Exemption of alcohol and non-alcohol beverages supplied to the Defence Forces Canteen Organisation (DEFCO) The Finance Bill 2018 proposes to exempt VAT on all supplies to Defence Forces. This in line with the budget 2018 where we have seen the government invest heavily in the military sector, with the canteen being seen as the welfare arm of the Defence Forces. This will see lower prices charged for all supplies made to DEFCO. Goods and services provided to special operating framework arrangements (SOFA) in government In achieving the big 4 Agenda, the bill proposes to exempt supplies to SOFA. However, it is worth noting that guidelines to establishing SOFAs have not been specified. In our view, where this is well implemented, it is a positive measure to spur economic growth to targeted sectors in the economy. Postal services Provision of postal services like postage stamps, rental of post boxes or mail bags and any subsidiary services will be VAT exempt. This reduces the VAT burden on the users of such services and will lead to affordable circulation of information. Expect an increase in pump prices When the VAT Act 2013 was introduced in September 2013, VAT at the standard rate of 16% on fuel products including petrol, diesel, kerosene and jet fuel was introduced with a three year transitionary grace period. The Finance Act 2016 extended the transition period by 2 years, that is, up to September 2018. We note that the Bill has not extended the transitional exemption on petroleum products. Accordingly, effective 2 September, 2018 we expect 16% VAT to apply on the petroleum products resulting in an increase of pump prices. With petroleum being an essential component in various sectors of the economy, we expect general inflation to increase as a result. Conclusion Whist the government is keen to ensure a reduction in the prices of essential commodities, exemption is not the way to go as suppliers are not eligible to claim any input tax credits in relation to the VAT incurred in making such supplies. Accordingly, all the unclaimable input tax is factored in the price charged to the final consumer thus making such supplies more costly. It is perhaps time for the Government to consider a preferential reduced tax rate for essential commodities as it focuses in achieving universal health care and food and nutrition security for all Kenyans. 5 Finance Bill 2018
Indirect Taxes (cont d) Excise Duty Introduction We observe that the Cabinet Secretary, National Treasury proposes a number of excise changes as presented in the budget speech. We detail below the changes introduced by the Bill. Pursuant to the Provisional Collection of Taxes and Duties Act, all the Excise Duty proposed changes are effective on 1 July 2018. 1. Change of excise duty rates Mobile money transfer The Bill has proposed to increase excise duty on fees charged on money transfer services provided by cellular phone service providers from 10% to 12%.The proposed amendment is aimed at enabling the government to raise revenue to fund universal healthcare. This measure will further drive up the cost of money transfer through cellular phone service providers that is predominately used by the unbanked members of the society making financial inclusion costly. Curbing adulteration of fuel - Illuminating kerosene The Bill has proposed to increase the excise duty rate on illuminating kerosene from from KES 7,205 per litre to 10,305 per litre. This is attributed to government s intention to curb adulteration of fuel products. This measure may however hurt the rural and low income households that rely on kerosene for heating and lighting. In addition, it may encourage low income households to opt for firewood and charcoal as an alternative presenting environmental degradation risks to the country. Private passenger cars The Bill has proposed to increase excise duty on private passenger motor vehicles whose engine capacity exceeds 2,500cc for diesel and 3,000cc for petrol powered vehicles from 20% to 30%. Currently, excise duty is charged uniformly at 20% on these categories of motor vehicles irrespective of the engine rating. This measure aims at ensuring progressivity which is a cardinal principle of taxation. Robinhood tax on cash transfers The Bill has proposed to introduce a Robin Hood tax of 0.05% on transfer of sums of money in excess of KES 500,000 through banks and other financial institutions. The intent of the tax measure is to allow government to earn a share of revenue from these financial activities while availing a pool of funds that would be used to finance Universal Healthcare initiatives in the country. This measure may however have an incremental impact on the cost of financial services and perhaps dampen the pace of investment. Sugar Confectionery and chocolate The Bill has proposed to introduce excise duty of KES.20 per kilogram on sugar confectionery of tariff heading 17:04 and chocolate in blocks, slabs or bars of tariff codes 1806.31.00, 1806.32.00 and 1806.90.00. The proposed amendment may be seen as aimed at reducing lifestyle related diseases linked to high consumption of sugar confectionery and chocolate products. 2. Exemption from excise duty Alcohol or non-alcohol beverages to DEFCO The Bill has amended the Second Schedule to the Excise Duty Act, 2015 to exempt alcohol or non-alcohol beverages supplied to the DEFCO. Currently, the exemption applies to all goods supplied for the official use by the Kenya Defence Forces (KDF) and the National Police Service but excludes DEFCO which is an integral arm of the KDF. 6 Finance Bill 2018
Indirect Taxes (cont d) Attracting investors through special fiscal incentives - SOFA The Bill has amended the Second Schedule to the Excise Duty Act, 2015 to provide for exemption of goods imported or purchased locally for direct use in the implementation of projects under special operating framework arrangements with government. We expect the government to provide additional clarity on the projects that will be classified under SOFA. 3. Supporting social development The Bill has proposed to amend the Excise Duty Act, 2015 to allow the Commissioner to pay into the Sports, Arts and social development fund including universal health care, 16% of the excise duty paid in respect of money transfer by cellular phone providers and the entire Robin Hood tax proposed. The proposed amendment is aimed at ring fencing funds earmarked by the government for use in supporting social development activities including universal health care. 4. Introduction of stiffer penalties The Bill has proposed to increase the minimum penalty for manufacturers or importers of excisable goods who operate without licenses. Currently, the Act only prescribes a penalty of double the excise duty payable; the Bill has introduced a penalty of five million shillings or double the excise duty payable, whichever is higher. In addition, the plant and excisable goods could be forfeited to the State. 5. Clarity - excise duty on bottled water The Bill has proposed to bring more clarity on the drinking water that is subject to excise duty. Currently, the Act is not very clear on the scope of water subject to excise duty; the Bill proposes to impose excise duty on bottled or similarly packed water. 6. Annual adjustment for inflation The Bill has proposed an annual inflationary adjustment for the specific rates of excise duty. Currently, the law provides for inflationary adjustment after every two years even though this provision is yet to be implemented by the Commissioner since its introduction in November 2015. 7 Finance Bill 2018
The Miscellaneous Fees and Levies Act, 2016 The Bill has amended various provisions of the Miscellaneous Fees and Levies Act, 2016. The effective date for the changes detailed below is 1 October 2018. Export levy/duty on copper waste and scrap metal The Bill has amended the First Schedule to the Miscellaneous Fees and Levies Act, 2016 to introduce an export levy at a rate of 20% on copper waste and scrap of tariff code 7404.00.00. This measure aims at encouraging local smelting and value addition for the waste copper. This move may also be aimed at discouraging vandalism of public property by unscrupulous dealers who sell these products outside of Kenya. In addition, the Bill has introduced a definition of the word Special Economic Zone to have the same meaning assigned to it under the Special Economic Zones Act of 2015. Under the said Act, a special economic zone means a zone declared as such under the Act by the Cabinet Secretary for industrialisation. Exemptions to projects under SOFA The Bill has amended the Second Schedule to the Miscellaneous Fees and Levies Act, 2016 to exempt goods imported for implementation of projects under SOFA with the Government from both Import Declaration Fee (IDF) and Railway Development Levy (RDL). Definition of terms The Bill has amended the definition of the term export to include goods taken out of an export processing zone. 8 Finance Bill 2018
Employment taxes and other employee statutory deductions Extension of foreign income tax amnesty to 30th June 2019 The Bill has extended the deadline of filing for amnesty on foreign income and assets to 30 June 2019. The amnesty covers taxes, penalties and interest for repatriated foreign income earned on or before 31 December 2017 and which would have been subject to tax in Kenya. The Bill further exempts the declared funds from the provisions of the Proceeds of Crime and Anti-Money Laundering Act, 2009 and other Acts that relate to investigations of financial transactions. However, this exemption does not cover money derived from terrorism, poaching and drug trafficking. This may be part of the government s efforts to increase uptake of the amnesty and address concerns raised by taxpayers during the process. Clarity on applying for extension of time to file returns From 1 July 2018, a taxpayer can request for an extension of time to file a return at least fifteen days before the due date for monthly returns and at least thirty days for annual returns. Upon request for extension, the Commissioner is required to respond at least five days before the due date lest the request is deemed accepted. This is a welcome move for taxpayers as the lack of clarity in the existing law made it difficult to request such extensions and where extensions had been applied for in the past, the revenue authority sometimes took a long time to respond. Higher interest and penalty for late tax payments The Bill has increased the late payment interest from 1% per month to 2% per month on the tax due. The Bill also introduces a late payment penalty of twenty per cent of the tax due. The increase in the interest and penalty may compel taxpayers to pay the taxes due on time. However, there is a reprieve for individuals since the Bill proposes to reduce the late filing penalty for individuals annual returns from twenty thousand shillings to the higher of five per cent of the tax payable or two thousand shillings. These changes are effective from 1 July 2018. It is however noted that under the current law interest cannot exceed the principal tax amount. Introduction of a National Development Fund levy In line with the government s Big-4 Agenda, the Bill proposes to amend the Employment Act, 2007 to introduce a National Housing Development Fund with both employer and employee contributions. Under the Bill employers and employees will each contribute to this fund 1% of the employee s gross monthly earnings up to a maximum of KES 5,000. This change is effective 1 October 2018. If this proposal is approved by Parliament this levy is likely to increase the cost of employment/labour, thus contradicting the government s aim to reduce unemployment rates. We await the guidelines on how the Fund will operate and how it will benefit potential homeowners among other issues. The Cabinet Secretary (CS) has however noted that the 1% as provided under the Bill is an error and will be amended to reflect a 0.5% employer and 0.5% employee contributions up to a maximum of KES 5,000 per month as per his speech. We await the correction of this error by Parliament. Tightening the noose on employers who delay pension contribution remittances The Bill proposes to amend the Retirement Benefits Act, 1997, to give powers to the Retirement Benefits Authority (RBA) to compel non-compliant employers to pay the outstanding contributions and interest with a penalty of five percent of the unremitted contributions or a minimum of twenty thousand shillings. This is a welcome move to employees who previously did not have sufficiently documented remedies for their pension non-compliant employers. This change is effective 1 October 2018. The proposed changes on the RBA Act is a welcome move to safeguard employee s pension contributions. However, even as we await the guidelines on the Housing Development Fund levy, this new statutory contribution will increase cost of employment and therefore negatively impact the Government s initiatives geared towards reducing unemployment. 9 Finance Bill 2018
Conclusion We await further deliberations on the Bill by the National Assembly before the Finance Act, 2018 comes into force. Therefore, there is still an opportunity for the various stakeholders to engage the National Assembly with proposals for inclusion in the Finance Act. Please speak to us should you require any assistance. For further information on the Finance Bill 2018, please contact any of the people below or your usual PwC contact. Steve Okello Director/Partner steve.x.okello@pwc.com +254 20 285 55116 Job Kabochi Director/Partner job.kabochi@pwc.com +254 20 285 5653 Titus Mukora Director/Partner titus.mukora@pwc.com +254 20 285 5395 Maurice Mwaniki Associate Director maurice.mwaniki@pwc.com +254 20 285 5334 This publication has been prepared as general information on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specifi c professional advice. 2018 PricewaterhouseCoopers Limited. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers Limited which is a member fi rm of PricewaterhouseCoopers International Limited, each member fi rm of which is a separate legal entity. 10 Finance Bill 2018