Kenya—a Two-Fold Approach to Covid-19: Tax Insight

NAIROBI (Capital Markets in Africa) — Following presidential directives to the National Treasury to put in place various tax and fiscal measures to cushion Kenya’s economy from the adverse effects of the Covid-19 pandemic, the Tax Laws Amendment Act 2020 (TLAA) was assented to by the President of Kenya on April 25, 2020. Kenya has adopted a two-fold approach, not only introducing relief measures but also measures to maintain tax revenue. This Insight will analyze the tax measures put in place and their impact.

Tax Measures to Cushion Taxpayers
Reduction of Tax Rates
– Like most countries, Kenya has reduced various tax rates to cushion taxpayers. Key highlights of the reduced rates include:
– reducing the value-added tax (VAT) rate for standard-rated items from 16% to 14%;
– reducing corporation tax rates for residents from 30% to 25%;
– adjusting the various pay as you earn (PAYE) tax bands, reducing the highest tax band from 30% to 25%;
– 100% income tax relief for persons earning employment income of 24,000 Kenyan shillings ($226) and below per month; and
– reducing the turnover tax (TOT) rate from 3% to 1%, and increasing the tax threshold from revenues not more than 5 million Kenyan shillings to revenues falling from 1 million to 50 million Kenyan shillings.

Individuals earning employment income will benefit from the reduced tax bands and increase in personal relief. This effectively reduces the PAYE liability for income earners and more disposable income results from the tax relief.

The VAT rate chargeable on standard rated goods has been reduced by 2%. Consequently, the prices of these goods are expected to decrease. However, this excludes other goods such as petroleum and petroleum products which are still taxable at 8% and have a nil effect on essential goods, including foodstuffs such as maize, bread, milk among others, which are either zero-rated or exempt.

Corporations that are resident in Kenya will benefit from a reduced corporation tax rate of 25%. Although this reduced rate will be beneficial to corporates it comes at a time when many corporates have already accounted for and paid their annual taxes. However, this reduction will be helpful going forward as businesses work to remain sustainable. The same cannot be said for nonresident entities generating business income in Kenya, as the corporation tax rate remains the same at 37.5%.

Individuals and businesses operating in the informal sector will benefit from the new thresholds for TOT which were raised, and the tax rate which was reduced to 1% from 3%. Prior to this, the Kenya Revenue Authority (KRA) had targeted taxpayers in the informal sector by the introduction of presumptive and turnover tax for those earning an income below 5 million Kenyan shillings.
The new amendments will exclude those earning an income below 1 million, providing a cushion for these businesses. This will be essential as most businesses are facing challenges due to reduced consumer spending and lockdown measures which adversely affect the flow of business income. Of note, however, is that incorporated companies are now under the ambit of the TOT. The inclusion of these companies means a widened scope of the TOT, hence more tax revenues to the government.

Exemption and Zero Rating of Essential Items from VAT
Personal protective equipment, including facemasks, for use by medical personnel and members of the public, is now exempted from VAT. This is due to the essential nature of these items for the healthcare sector and individual households in preventing and managing the spread of Coronavirus, and the exemption is timely and beneficial.

Medicaments and vaccines, previously zero-rated, have been exempted from tax. Although these items will not be subject to VAT, the manufacturers and suppliers of these items will not be able to deduct input VAT incurred during the manufacturing process. As a result, the input VAT incurred will probably be passed on to the final consumers, making these items more costly at a time when they are an essential necessity.

Expedited Payment of Verified VAT Refunds
In his press brief on proposed tax measures, the President directed the KRA to expedite the payment of verified VAT refund claims of up to 10 billion Kenyan shillings within three weeks. It is expected that if the VAT refunds have already gone through review by the KRA VAT refunds department and been approved, they will be payable immediately. The aim of this directive is to ensure increased cash flow for businesses.

With the President’s directive, it is expected that the National Treasury will release funds to the KRA for the processing of the refunds. For taxpayers with any outstanding VAT refunds, this is an opportune time to ensure that their refund applications have been reviewed and verified by the KRA to expedite payments.

The National Treasury also received directives to allow the offsetting of verified VAT refund claims against withholding VAT (WHVAT) owed. This should reduce the WHVAT tax liability by offsetting VAT amounts owed against WHVAT to be paid. This will enable businesses that owe WHVAT and have refund claims to improve cashflow.

Tax Measures to Sustain Tax Revenues
Even with the issuance of the above tax reliefs, the government has put in place various measures to generate more tax revenues. These measures include reduction of tax incentives, reduction of exempt income, and increase of tax scope. It is unconventional to remove tax incentives and reduce the scope of exempt income at a time when the economy needs these incentives the most. We will, however, analyze the effect of these measures below.

Increased Tax Scope
The TLAA proposed changes that have increased the tax scope under various tax heads. The scope of withholding tax (WHT) now includes payments made to non-residents for services relating to sales promotion, marketing, advertising, and transportation of goods, excluding air and shipping transport services. Further, reinsurance premiums, excluding those paid in respect of aviation insurance, are now subject to WHT. There has also been an increase in resident WHT rates on dividend payments from 10% to 15%.

The expansion of the scope of WHT is to ensure that the government is able to generate more revenue to sustain the economy even with the outbreak of Covid-19. The increase in WHT scope to include various services mirrors the tax regimes in neighboring East African countries where similar services are subject to WHT.

Reduction of Tax Incentives
Capital expenditure deductions on investments in building and equipment, which would ordinarily range from as high as 100% to 150% of the expenditure have been reduced to 50%. Although businesses that had already applied for the deduction will progressively utilize their current incentives, new applicants will have to settle for the reduced rates. The reduction is seen as a move to reduce corporation tax revenue loss through tax incentives, as most businesses would take a long time before fully utilizing the capital deduction allowance.

Other incentives that were repealed include preferential corporation tax rates for newly listed companies and resident life insurance businesses, which changed from 20% to 25%. The new rates may not affect many companies, as the number of newly listed companies is quite low. Electricity costs rebates given to manufacturing companies have also been removed. This entailed an additional deduction of 30% of electricity costs incurred by manufacturers. This will be felt more once lockdown measures are lifted and production picks up.

Reduction of Exempt Income
Various government parastatals that were exempt from income tax will no longer be exempt; this mainly includes agricultural boards and bodies. This measure includes an overhaul of the exemption schedule to update the income exemptions and to remove outdated exemptions.

Other changes include:
– capital gains tax exemptions on transfers of property by individuals in various cases have been removed;
– bonus, overtime and retirement benefits paid to income earners in the lowest tax bracket will no longer be exempt;
– compensating tax exemptions given to power producers in power purchase agreements will no longer be applicable;
– dividends paid by special economic zone operators to nonresident investors will no longer be exempt; and
– dividends received by registered venture capital companies will no longer be exempt.

Although these changes were primarily introduced to overhaul and update the income tax exemption schedule, the resultant effect will be that tax revenue from taxation of these incomes will increase. 

Removal of Tax Incentives
One of the key amendments under the TLAA is the reduction in the number of goods and services exempted from VAT. This is a move to increase tax revenues to raise more funds to be used to combat the effects of Covid-19 on the economy. However, the imposition of these taxes means that various incentives will be withdrawn at a time when many industries need them.

These inputs will be more expensive and the costs will trickle down to the final consumers. A good example is a likely increase in the cost of supply of essential commodities such as liquid petroleum gas, which cost will be borne by consumers. Other affected supplies include insurance brokerage services, given that insurance services will be an essential supply during the pandemic, and others also include exemptions relating to supplies to industrial parks, mining and exploration companies, marine and fisheries companies, plant and machinery used for manufacture, and supplies to power generating plants.

These changes will greatly affect these industries and defeat the purpose of the introduction of the exemptions in the first place, which was to boost the growth of the industries, especially since they are essential industries in the Kenyan economy.

Outlook
The measures introduced are aimed at cushioning taxpayers by providing tax reliefs, at the same time as maintaining tax revenues by reducing tax exemptions and incentives. While it may be unconventional to increase taxes during a pandemic, it is essential that Kenya ensures that tax revenues collected are maintained in an effective way that does not strain the taxpayer’s pocket.

Perhaps the Government of Kenya could introduce more tax measures such as tax reliefs or tax breaks, deferral of tax payments, waivers of any accrued penalties and interest (which is currently frozen even when applied for) across the board, and more so for businesses that will be hardest hit by further precautionary measures such as lockdowns. These businesses include service industries such as the hospitality sector, manufacturing and transport sector, and the informal sector. This could also include rebates for employers who maintain and pay their staff as well as subsidies and rebates in the informal sector. 

Planning Points
It is important for individuals and businesses to take note of the current changes and take appropriate measures to adapt to the current economic situation. We recommend the following considerations:
– taxpayers can take advantage of the reduced rates for both employment and business income to ensure sustainability and maintain tax savings;
– individuals and businesses can also take advantage of fiscal incentives to ensure continued cashflows. These include reduced Central Bank rates, cash retention ratios for financial institutions, – – – elimination of defaulter listings, which will mean more money for lending at lower tax rates;
– investors can also consider investment in Kenya when things pick up, as Kenya will have more preferential rates such as reduced corporation tax rates and low capital gains tax rates in the East – – African region, and exemptions for structuring arrangements for already established firms;
– the Kenyan tax authority should consider more effective tax measures that will cushion industries or possibly reinstating incentives that encourage investment in key industries as things pick up.

Lynnet Mwithi is a Manager and Diana Chepkemoi is a Senior Legal Analyst with Taxwise Africa Consulting LLP. The authors may be contacted at: lmwithi@taxwise-consulting.com; dchepkemoi@taxwise-consulting.com