THE HITS & MISSES IN THE FINANCE BILL, 2024
(Analysis of the proposed amendments to the Income Tax Act)
Definitions and interpretation
Section 2 of the Income Tax Act
This section is known as the interpretation section, since it contains definitions of key words used in the Income tax act.
The proposed amendments by way of addition relates to the following: –
- “Digital content monetization” – The following activities have been introduced to mean “digital content monetization” i.e., Creative works, creating or sharing of the material; or any other material that is not exempted under the Act.
- “Related person” – This definition is provided for under Section 18 (6) of the Income Tax Act, although it was not comprehensive. The Bill has now proposed to define “related-persons” as follows: –
“Related person” means in the case of two persons, either person who participates directly or indirectly in the management, control or capital of the business of the other person, and in the case of more than the two persons, —
- any other person who participates directly or indirectly in the management, control or capital of the business of the two persons; or
- an individual who—
- participates directly or indirectly in the management, control or capital of the business of the two persons; and
- is associated to the two persons by marriage, consanguinity or affinity and the two persons participate in the management, control or capital of the business of the individual;
Implication: Brings clarity to the previously mentioned definitions under Section 18 (6) of the Income Tax Act.
Taxation of ride-hailing services, food delivery services, freelance services on a Digital market place
Section 3 of the Income Tax Act, also referred to as the “charging provision,” establishes income tax as applicable to all income earned by residents or non-residents in Kenya.
The proposed amendments to this section broaden the definition and scope of “Digital marketplace” to encompass various services, including ride-hailing services, food delivery services, freelance services, professional services, rental services, task-based services, and any other services not exempted under the Act.
Implication: Expands the tax net to include a wider array of digital activities. Academic writing and similar pursuits can fall under the broad categories outlined in the new definition of a “digital marketplace” such as task-based services, professional services, or freelance services. This expansion brings more people to the tax net.
Taxation of business income where Foreign Losses are realized
Section 4A of the Income Tax Act has been amended to address the treatment of income from businesses involving foreign exchange gains or losses. Under this proposed amendment, forex losses can only be deferred and claimed over a period of up to three (3) years from the date they were realized. This deferral is applicable to a person whose gross interest paid or payable to non-residents exceed 30% of their EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
The current legislation allows for a deferral period of up to five (5) years, which has now been reduced to three (3) years under the proposed amendments. the losses could be deferred for five (5) years. This has now been reduced to three (3) years.
Implication: This proposed amendment reduces the period during which foreign exchange losses can be deferred, from five years to three years. This will potentially affect MNE’s and transactions between related parties that are financed by foreign entities. The shorter deferral period may necessitate adjustments in financial planning and proper tax strategies to minimize foreign exchange exposure.
Taxation of income received from a Public Entity
Section 4C is a newly introduced provision that clarifies that any payment received by an individual from a government or public organization for the supply of goods will be considered as the individual’s income for the tax year in which payment is received.
Implication: This proposal aims to expand the scope of taxable income by including individuals who receive payment from a public entity for supplying goods, such as those who participates in public tenders. This expansion implies that such payments would now be deemed as income hence the individuals would be required to report and taxes on the payments they received.
Taxation of Employee Benefits i.e., Meals
Section 5: “Gains and profits” derived from Employment Income.
Under Section 3 (2) of the Income Tax Act, an employee’s “gains or profits” encompass various forms of compensation such as wages, salary, allowances (including subsistence and commuter), employer-provided meals, travel allowances etc.
The changes proposed are: –
- Reimbursement of expenses: Presently, expenses incurred by an employee wholly and exclusively in the production of income are exempted up to the first Kshs. 2,000/= per day paid to an employee when outside their usual place of work while on official duty (per diems). The proposed Bill seeks to Remove the limit of Kshs. 2000/= and substituting it with the requirement that an employee shall enjoy a tax-benefit of an amount not exceeding 5% of his/her gross earnings.
- Aggregate value of a benefit: Raising the minimum taxable value of a benefit from Kshs. 36,000/= p.a. to Kshs. 48,000/= p.a.
- Meals: Previously, meals served on employees in a canteen or cafeteria operated by employer or a third party were tax-exempt benefits if the value of the meal did not exceed Kshs. 48,000/= p.a. per employee. Any amount above Kshs. 48,000/= was treated as a taxable benefit. However, the Bill proposes to raise this limit to Kshs. 60,000/= p.a. with any amount above this limit considered a taxable benefit thus subject to tax.
Implication: This amendment carries a positive impact as it enhances employees’ benefits. It signifies that any benefit an employee receives up to Kshs. 60,000/= p.a. shall not be categorized as a taxable benefit on the employee’s earnings.
Income from Management or Professional fees, royalties, interest and rents
Section 10: – This section outlines the payment of management fees and professional fees at the rates specified in the Income Tax Act.
An amendment has been introduced to this section by adding subsection (4), which stipulates that any individual who owns or operates a digital marketplace, and engages in or facilitates payments related to digital content monetization, will be subjected to tax on the acquired amount, which will be deemed to have accrued in or derived from Kenya.
Implication: This amendment carries a positive impact as it aims to broaden the tax base. Consequently, income generated through the digital marketplace will be deemed as income accrued in or derived from Kenya thus subjected to tax. Moreover, the owner or operator of the platform facilitating these transactions will be mandated to withhold the payments and apply the applicable withholding tax rate.
Digital Services Tax (DST)
Section 12E: Repeal of the Digital service tax
The current Section 12 E of the Income Tax Act was initially introduced as a tax obligation for non-resident individuals whose income accrues or originates in Kenya through business conducted via a digital market place.
However, the introduction of this section occurred despite the directives of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting, which urged countries to rescind their respective Digital Services Taxes, as they would be contingent upon Pillar 1.
This action was taken to pave way for the implementation of the global minimum corporate rate of 15% on multinational entities with economic presence in developing countries i.e., Kenya.
In line with the implementation of OECD Pillar 1, Kenya has subsequently proposed to repeal the Digital Service Tax applicable to non-resident entities operating in Kenya.
In light of the above, Section 12E has been replaced by a new tax for non-resident entities known as “significant economic presence tax” whose income from provision of services is derived from or accrues in Kenya through businesses carried out on the digital market place.
Implication: This amendment represents a positive step towards implementation of the OECD/G20 framework on Pillar 1 and 2 proposals. However, from the viewpoint of developing countries, the question of whether they will reap any benefits from the OECD proposals remains a contentious and pertinent issue.
Motor Vehicle Circulation Tax
Section 12H: Motor Vehicle Circulation Tax
This amendment entails a new tax obligation payable to the Commissioner for each motor vehicle upon the issuance of an insurance cover, at a rate specified in the Third schedule to the Income Tax Act.
Insurance companies will be required to collect and promptly remit the tax to the Commissioner within five (5) days from the date of issuance of an insurance cover.
This tax bears resemblance to the United Kingdom’s Vehicle Excise Duty tax (VED) which is an annual levy imposed on all vehicles utilizing public roads, collected by the Driver and Vehicle Licensing Agency.
Implication: This tax imposition seems redundant, given that Kenyans already bear a significant tax burden during vehicle purchases and at the fuel pump.
Section 15: Allowable deductions (Against Taxable Income)
When determining an individual’s total income for a specific accounting period, certain deductions are permissible. These deductions may encompass expenses that are wholly and exclusively incurred in the generation of that income.
This section has been amended by introducing the following: –
- Contributions made by an employee to the Social Health Insurance Fund are now an allowable deduction;
- Deductions made by an employee in accordance with the Affordable Housing Act are now allowable deductions;
- Contributions made to a post-retirement medical fund are deductible to a limit of Kshs. 10,000/= p.m. equating to Kshs. 120,000/= annually.
- Mortgage Interest payments, not exceeding Kshs. 360,000/= annually, on an amount borrowed from a specified financial institution and utilized for the purchase or enhancement of residential premises occupied during that year of income, are eligible for deduction. The current allowable interest deduction amount is Kshs.300,000/=
Implication: This amendment carries a positive tone as it aims to complement both the Affordable Housing Act and the Social Health Insurance Fund Act. Furthermore, it raises the ceiling on interest payments allowable from Kshs. 300,000 annually to Kshs. 360,000/= annually.
However, as will be discussed in subsequent proposed amendments in the third schedule, these proposals seek to eliminate the personal relief.
Section18 (6): Definition of “related-person”
Typically, Section 18 of the Income Tax Act pertains to transactions between related persons. This means that such transactions are to be considered at arm’s length for transfer pricing purposes.
Accordingly, Section 18 (6) of the Income Tax Act defines a “related-person” as follows: –
“A person is related to another if-
- Either person participates directly or indirectly in the management, control or capital of the business of the other;
- A third person participates directly or indirectly in the management, control or capital of the business of both; or
- An individual, who participates in the management, control or capital of the business of one, is associated by marriage, consanguinity or affinity to an individual who participates in the management, control or capital of the business of the other.”
However, an amendment has been proposed to delete section 18 (6). With the elimination of the “related-persons” definition, the Act now references the definition and interpretation of “related-persons” as outlined in Section 2 of the Act.
Implication: The act has now comprehensively provided for the definition and interpretation of “related-persons” under section 2 of the Income Tax Act instead of Section 18 (6) of the Act. This amendment is regarded favorably.
Advance Pricing Agreements
Section 18G: This is a new amendment on Transfer Pricing
This amendment introduces the concept of Advance Pricing Agreement (APA).
APA is an arrangement that determines, in advance an appropriate set of criteria (e.g., method, comparable, appropriate adjustments, and critical assumptions) for determining transfer pricing for specific transactions over a predetermined period.
APAs are requested by taxpayers and negotiated between the taxpayer and the tax administration.
This proposal seeks to achieve the following: –
- Certainty in transfer pricing methods;
- Eliminate double taxation and non-taxation;
- Reduce transfer pricing disputes;
- Facilitate disclosure of business information.
Implication: This amendment is welcomed, particularly as there is a growing need for Advance Pricing Arrangements (APAs) in Africa. However, Kenya will need to develop both technical expertise and intellectual capacity to effectively manage APAs. This is crucial given the intricacies and time required for evaluating the future projections provided by the taxpayers.
Taxation of Members’ club and trade associations
Section 21: Members’ club and trade associations.
This section provides for taxation of member clubs and trade associations.
Member clubs are taxed under Section 21 (1) as follows: –
“A body of persons which carries on a members’ club shall be deemed to be carrying on business and the gross receipts on revenue account (including entrance fees and subscriptions) shall be deemed to be income from a business:
Provided that where not less than three-quarter (¾) of such gross receipts, other than gross investment receipts, are received from members of such club, shall not be deemed to be carrying on a business and no part of the such gross receipts, other than gross investment receipts, shall be income.”
In simpler terms, if the majority of the club’s income comes from its members, it’s not seen as a business for tax purposes, and the income generated from those member-related activities isn’t taxed. However, if the club derives most of its income from sources other than its members, it is considered a business, and all income, including membership fees, is subject to taxation.
The amendment deletes the definition of “gross investment receipts” which are: – gross receipts in respect of interest, dividends, royalties, rents and other payments.
Implication: This amendment is likely to result into interpretation challenges. Because, gross investments receipts (which are typically excluded) from the calculation when determining whether the club is considered to be carrying on business or not has been proposed to be deleted by the amendment. Will this mean that such investments are included in the computation when determining whether the club’s is carrying on a business? There might be question on how to classify income from investments.
Section 22A – Deductions in respect to contributions to registered pension or provident funds.
- Contributions by members to a registered retirement benefit scheme are tax deductible up to a maximum of Kshs. 20,000/= p.m. or Kshs. 240,000/= p.a.
- The Finance Bill introduces an amendment by increasing the maximum tax deductible from Kshs. 240,000/= p.a. to Kshs. 360,000/= p.a.
Implication: This compliments the amendments made in Section 16 (2) where allowable deductions in respect of contributions of an employee have been adjusted to a limit of Kshs. 360,000/=.
This will ensure that members who contribute to a registered pension fund enjoy some benefit when computing their taxes.
Section 27: Accounting Periods not coinciding with year of Income
This section provides that if a person prepares their business accounts for a period of 12 months ending on a day other than 31st December, adjustments may be necessary, at the discretion of the Commissioner, to determine their total income for any given tax year.
Section 27 (1A) allows an incorporated body to alter the date to which the accounts of the business are made, subject to written approval of the Commissioner.
A person seeking the Commissioner’s approval to change accounting dates must submit a written application at least six (6) months before the intended date for finalizing the accounts. Subsequently, the Commissioner is obligated to provide a decision within six (6) months from the date of receipt of the request.
Notably, the amendment introduces Section 22 (1D), stating that if the commissioner fails to render a decision within these six (6) months periods, the taxpayer’s application will be automatically approved.
Implication: This amendment has a positive implication as it ensures timely processing of taxpayer’s request to change the accounting period for their business. It provides assurance to taxpayers that their applications will be handled promptly and efficiently. This promotes transparency and accountability in the process of altering accounting dates.
Section 31: Insurance Relief
Currently, this section grants insurance relief to resident individuals on premiums paid for education policies, health policies, or life insurance.
However, the Finance Bill 2024 proposes deletion of paragraph (v) of the proviso to section 31 (1). This paragraph currently permits insurance relief on contributions made to the National Hospital Insurance Fund (NHIF).
Implication: This deletion aligns with the establishment of the new Social Health Insurance Fund. The Finance Bill, 2024 introduces this contribution as an allowable deduction under Section 15 of the Income Tax Act. However, it affects taxpayer’s eligibility for insurance relief in the context of contributions made to SHIF.
Section 34: Rates of Tax
Section 34 of the Income Tax Act provides for general rates of tax applicable for specified kinds of income to resident and non-resident persons.
This Section is deleted and replaced by the following: –
Section 34 (1) “The tax chargeable on any income specified in this Act shall be at the rate specified in the Third Schedule”
Implication: This amendment by way of deletion simplifies the process for taxpayers and tax administrators to refer to the specified tax rate applicable to the income in question as outlined in the Third schedule.
What does the third schedule provide? – This schedule outlines the diverse tax rates that apply to specific sources of income as defined under the Income Tax Act. For instance, it includes rates for PAYE, corporate income tax, and non-resident taxes on management or professional fees.
Section 72C: Penalty on underpayment of instalment tax
Installment tax is an estimated income tax paid to KRA periodically in four equal instalments, in anticipation of the tax payable for a year of income.
The current section 72C provides for a penalty of twenty (20%) of the difference between the amount of instalment tax payable and the instalment tax actually paid.
The Bill proposes to repeal this section entirely.
Implication: The deletion of this provision is a welcomed amendment as it was punitive and costly to taxpayers. This is because, installment tax is solely based on estimations and projections, inevitably leading to discrepancies between the instalment tax payable and the instalment tax actually paid.
Taxation of amateur sporting associations
Proposed amendments to the First Schedule to the Income Tax Act
The first schedule to the Income Tax Act grants exemptions for certain types of income. For instances, income from organizations established for the purpose of relief of poverty or distress; income of individuals exempted by or under any Act of Parliament, income from amateur sporting associations etc.
Paragraph 6: of the First schedule exempts income from amateur sporting associations from taxation. This implies that any income earned by such associations is not subject to income tax and therefore not liable for taxation.
However, the proposed Bill now seeks to amend paragraph 6 by way of deletion.
Implication: This amendment by way of deletion implies that any income earned by an amateur sporting association will now be subjected to taxation, removing its previous exemption. A critical question arises: will this negatively impact amateur sporting associations in Kenya, especially considering the current state of amateur sport development and talent management, which is still lacking.
Taxation of income of registered trust scheme
Paragraph 13: Currently, the income of any registered trust scheme is exempted.
The Bill proposes to amend this paragraph by way of deletion.
Implication: Income generated by any registered trust scheme, specifically referring to trust schemes designated for providing retirement annuities, will now be subjected to taxation. This indicates a change in tax treatment for such schemes. Both trustees and the beneficiaries under the registered trust schemes will be affected by these proposals.
Taxation of interest income earned from Listed Bonds, notes and other similar securities
Paragraph 51 of the First Schedule to the Income Tax Act stipulates that interest income derived from listed bonds, notes or other similar securities used to raise funds for infrastructure and other social services is exempted from taxation.
However, the proposed amendment seeks to insert a proviso, to the extent that the exemption shall only apply to interest income from bonds, notes, or securities listed before this new provision.
Implication: This implies that interest income derived from any bonds, notes, or securities of a similar nature subsequent to this amendment will not benefit from income tax exemption. The potential consequence of this amendment is that it might dissuade investors from investing in these listed securities due to the loss of tax advantages.
Taxation of Monthly Pension withdrawals
Paragraph 53 of the First Schedule of the Income Tax Act specifies that monthly pension granted to individuals aged 65 years or older are exempt from taxation.
However, the new amendment proposes to delete this section by replacing it with a new section. Under this amendment, payments from a registered pension, provident fund, or individual retirement fund will be exempted from income tax if a person:
- Retires prematurely due to ill health before reaching the retirement age; or
- Withdraws from the fund after twenty (20) years from the date of registration as a member of the fund.
Implication: This amendment widens the exemption criteria from solely applying to individuals aged 65 years or older to now include those retiring due to ill-health before reaching the retirement age. Consequently, anyone retiring due to ill-health reasons will be exempted from income tax on their withdrawals or payments from the fund as the stipulated limit.
Taxation of income of a registered family trust.
Paragraph 57: Thisprovisionspecifies that income or Principal sum of a registered family trust is exempted from income tax.
However, the Act proposes to delete this section.
Implication: This means that the income of a registered family trust will now be subjected to income tax. This change, when considered alongside section 11 of the Income Tax Act concerning deemed trust income, eliminates any tax benefits previously associated with the registering a family trust.
Transfer of immovable property to a registered family trust
Paragraph 58 of the First schedule to the Income Tax Act outlines that any capital gains arising from the transfer of title of immovable property to a family trust are exempted from income tax.
The purpose of this section was to incentivize individuals to register family trusts and transfer assets to them. This approach aimed to facilitated estate planning, thereby mitigating potential succession disputes among heirs.
The proposed Bill aims to amend this section through deletion, possibly influenced by transactions involving third parties and registered family trusts. Such transactions might necessitate capital gains tax on immovable property. However, I believe that when property is transferred from an individual to their registered family trust, an exemption from capital gains tax should be granted.
Implication: Deleting this section implies that any capital gains arising from the transfer of title of immovable property to a family trust will be subjected to income tax. This taxation would be governed by the Eighth schedule to the Income Tax Act, which imposes a rate of 15% on the net gain.
Taxation of interest income earned from listed Green Bonds, notes etc.
Paragraph 60 of the First Schedule to the Income Tax Act stipulates that interest income from listed green bonds, notes, or similar securities is exempt from income tax.
However, the proposed amendment, akin to the one in paragraph 50, aims to only exempt interest earned before the introduction of the proviso. Consequently, any interest accrued from subsequent listed green bonds would be subject to taxation.
Proposed amendments to the Second Schedule to the Income Tax Act
The Second Schedule typically outlines deductions for investment allowances, which serve as tax incentives for capital expenditures. These allowances encompass wear and tear, industrial building deductions, investment deductions, and more.
The proposed amendment to paragraph 1 involves deleting sub-paragraph (c). This change introduces a condition regarding the rate of investment allowance applicable to the purchase or acquisition of an indefeasible right to use fiber optic cable or spectrum license by a telecommunication operator. Specifically, it stipulates that for spectrum licenses purchased or acquired before July 1, 2024, the deduction shall be the unamortized portion over the remaining useful life of the spectrum license.
Scrapping of the Affordable Housing Relief
Top of Form
Proposed amendments to the Third schedule to the Income Tax Act
As previously noted, the third schedule to the Income Tax Act is divided into two categories, notably, Head A which pertains to personal relief and Head B on tax rates.
Head A offers taxpayers various deductions during computation of their annual taxes. These deductions encompass insurance relief and affordable housing relief.
Paragraph 3 currently provides for Affordable Housing Relief at the rate of 15% of the employee’s contribution, capped at Kshs. 108,000/= p.a.
The proposed amendment seeks to remove this Affordable Housing Relief altogether.
Implication: Employee’s will no longer benefit from the Affordable Housing Relief. This change may stem from the fact that deductions made by an employee under the Affordable Housing Act are now considered allowable deductions when computing their income.
