Analysis of the Kenya Finance Act 2023

Introduction

1. The Finance Act 2023 was assented to by the President of Kenya on 26th June 2023.
2. The Finance Act 2023 issued Conservatory Orders which suspended the implementation of the Act on 29th June 2023 following an application in the Constitutional Petition filed in Petition No. E181 of 2023, Okiya Omtatah Okoiti & 4 Others v the Cabinet Secretary for the National Treasury and Planning & 2 Others. 
3. The Court of Appeal delivered a ruling on 28th July 2023 lifting the conservatory orders suspending the implementation of the Finance Act.
4. This effectively means that the Finance Act 2023 took effect from 1st July 2023 and as such, taxpayers are required to comply with the provisions of the law..
5. The Finance Act has brought about major changes to Kenya’s taxation laws. The Finance Act is a significant piece of legislation that will have a major impact on taxpayers in Kenya. The Act makes a number of changes to the tax laws in Kenya, including:

Income Tax Act

Pay As You Earn (PAYE)

1. The Finance Act introduces two new PAYE tax bands in addition to the current band of 30%. 
2. The top rate has increased from 30% to 32.5% for income between KShs 500,000 to KShs 800,000, and to 35% for income exceeding KShs 800,000.
3. The PAYE tax bands will be computed as follows:

Taxable Amount (Annual Band)	Taxable Amount (Monthly band)	Tax rate
First 288,000	First 24,000	10%
Next 100,000	Next 8,333	25%
Next 5,612,000	Next 467,667	30%
Next 3,000,000	Next 300,000	32.5%
Above 9,600,000	Above 800,000	35%

Mileage Treatment Rates approved by AA Kenya

1. The Finance Act also amended the section 5 (2) (a) (iv) to state that employers paying mileage reimbursement to their employees at the standard rate approved by AA Kenya will not be required to assess a taxable benefit on the receiving employee. Any mileage reimbursements in excess of the AA Kenya guideline will be taxable on the employee.

Club Entrance and Subscription Fees

1. Section 16 (2) (v) of the Income Tax Act has been amended to state that club entrance and subscription fees paid by the employer on behalf of employees shall be treated as taxable income on the employee to the extent that the expense has been allowed against the employer’s income.

Tax exemption for non-resident individuals working for development partners in Kenya.

1. The First Schedule of the Income Tax Act has been amended to introduce tax exemption on income earned by a non-resident contractor, sub-contractor, consultant, or employee involved in the implementation of a project financed through a 100% grant under an agreement between the Government and the development partner, to the extent provided for in the Agreement. The validity of this exemption will only be applicable if the non-resident is in Kenya solely for the implementation of the project.

Due dates for Withholding Tax, Withholding VAT, Rental Income Tax and Excise Duty Remittances

1. The Finance Act requires that Withholding Tax, Withholding VAT Tax, Rental Income Tax and Excise Duty to be remitted on the 5th working day after the deduction is made.

Definition of winnings

1. Section 2 of the Income Tax Act has been amended by the Finance Act in the definition of “winnings” to mean the payout from a betting, gaming, lottery, prize competition, gambling or similar transaction under the Betting, Lotteries and Gaming Act without deducting the amount staked or wagered.
2. The new definition eliminates ambiguity on the taxation of winnings.

Definition of immoveable property

1. Section 2 of the Income Tax Act has been amended by the Finance Act in the definition of “immovable property”. Immovable property now includes:
   • Land, whether covered by water or not. 
   • Any estate, rights, interest or easement in or over any land. 
   • Things attached to the earth or permanently fastened to anything attached to the earth, including a debt secured by mortgage or charge on immovable property.
   • A mining right, an interest in a petroleum agreement, mining information or petroleum information.

Taxation of digital content monetization

1. As the digital economy continues to grow and evolve, governments worldwide are recognizing the significance of capturing revenue from digital transactions. Taxing digital content monetization provides governments with an additional stream of revenue. As more businesses and individuals engage in digital content creation, distribution, and monetization, the potential tax base expands, allowing governments to fund essential public services and infrastructure.
2. The Finance Act defines “Digital content monetisation” to mean offering for payment entertainment, social, literal, artistic, educational or any other material electronically through any medium or channel, in any of the following forms:
   • Advertisement on websites, social media platforms or similar networks by partnering with brands including endorsements from sellers of such brands.
   • Sponsorship where a brand owner pays a content creator for content creation and promotion. 
   • Affiliate marketing where the content creator earns a commission whenever the audience of the content creator clicks on the product displayed. 
   • Subscription services where the audience pays a periodic fee to access the content and support the content creator. 
   • Merchandise sales where physical goods and services are sold featuring a logo, brand or catchphrase to the audience of the content creator, eBooks, courses or software. 
   • Memberships programmes for exclusive content including early access. 
   • Licensing the content including photographs, music or other businesses or individuals for use in the user’s own projects. 
   • Crowdfunding for raisings funds for specific goals for a content creator or another person. 
3. The Withholding Tax rate will be 5% for resident persons and 20% for non-resident persons. 

Changes to limitation on interest expense deductions

1. Currently, deductible interest expense is limited to 30% of an entity’s earnings before interest tax, depreciation, and amortization (EBITDA).
2. The Finance Act removed interest expense on local debt from the restriction. The 30% EBITDA restriction will now only apply to interest on foreign debt, whether from related parties or third parties. 
3. The effective date is 1st January 2024.

Deferment of realized foreign exchange losses.

1. For companies that exceed the stipulated interest expense deductibility threshold of 30% of EBITDA, the Finance Act limits the carry-forward period for foreign-exchange losses to five years from the tax period that a foreign exchange loss is realized. 

Turnover tax (TOT)

1. The Act introduces a branch/PE repatriation tax of 15%. This is in addition to tax chargeable on the income of the branch. The Act provides a formula for computing this tax based on the branch’s net assets and profitability.
2. Additionally, the Act reduces the corporate income tax rate for branches to 30% (from 37.5%) beginning with the 2024 year of income.

Turnover tax (TOT)

1. The Finance Act reduced the TOT’s upper threshold from KShs 50 million to KShs 25 million. The Act increases the TOT rate from 1% to 3%.
2. The threshold reduction increases the businesses that must pay TOT. 
3. Residents whose turnover tax exceeds KES 25,000,000 will be subject to corporation tax of 30% of their taxable profits. 

Taxation of digital assets

1. Amendment by insertion of section 12F to introduce the Digital Asset Tax of 3% payable by a person on income derived from the transfer or exchange of digital assets. Digital assets have been defined to including anything of value that is not tangible such as cryptocurrencies, token codes and Non-Fungible Tokens (NFTs). The Digital Asset Tax is intended to be payable at the rate of 3% of the transfer or exchange value by the person deriving the income at the gross fair market value consideration received, but also through owners of platforms who facilitate exchanges of these assets. Where the owner of the platform is non-resident, they are expected to be registered in Kenya for tax purposes.

Non-deductibility of TIMS/e-TIMS non-compliant invoices

1. The Kenya Revenue Authority has recently been enforcing compliance with its electronic tax invoicing system. 
2. The Finance Act disallows, for corporate income tax purposes, deductions for any expenditure or loss where the supporting invoices of the transactions are not generated from an electronic tax invoice management system.
3. The effective date is 1st January 2024.

Withholding tax on rental Income

1. The Act requires all recipients of rental income on behalf of an owner to withhold and remit withholding tax to the Commissioner within five working days after withholding if the Commissioner has appointed the withholder in writing as an agent. The withholder must also furnish the Commissioner with a return in writing stating the tax deducted and any other information the Commissioner may require. The Commissioner, in turn, must furnish the owner of the rental income with a certificate stating the amount of rent and the tax deducted therefrom.
2. This change is apparently aimed at curbing tax evasion by landlords and enhancing revenue collection from rental income.

Capital gains tax.

1. The Act introduces the following changes to capital gains tax:
2. Capital gains realized on the sales of shares or comparable interests, including interests in a partnership or trust, will now be taxable if, at any time during the 365 days preceding the alienation, the shares or comparable interests derived more than 20% of their value directly or indirectly from immovable property situated in Kenya.
3. The gains derived from the alienation of shares of a company resident in Kenya will now be taxable if the alienator, at any time during the 365 days preceding the alienation, directly or indirectly held at least 20% of the capital of that company. Moreover, the alienator must notify the Commissioner if the transfer will change the underlying ownership of the property by more than 20%.
4. Where property is transferred in a transaction that is not subject to capital gains tax, and the property is subsequently transferred in a taxable transaction within less than five years, the adjusted cost in the subsequent transfer will be based on the original adjusted cost in the first transfer. The provision is apparently meant to curb abuse of existing capital gains tax exemptions.
5. For internal group restructurings that do not involve transfer to a third party, the group must have existed for at least 24 months to qualify for an exemption from capital gains tax.
6. Capital gains tax will now be due and payable on the earlier of:
   • The vendor’s receipt of full purchase price or,
   • Registration of the transfer.

Introduction of preferential intellectual property income regime

1. The Act introduces a preferential tax regime for qualifying intellectual property income. This includes royalties, capital gains and any other income from the sale of an intellectual property asset.
2. The provision appears to be aimed at encouraging retention of intellectual property in Kenya. However, the Act does not specify the preferential tax rate that would apply to the qualifying intellectual property income.

42. Effective date: 1 January 2024

Indirect transfers of interest in licensee or contractor

1. The Act requires a licensee or contractor to notify the Commissioner when its underlying ownership changes by 20% or more.
2. Previously, the Commissioner had to be notified of a 10% or greater change in the ownership of the licensee or contractor.

Review of exemptions

1. The Act introduces income tax exemptions for the following:
   • Royalties paid to a non-resident person by a company undertaking manufacture of human vaccines.
   • Interest paid to a resident person or non-resident company undertaking manufacture of human vaccines.
   • Investment income from post-retirement medical funds.
   • Income earned by a non-resident contractor, sub-contractor, consultant or employee who is in Kenya and involved solely for the implementation of a project that is financed 100% through a grant under an agreement between the Government and the development partner, to the extent provided for in the agreement.
   • Gains on transfer of property by a SEZ enterprise, developer or operator.
   • Royalties, interest, management fees, professional fees, training fees, consultancy fees, agency or contractual fees paid to a non-resident person by a SEZ developer, operator or enterprise in the first 10 years of its establishment.
2. The provisions appear geared towards promoting investment in the manufacture of human vaccines and medical access by retirees, among other objectives. The Act also eliminates an income tax exemption for companies undertaking the manufacture of human vaccines.

Changes on investment allowances

1. The Act introduces a 10% straight-line investment allowance for industrial buildings and docks under the Second Schedule to the ITA.
2. The Act also defines the term “industrial building” to include a building used for the purpose of transport, as a bridge, as a tunnel, for inland water navigation, and for electricity or hydraulic power undertaking.
3. The Act defines “dock” to include a container terminal berth, harbour, wharf, pier, jetty, storage yard, or other works in or at which vessels load or unload merchandise but does not include a pier or jetty used for recreation.
4. The changes are welcome move as they will encourage investment in the blue economy.
5. The Act broadens the definition of “telecommunication equipment” under the Second Schedule to the ITA to include civil works deemed as part of the telecommunication equipment or civil works that contribute to the use of the telecommunication equipment.
6. The expanded definition is a welcome change that will encourage players in the telecommunication sector.
7. Effective date: 1 January 2024

Employment Act 2007

1. The Finance Act amended the Employment Act 2007 to introduce section 31B introducing a Levy known as the Affordable Housing Levy.
2. The housing levy of 1.5% of the employee’s gross salary is payable by both employers and employees. This means that an employee will contribute 1.5% to the Housing Development Fund and another 1.5% will be contributed by the employer.
3. The gross salary means the basic pay before taxes and benefits. Employers are required to remit the Levy to the Kenya Revenue Authority by the 9th of the month following the payroll month.
4. The Kenya Revenue Authority released a guideline indicating that the Payslip deductions are to be backdated to 1st July 2023 to include the period when the Finance Act had been suspended.
5. Failure to contribute the levy will attract a penalty of 2% of the unpaid funds for every month of non-compliance. 
6. The levy is to be used to finance the construction of affordable housing in Kenya.

Value Added Tax Act

1. The Finance Act has deleted section 5 (2) (aa) of the VAT Act effectively moving petroleum products (excluding Liquid Petroleum Gas) to VAT at the standard rate of 16%. This will impact the prices of transport and production of goods, increasing the inflationary pressure in the economy.
2. The Act has also amended the Second Schedule to the VAT Act to zero-rate Liquified Petroleum Gas (LPG). This will reduce the cost of LPG and positively impact the climate through the use of clean energy. 
3. The Finance Act now requires persons supplying imported digital services over the internet or an electronic network or through a digital marketplace to register for VAT, whether or not they have met the KShs 5 million threshold.
4. The Finance Act has reclassified the exportation of services from standard rated to zero-rated status.

Excise Duty Act 2015

1. The Act has repealed the general offences section and introduced specific offences with a fine of KES 5,000,000 or a term not exceeding three years or both upon conviction. 
2. These offences include: 
   • Defacing or printing over an excise stamp affixed on any excisable goods or package.
   • Being in possession of excisable goods on which stamps have not been affixed and which have not been exempted from these requirements under law.
   • Acquire or attempt to acquire an excise stamp without authority.
   • Prints, counterfeit, makes or in any way creates an excise stamp without authority.
   • Being in possession of an excise stamp which has been printed, made or in any way acquired without authority.
   • Being in possession of, conveys, distributes, sells, offers for sale or trades in excisable goods without affixing excise stamps in accordance with the Act or Regulations.
   • Being in possession of, conveying, selling, distributing, or trading in excisable goods which have be affixed with counterfeit excise stamps.

Tax Appeals Tribunal Act

1. The Finance Act has included appealable decisions as part of the bundle of documents to be filed before the Tax Appeals Tribunal. Further, the Act has widened the scope of documents to be filed together with the appeal to include any other document that may be necessary to enable the Tribunal to decide the appeal. 

The Kenya Finance Act, 2023 is a significant piece of legislation that will have a major impact on taxpayers in Kenya. It is important for taxpayers to be aware of the changes and to take steps to comply with their tax obligations.

We hope that this commentary helps in determining matters going forward. However, please do not hesitate to contact us if you require any clarification or further assistance on this or any other matter(s).