The Kenya Revenue Authority (KRA) has increased the market interest rate on fringe benefits to 15 percent for the next three months, reflecting the impact of rising interest rates which will see employers pay higher taxes.
Fringe benefits constitute soft loans that employers give to their workers at zero or below market rates as part of their remuneration package or incentives.
The difference in the rate charged by the employer and the market rate –determined periodically by KRA— represents the taxable value, which is then taxed at the corporate income tax rate of 30 percent.
“For the purposes of Section 12B of the Income Tax Act, the Market Interest Rate is 15 percent. This rate shall be applicable for January, February and March 2024,” said the taxman in a notice.
Employers facing higher tax bills on the benefit may respond by raising the rates on the cheap loans, diluting the benefits.
Fringe benefits
The latest review by KRA marks an increase from the market rate of 13 percent which was applicable for October, November and December 2023.
It is the third successive increase in the market interest rate. The latest rate will be in force in January, February and March. The new rate is a significant jump from nine percent, which was in place during the same period last year, underlining the steep increase in market lending rates.
“The fringe benefits tax is pegged on the average 91-day Treasury bill interest rate for the previous quarter,” said Nikhil Hira, a tax expert.
T-bill rates have been rising steadily in recent months amid the elevated cash needs of the government.
The 91-day average T-bill rate rose from 15.11 percent in October to 15.52 percent in November and 15.98 percent in December, according to data from the Central Bank of Kenya.
Fringe benefit tax is provided under section 12B of the Income Tax Act, which became effective on June 12, 1998.
