This follows the reintroduction of a 100 percent investment deduction when calculating corporate income taxes, which allows firms to recover the worth of their spending on buildings and machinery from taxes.
Currently, the firms are allowed to deduct 50 percent of the expenses from profit, which ultimately lowers taxation.
Firms investing at least Sh250 million annually outside Nairobi and Mombasa will from Saturday pay less tax in government efforts to spur economic activities outside the two cities.
This follows the reintroduction of a 100 percent investment deduction when calculating corporate income taxes, which allows firms to recover the worth of their spending on buildings and machinery from taxes.
Currently, the firms are allowed to deduct 50 percent of the expenses from profit, which ultimately lowers taxation.
The new rate also applies to companies that had cumulatively spent at least Sh2 billion on buildings and machinery outside Kenya’s two largest cities in three years before the review of investment deductions on April 25, 2020.
The review — through the Tax Laws (Amendment) Act 2020 — had resulted in a sharp fall in capital allowances from a high of 150 percent of investment value to 50 percent in the first year and 25 percent in subsequent years.
Before the April 2020 review, investors outside Nairobi, Mombasa and Kisumu were eligible to deduct 150 percent of expenditure on buildings and machinery if the investment value was at least Sh200 million.
“For investments made prior to 25 April 2020, it appears that there is an intention to provide people who had invested in items qualifying for investment deductions on the knowledge of gaining a 150 percent capital allowance to be allowed to enjoy this rate,” tax consultants at KPMG East Africa wrote in a note on the Finance Act. “(This is) subject to meeting the condition of Sh2 billion cumulative investment over the last three years.”
The Treasury in previous disclosures to the International Monetary Fund said the reduction in investment deductions for firms putting up buildings for manufacturing plants and hotels help Kenya Revenue Authority collect Sh14.74 billion more annually.
The Treasury and the taxman have in recent years been looking to claw back some of the preferential rates of tax, investment deductions, tax reliefs, zero-rating for value-added tax purposes, remissions of taxes and exemptions.
They argue the tax benefits have failed to boost the economy through increased jobs and affordable prices for consumers and instead added to the profits of firms and the wealthy.
Latest data on tax expenditures dropped to Sh318.32 billion in 2020 from Sh350.86 billion the year before, Sh535.9 billion (2018) and Sh437.12 billion (2017).
This (reinstatement of 100 percent capital allowance) is a welcome move by the Government since it would encourage investors to develop/invest in areas outside Nairobi and Mombasa as well as SEZ (special economic zones),” consultants at PricewaterhouseCoopers (PwC) wrote in a note on the Finance law.
