The A-Z of new taxes in the 2024 Finance Bill

President William Ruto’s administration plans to spend Sh3.914 trillion in the new budget cycle that starts in July. To fund this plan, the government hopes to collect Sh3.354 trillion from taxes. This will be made up of Sh2.913 trillion as ordinary revenues while appropriations-in-aid is expected to net another Sh441 billion. 

Appropriations-in-aid is revenue received by state departments and retained to meet expenditures instead of being paid into the Consolidated Fund.

But this will leave the government with a fiscal deficit of Sh703.9 billion, which translates to 3.9 percent of Kenya’s Gross Domestic Product (GDP). This deficit will be financed by debt. 

To meet this ambitious tax target, the Treasury has lined up new taxes in line with proposals agreed with the International Monetary Fund (IMF) that will introduce Kenyans to some of the most painful taxes yet. 

Some of the new proposals include the contentious motor vehicle tax set at a rate of 2.5 percent of the value of the vehicle, with a floor of Sh5,000 and a ceiling of Sh100,000. Another key change is the extension of the time frame for the Kenya Revenue Authority (KRA) to issue decisions from 60 days to 90 days. 

Then there is a proposal to increase the value added tax (VAT) registration threshold for taxpayers making taxable supplies from Sh5 million to Sh8 million. 

For the first time, the Finance Bill 2024 will also bring incomes from investments of an amateur sporting association, registered trust schemes, and income or principal sum of a registered family trust within the tax net. The taxman will also be empowered to tax income from the National Housing Development Fund and any capital gains relating to the transfer of title of immovable property to a family trust as well as any amount withdrawn from the National Housing Development Fund to purchase a house by a contributor who is a first-time homeowner.

On the international tax front, the Bill suggests implementing a minimum top-up tax of 15 percent, mirroring the Inclusive Framework Pillar Two proposal. 

The provision applies to resident persons or entities with a permanent establishment in Kenya that are part of a multinational group with a consolidated annual turnover of 750 million euros (approximately Sh108 billion) in at least two of the previous four years preceding the first year of income. But these are not the only changes. 

The Business Daily sat through a tax session with experts from audit firm KPMG to break down the A-Z of what lies ahead in the Finance Bill, 2024.

To meet this ambitious tax target, the Treasury has lined up new taxes in line with proposals agreed with the International Monetary Fund (IMF) that will introduce Kenyans to some of the most painful taxes yet. 

Photo credit: File | Fotosearch

Out: Digital Service Tax; In: Significant Economic Presence Tax

The Bill abolishes the digital service tax and replaces it with a significant economic presence (SEP) tax. This new tax will apply to non-resident persons whose income from the provision of services is derived from Kenya through a business carried out over a digital marketplace. The proposed chargeable tax is 30 percent of the taxable profit, which will be 20 percent of the gross turnover. This, however, is subject to regulations that the Cabinet Secretary for National Treasury may issue.

The Bill exempts a resident from SEP tax concerning management or professional fees, royalties, and interest, among others. It also exempts businesses transmitting messages by cable, radio, optical fibre, television broadcasting, very small aperture terminal (VSAT), internet, satellite or any other similar method of communication from the tax. 

KPMG says the implication of this new change will see an effective tax rate of six percent substantially increase the income tax generated through digital marketplaces, currently subject to tax at 1.5 percent under the Digital Services Tax (DST) regime.

SEP offers alternative nexus rules to tax the profits rather than tax the gross turnover as currently determined under DST.

The proposed effective date for SEP is January 1, 2025.

Spectrum licences to be eligible for capital allowance in major win for telcos  

The new Bill seeks to extend a capital allowance of 10 percent per year, to include a spectrum licence by a telecommunication operator. This investment allowance will apply on the remaining useful life of the licence where the licence is acquired before July 1, 2024. This means that spectrum licences will be eligible for the investment allowance at the rate of 10 percent. 

“With this proposal, investment in spectrum licences will be treated as capital expenditure and become eligible for investment allowance from the date when this provision will come into force,” KPMG says in its Finance Bill analysis. 

Three years cap for deferment of foreign exchange losses

Kenya and US currencies

Treasury has proposed the introduction of value-added tax(VAT) on financial services, including forex transactions and cheque processing.

Photo credit: Shutterstock

The Bill proposes to reduce the period for deferment of realised exchange loss from five to three years. What this means is that companies that are subject to interest restriction with respect to non-resident loans will be able to deduct foreign exchange losses within three years from the date of realisation. 

Accordingly, companies will have to restructure their debt within the same three-year period to reverse their interest restriction position to avoid forfeiting the realised foreign exchange loss deduction. The proposal takes effect on July 1, 2024 if the Bill is passed as is. 

Minimum top-up tax

The Bill introduces a minimum top-up tax (MTT) that will apply to a covered person. This means a resident with a permanent establishment in Kenya who is part of a multinational group with a consolidated annual turnover of 750 million euros (approximately Sh106 billion) in at least two of the previous four years of income immediately preceding the first year of income.

The minimum top-up tax shall be the difference between 15 percent of the net income or loss for the year of income for a covered person, and the combined effective tax rate for the year of income, multiplied by the excess profit of the covered person.

Motor vehicle tax at 2.5 percent

The new motor vehicle tax of 2.5 percent of the value of the motor vehicle will be collected by the insurer at the point of issuing motor vehicle insurance. The proposed tax amount shall be a minimum of Sh5,000 and a maximum of Sh100,000.

 Eyre Motors

Motor vehicles at a car yard in Mombasa County.

Photo credit: File | Wachira Mwangi | Nation Media Group

The value will be determined based on factors such as make, model, engine capacity (in cubic centimetres), and year of manufacture, subject to the KRA Commissioner-General’s prescribed guidelines.

This tax should be remitted to KRA within five working days. The applicable penalty for failure to account for motor vehicle tax due will give rise to a penalty of 50 percent of the tax due.

Ambulances, vehicles owned by the national government, county government, Kenya Defence Forces, National Police Service, National Intelligence Service, or those exempt from tax under the Privileges and Immunities Act shall be exempted from this tax.

Implication: This will hurt the transport and logistics industry which may opt to pass through the additional cost to their customers thus escalating the cost of living through the multiplier effect. The motor vehicle tax, unlike advance tax on commercial vehicles, cannot be offset against income tax payable.

The proposed effective date for the motor vehicle tax is January 1, 2025.

VAT on bread

The Bill has proposed to reclassify the supply of ordinary bread from zero-rated to standard-rated. If passed, the change of value-added tax rate on the supply of bread from zero rate to vatable will increase the price of the product, which is a staple for ordinary Kenyans.

Broaden digital content definition  

The new Finance Bill has proposed to widen the definition of what will be considered digital content monetisation. If it passes, digital content will now also include creative works, creating or sharing of material and any other material that is not exempt from tax under the Income Tax Act (ITA). Analysts at KPMG say the implication of this proposal is to alleviate the administrative burden associated with dual registration by eliminating the requirement to register with the Kenya Revenue Authority (KRA).  This change will take effect on July 1, 2024, if the Bill is passed as is. 

Withholding tax on payment on the digital marketplace

The Bill also redefines a digital marketplace to mean an online or electronic platform which enables a person to sell or provide goods, property or services and this brings services such as ride-hailing, food delivery, freelance, professional, rental, task-based and any other services under the tax net. 

Additionally, the Bill proposes to include the definition of “platform” to mean a digital platform or website that facilitates the exchange of a short-term engagement, freelance or provision of a service, between a service provider, who is an independent contractor or freelancer, and a client or customer.

A Glovo delivery motorcycle outside on Kimathi Street.

Photo credit: File | Nation Media Group

Further, the Bill proposes the introduction of withholding tax on income deemed to have accrued in or derived from a digital marketplace from the making or facilitation of payments by the digital marketplace or platform. The proposed withholding tax rates are 20 percent and five percent for resident and non-resident persons, respectively.

Implication: With this proposal, the sellers or persons offering goods or services through a digital marketplace or platform will now be brought within the tax ambit. This proposal will be effected by the owners of the digital marketplace or platform being required to withhold tax at the rate of 20 percent or five percent for non-residents and residents, respectively.

This proposal will result in increased tax revenue while at the same time placing an additional compliance burden on operators of digital marketplaces or platforms.

The proposed effective date is July 1, 2024. 

Donations redefined 

The new Finance Bill proposes to redefine what "donation” means to capture a benefit in money in any form, promissory note or a benefit in kind conferred on a person without any consideration. This change seeks to clarify what will be considered as a donation for purposes of qualifying for exemption under the Income Tax Act. It will also be effective from July 1. 

Make software payments part of royalties 

The Bill proposes to expand the definition of 'royalty' to include a payment made as a consideration for the use or right to use any software, proprietary or off-the-shelf, whether in the form of licence, development, training, maintenance or support fees and includes the distribution of software. The implication of this proposal is to include payments for the use or transfer of the right to use the software as part of royalties when charging withholding tax. 

This change is seen as a reaction to various cases that have been ruled in favour of the taxpayer, such as Seven Seas Technologies Limited v the Commissioner of Domestic Taxes, because the distribution of software is not subject to withholding tax where the distributor does not exploit any right in the software.

The proposed effective date is July 1, 2024. 

Align late income tax filing penalties for EPZ enterprise to the Tax Procedures Act

The Bill proposes to remove the daily penalty of Sh2,000 on failure to submit a return or late submission of a return by an export processing zone (EPZ) enterprise. Instead, from July 1, 2024, EPZs that fail to file taxes on time will be charged a Sh20,000 penalty per month for each month the enterprise’s income tax return remains outstanding.

Licensed SEZ’s off the hook of capital gains tax 

The Bill proposes to exempt from tax gains derived from transfer of property within a special economic zone (SEZ), by a licensed developer, enterprise or operator. This will bring clarity to investors considering setting up shop within the SEZ framework. For such investors, the exemption from capital gains tax on the transfer of property within an SEZ may act as an incentive to invest in SEZs.

The proposed effective date is July 1, 2024,

Reduced capital gains tax from 15pc to 5pc

The Bill proposes to reduce the capital gains tax (CGT) rate from 15 percent to five percent for the transfer of investments, provided that the Nairobi International Financial Centre Authority certifies the investment to be at least Sh3 billion in at least one entity incorporated or registered in Kenya within two years. Additionally, the transfer of investment must occur after five years from the date of the initial investment. The aim is to incentivise foreign investors to set up their businesses or acquire existing businesses which are registered or incorporated in Kenya as part of the push to attract foreign direct investments.

The proposed effective date is January 1, 2025.

Withholding tax on interest on infrastructure and social bonds

The Bill proposes to introduce withholding tax of five percent and 15 percent on interest paid to resident and non-resident persons, respectively, on bonds, notes or other similar securities with a maturity of at least three years used to raise funds for infrastructure and other social services issued after July 1, 2024. 

The same will also apply to bonds, notes or other similar securities with a maturity of at least three years used to raise funds for infrastructure and other social services, projects and assets defined under the green bond standard and guidelines issued after July 1 2024.

The main implication of this is to bring into the tax net, taxpayers that have been levering on tax exemptions of these bonds to reduce their effective tax rates.

However, the proposed tax rate of five percent for resident persons, according to KPMG tax experts is lower than most of the resident tax rates and will therefore continue to be an incentive for investment in such securities.

For non-residents, the higher tax could be a disincentive to investing in Kenyan bonds although the government could be seeking to claw back some benefit from the high interest rates on government bonds.

The proposed effective date is July 1, 2024. 

Non-resident air transport operator and ship-owner subject to 3pc tax 

The Bill proposes to increase the tax rate from 2.5 percent to three percent on non-resident air transport operators and ship owners where Kenya has no reciprocal arrangement or treaty with the other country.

Should this proposal pass, non-resident air transport operators or ship owners from countries without a reciprocal arrangement or treaty will be subjected to a higher tax rate of three percent. This proposal may discourage such operators from coming to Kenya due to the increased cost of operation.

The proposed effective date is July 1, 2024. 

150pc investment allowance on bulk storage scrapped

The Bill proposes an end to the investment allowance of 150 percent on investments made before December 31, 2024, on the construction of bulk storage (100,000 metric tonnes and above) and handling facilities to support the standard gauge railway operations.

This means that such facilities will enjoy a reduced investment allowance of 10 percent per annum.

The proposed effective date is July 1, 2024. 

Expansion of per-diem rates

The Bill proposes to amend the tax-free per diem rate from a daily maximum of Sh2,000 to an amount not exceeding five percent of the monthly gross earnings of an employee where the employer has a policy on the payment and accounting for the per diem.

The proposed effective date is July 1, 2024. 

Transfer of a business as a going concern

The Bill proposes to reclassify the transfer of business on a going concern (TOGC) from standard rated to exempt.

Implication: This is a significant change as firms investing in new businesses or firms consolidating their businesses will have a significant upfront cash flow saving. While this can be beneficial to the buyer, any input VAT directly attributable to the TOGC will not be claimable in the VAT return.

Payment of excise duty on manufactured alcoholic beverages

The Bill proposes to increase the period licensed manufacturers of alcoholic beverages are required to account for the excise duty from 24 hours to five working days.

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Note: The results are not exact but very close to the actual.