Foreign currency loans relief proposal for firms

Banks increased their issuance of loans in foreign currency amid the recent local forex market dysfunction. PHOTO | SHUTTERSTOCK

Businesses with foreign currency denominated loans and have their interests exceeding 30 percent of their net income could get relief if MPs endorse the proposal to defer forex losses from three years to five.

Forex losses materialise when a business that deals in more than one currency has its local currency depreciating due to the rising cost of servicing interest payments when foreign currencies rally.

Forex loss is categorised as an ordinary expense and businesses are allowed to deduct it in arriving at their taxable income provided the loss does not exceed 30 percent of net income.

The Finance Bill proposes that non-deductible forex losses can only be carried forward for three years, signalling an intention by the government to reduce the period within which firms exposed to forex losses are allowed to deduct the same in arriving at their taxable income.

“The proposal to extend to the period within which to claim foreign exchange losses from three years to five years is a welcome starting point given the deteriorating shilling against major currencies," said Robert Waruiru, the chairperson of the Institute of Certified Public Accountants Public Finance Committee.

"We, however, hope the deferral can go back to its previous position of being indefinite as this will shield taxpayers from higher corporation tax on account of the deteriorating shilling”.

This proposal comes at a time the shilling has been under considerable pressure against major currencies with the local unit having depreciated against the US dollar by 13.1 percent since the start of 2023 and 19.2 percent over the last 12 months according to the Central Bank of Kenya.

In March, the government unveiled the government-to-government oil deal with Saudi Arabia which seeks to address the forex challenges.

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