Finance Bill, 2024: Align proposed tax changes with global best practices

The National Treasury building. 

Photo credit: File | Lucy Wanjiru | Nation Media Group

The Finance Bill 2024, recently tabled in Parliament, presents an opportunity for Kenya to align its fiscal policy with global best practices in taxation.

The Bill aims to expand the tax base by bringing more economic activities into the tax net and removing certain tax exemptions.

While broadening the tax base is essential for revenue mobilisation, it is equally important to ensure that the tax system remains equitable and does not impose undue burdens on taxpayers.

The proposal to tax all software payments as royalties, for instance, deviates from international norms, which generally distinguish between payments for the right to use software and payments for the commercial exploitation of software. To align with global best practices, it would be prudent to maintain the current position of taxing only those software payments where the payer acquires the right to commercially exploit the software.

The Bill also introduces several measures aimed at promoting investment and economic growth, such as the proposed investment deduction for telecommunications companies investing in fibre optic infrastructure and spectrum.

To maximise the impact on digital infrastructure development, the government could consider increasing the deduction rate to 20-25 percent and extending it to other forms of infrastructure investment.

Similarly, the proposal to remove tax exemptions for family trusts may discourage the use of this important tool for succession planning and wealth management.

To strike a balance between preventing abuse and supporting the legitimate use of family trusts, the government could consider reinstating the exemption with qualifying conditions such as mandatory registration and annual disclosures.

In an increasingly globalised economy, aligning domestic tax policies with international standards is crucial for attracting foreign investment and preventing double taxation. The proposed introduction of Advance Pricing Agreements (APAs) for transfer pricing is a positive step towards providing certainty to taxpayers and reducing disputes.

However, to ensure fairness, the Bill should clarify the circumstances under which the Kenya Revenue Authority (KRA) can cancel an APA and provide taxpayers with the right to appeal such decisions.

The proposed minimum top-up tax of 15 percent based on global revenues also warrants careful consideration. While the intention to ensure a minimum level of taxation is laudable, the high rate may deter investment.

To mitigate this risk, the government could consider a lower rate (10 percent, for instance) and allow foreign tax credits to avoid double taxation.

The Finance Bill 2024 proposes several measures aimed at achieving socio-economic objectives, such as allowing deductions for contributions to social health insurance, affordable housing, and post-retirement medical funds. While these initiatives are commendable, it is essential to ensure that they are well-regulated and transparent to prevent misuse of public funds.

The proposed motor vehicle tax of 2.5% on vehicle value, capped at KES 100,000, may disproportionately burden individual taxpayers. To strike a balance between revenue generation and equity, the government could consider a lower rate (e.g., 1-1.5%) without a cap, along with exemptions for commercial and public transport vehicles to support economic activity.

A complex tax system can lead to high compliance costs, reduced efficiency, and lower tax morale. The Finance Bill 2024 misses an opportunity to simplify and rationalize the tax system. For instance, the proposed expansion of withholding tax to income from digital marketplaces may create uncertainty due to the lack of a clear definition of "digital marketplace." To address this, the government should provide a precise definition and consider a lower withholding tax rate (e.g., 5%) for residents to minimize the compliance burden.

The Finance Bill 2024 contains several provisions aimed at expanding the tax base, promoting investment, and achieving socio-economic objectives. However, to ensure that the proposed changes align with global best practices and support sustainable economic growth, the government should consider striking the right balance between revenue mobilization, economic efficiency, and social equity.

The writer is a management and development specialist. [email protected]

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