Foreign firms shipping profits out of Kenya will pay a 10 per cent tax if Parliament passes proposed amendments to the income tax law targeting the flow of funds out of the country.
The Income Tax Bill is also proposing the introduction of a higher 10 per cent tax (from five per cent) on foreigners earning pensions from Kenya.
Firms established in the special economic zones will also pay a five per cent tax on dividends and a 20 per cent levy on shipping demurrage fees.
If the Bill is passed, large multinationals operating in Kenya which are among the most profitable, will take the biggest hit on the billions of shillings in repatriated profits and dividend payouts to owners of parent companies abroad.
Besides introducing new taxes and adjusting existing ones, the Bill has harmonised the corporate tax rate for both resident and non-resident firms at 30 per cent for taxable income below Sh500 million. Any income above this level will be taxed at the rate of 35 per cent.
Currently, branches of non-resident firms (multinationals) are levied corporate tax at the rate of 37.5 per cent.
Equity in taxation
Tax experts reckon that although the decision to introduce a 10 per cent tax on repatriated profits will effectively see these firms go back to paying a higher tax, it will ultimately not leave them at a tax disadvantage compared to resident firms, whose dividend payouts are already subject to withholding taxes.
“With the revision of the tax rates for branches from 37.5 per cent to 30 per cent, it is expected that this withholding tax on branch profit repatriation will bring the effective rate of tax for branches at ‘par’ with the effective tax for resident companies given that dividends paid by resident companies are subject to taxation at the rate of five and 10 per cent. This measure therefore ensures equity in the taxation of companies,” said Deloitte tax partner Fred Omondi.
Multinational firms have in the past been accused of failing to reinvest their earnings locally, instead choosing to ship profits out, denying the economy jobs that would have accrued from local investment.
Movement of large amounts of money out of the country has also seasonally impacted on the shilling.
Heavy demand for dollars during the profit repatriation season has had the effect of weakening the shilling as the demand for dollars from the local market rises.
A number of the large listed firms at the Nairobi Securities Exchange (NSE), including top-tier banks Standard Chartered #ticker:SCBK, Barclays #ticker:BBK, and Stanbic #ticker:CFC, are majority foreign-owned.
The list includes firms such as WPP ScanGroup #ticker:SCAN, Bamburi #ticker:BAMB, Total Kenya #ticker:TOTL and BAT #ticker:BAT.
The Income Tax Bill proposals are expected to increase corporate tax revenue by Sh59.5 billion to Sh389.2 billion in the next fiscal year, while PAYE is expected to rise by Sh68 billion to Sh447.6 billion.
Tax experts at Anjarwalla & Khanna Advocates said the notional repatriated income will likely be calculated as the company’s net assets at the beginning of the year less those at the end of the year, taking into account the profit after tax for the relevant year.
They, however, warned that this method of calculating repatriated income opens the door for confusion where the value of the assets diminishes for other reasons.
“It is unclear how this provision is intended to apply in practice, as it may unintentionally capture a diminution in value of net assets unconnected with a repatriation of assets,” the experts said in a note.
Mr Omondi further warned that levying the 20 per cent tax on ship demurrage fees could increase the cost of doing business in Kenya as international shippers look to protect their margins.
“This measure is likely to have a negative effect on business and make the country less competitive in terms of shipping business. It is likely that the affected taxpayers could increase the original freight charges and pass the burden on to importers thus increasing cost of business,” he said.
Demurrage fees are the levies charged by ships for delayed offloading at the port, and can go as high as $15,000 (Sh1.5 million) for a single ship per day.
They are normally passed on to the buyers of goods by importers.