The Finance Bill 2024 proposes significant changes to the Kenya Revenue Authority (KRA) iTax system, impacting various aspects of income tax, digital transactions, and overall tax compliance. With the aim of enhancing tax collection and streamlining the tax process, these modifications signal a pivotal shift in Kenya’s fiscal landscape, making it crucial for individuals and businesses to understand the impending adjustments.
This article delves into the intricacies of the Finance Bill 2024, outlining the key income tax changes, their implications on digital transactions and e-commerce, adjustments in VAT and excise duties, and how these reforms affect business compliance and tax planning strategies. It serves as a guide to navigating the changes implemented by the KRA to ensure seamless adaptation to the new tax regulations.
Overview of the Finance Bill 2024
The Finance Bill 2024, tabled before the National Assembly on May 13, 2024, introduces comprehensive amendments aimed at enhancing revenue collection and ensuring tax compliance across various sectors. This legislation aligns with the Medium-Term Revenue Strategy (MTRS) for FY 2024/25 to FY 2026/27, developed in response to a historical decline in revenue collection. The MTRS outlines ambitious tax reforms to increase the country’s revenue to 20% of GDP from the current 16% and improve tax compliance rates.
Key Proposals in the Finance Bill 2024
- Introduction of New Taxes and Amendments:
- New taxes such as the Motor-Vehicle Tax, Minimum Top-Up Tax, and Significant Economic Presence Tax.
- Amendments targeting enhanced revenue collection and compliance, particularly in the digital sector.
- Revisions to Existing Tax Definitions and Provisions:
- Deletion and restatement of various tax definitions including ‘related persons’ and ‘royalties’ which now encompass a broader range of software-related transactions.
- Introduction of a definition for ‘donations’ to include any monetary or kind benefit given without consideration.
- Changes to Tax Deduction and Compliance Rules:
- Reduction of the period for deferring foreign exchange losses from five years to three years.
- Introduction of withholding tax on payments for goods supplied to public entities.
- Significant amendments to the non-taxable benefits for employment, increasing the limits and revising conditions under which these benefits apply.
Sector-Specific Impacts
- Digital and E-commerce:
- The Bill proposes significant changes in the taxation of digital transactions, including the repeal of the Digital Service Tax and introduction of the Significant Economic Presence Tax.
- New provisions for digital content monetization, considering income from digital platforms as accrued in Kenya.
- Pension and Employment Benefits:
- Enhancement of the tax-deductible contributions to registered pension schemes.
- Introduction of new rules regarding the taxation of pension benefits and employment income.
- Environmental and Public Health:
- Implementation of environmental levies on goods like mobile phones and batteries.
- Changes in excise duties on products such as cigarettes and alcoholic beverages based on their alcohol content.
This overview encapsulates the broad spectrum of reforms proposed in the Finance Bill 2024, reflecting a strategic shift towards expanding the tax base while attempting to balance economic growth and compliance. These changes are poised to have a lasting impact on both individual taxpayers and the business landscape in Kenya.
Key Income Tax Changes and Implications
Expanded Definition of Digital Content Monetization
The Finance Bill 2024 broadens the scope of ‘digital content monetization’ under the Income Tax Act (ITA) to encompass creative works and the creation or sharing of digital content, including materials not previously exempt. This change addresses the evolving digital landscape and aims to capture revenue from a wider array of digital activities.
Updated Definition of a ‘Related Person’
The Bill clarifies the term ‘related person’ to include any individuals or entities directly or indirectly involved in the management, control, or capital of a business. This redefinition is crucial for determining tax liabilities and compliance, especially in transactions between related parties.
New Definition of ‘Royalty’ to Include Software Usage
Under the new provisions, ‘royalty’ now extends to payments for the use of any software, whether proprietary or off-the-shelf. This includes licenses, development, training, maintenance, or support fees, reflecting the growing importance of software in business operations.
Revised Tax Treatments for Pension Funds
The Bill amends the definitions of ‘pension fund,’ ‘provident fund,’ and ‘individual retirement fund’ to align with registration under the ITA if they are registered with the Retirement Benefits Authority. This adjustment ensures that these funds meet regulatory standards and receive appropriate tax treatments.
Introduction of New Taxes: Motor-Vehicle Tax, Minimum Top-Up Tax
- Motor Vehicle Tax: Imposed at a rate of 2.5% of the motor vehicle’s value at the time of insurance issuance, this tax considers factors like make, model, and engine capacity.
- Minimum Top-Up Tax: Targeting multinational groups, this tax applies to entities in Kenya with a consolidated annual turnover of EUR 750 million or more at the parent level. It ensures that their effective tax rate is at least 15%.
Impact on Digital Transactions and E-Commerce
Taxation of Digital Marketplace Income
The Finance Bill 2024 introduces a pivotal shift in how digital marketplace income is taxed. Owners and operators of digital platforms, such as those offering ride-hailing, food delivery, and freelance services, are now required to withhold taxes at differentiated rates: 5% for payments to residents and 20% for payments to non-residents. This move aims to ensure that income derived from digital transactions is accurately reported and taxed, reflecting the government’s effort to capture revenue from the burgeoning digital economy.
Repeal of Digital Service Tax and Introduction of Significant Economic Presence Tax
Under the new legislation, the Digital Service Tax (DST) is set to be repealed and replaced by the Significant Economic Presence (SEP) Tax. This tax imposes a 30% levy on the deemed taxable profits, which are calculated as 20% of the gross turnover from non-residents operating over digital marketplaces. The SEP Tax targets non-resident entities engaging in significant digital activities within Kenya, marking a substantial change in the taxation landscape aimed at ensuring fair taxation of digital giants.
Withholding Tax for Digital Content Monetization
The Bill mandates a final withholding tax on digital content monetization for non-residents. This adjustment simplifies the tax process by making the withholding tax a final tax obligation, thereby reducing administrative burdens for businesses involved in digital content creation and distribution. This tax reform is particularly significant as it expands the scope of taxable digital content to include a variety of creative and digital works, further broadening the tax base in the digital sector.
Changes in VAT and Excise Duties
Revision of VAT Exemptions
The Finance Bill 2024 introduces significant revisions to VAT exemptions, particularly focusing on financial services and specific goods. Notable changes include:
- Financial Services: The bill proposes removing VAT exemptions on several financial services, including the issuing of credit and debit cards, telegraphic money transfer services, and foreign exchange transactions. This adjustment means these services will now be subject to VAT at the standard rate of 16%.
- Goods and Services: There is a removal of VAT exemptions on betting, gaming, and lottery services, which will also be taxed at the standard rate. Additionally, the bill proposes to limit VAT exemptions on insurance and reinsurance services strictly to premiums, excluding other related services.
- Digital Services: Suppliers of imported digital services are now required to register for VAT, ensuring compliance with the KShs 5M annual threshold. This is aimed at capturing revenue from the growing digital economy.
- Specific Goods: The bill introduces zero-rated VAT for certain locally manufactured or assembled items like mobile phones and electric buses, aiming to support local industries. Conversely, it proposes standard VAT rates for previously exempt or zero-rated items like electric bicycles and solar batteries, potentially impacting their market prices and consumption.
Introduction of Excise Duty on Digital Services
The Finance Bill 2024 marks a pivotal shift in the taxation of digital services by introducing an excise duty on services provided by non-residents through digital platforms. Key aspects of this new duty include:
- Scope of Services: The excise duty covers a broad range of digital services including telephone and internet data services, and fees charged for various financial transactions by banks and other financial service providers.
- Rate of Duty: The proposed excise duty rate is set at 20%, significantly impacting the cost structure for digital service providers and potentially the prices for consumers.
- Implications for Non-residents: Specifically targeting services offered in Kenya by non-residents, this duty aims to level the playing field between local and foreign digital service providers, ensuring that revenue from these activities contributes to the national economy.
These changes in VAT and excise duties are aligned with the broader goals of the Medium-Term Revenue Strategy, aiming to enhance tax compliance and increase revenue collection while adjusting the tax landscape to the modern digital and economic environment.
Implications for Business Compliance and Tax Planning
Adjustments for Accounting Periods
The Finance Bill 2024 introduces provisions that significantly impact business compliance by automating the approval of changes in accounting periods. Applications for adjustments that are not addressed within six months are deemed approved. This measure is designed to enhance efficiency and reduce delays caused by the lack of timely responses from the Commissioner. Businesses can now rely on a predictable timeline, allowing for better financial planning and reduced administrative burdens.
Introduction of Advance Pricing Agreements
To mitigate transfer pricing disputes and enhance compliance certainty, the Bill proposes the introduction of advance pricing agreements (APAs). These agreements, valid for up to five years, will allow entities to agree in advance on the pricing methodologies for transactions between related parties. The introduction of APAs aims to align Kenya’s practices with those of neighbouring jurisdictions like Tanzania and Uganda, which have established regulations governing APAs. This move is expected to provide businesses with greater stability in their tax planning strategies and reduce the likelihood of costly legal disputes.
Implications for Tax Compliance and Reporting
The new regulations under the Finance Bill 2024 extend significant changes to tax compliance and reporting processes. The introduction of electronic tax invoice regulations mandates businesses to maintain accurate records of stock and transactions through an integrated system. This system must be compliant with the KRA’s specifications to ensure that all taxable transactions are duly reported, and taxes are accurately calculated and remitted. The expansion of transactions exempt from these requirements and the ability of the Commissioner to grant exemptions via a Gazette notice provide some flexibility, yet underscore the move towards more stringent compliance measures.
Businesses must adapt to these changes by ensuring their systems are capable of meeting the new electronic documentation standards. This adaptation includes integrating eTIMS software, registering for the electronic tax invoicing system, and maintaining up-to-date records as specified by the law. These measures are intended to improve the accuracy of tax reporting and enhance the efficiency of tax collection, aligning with the government’s goals of increasing revenue and compliance.
The Finance Bill 2024 brings forth a comprehensive raft of changes to the KRA iTax system, aiming at refining income tax, adjusting VAT and excise duties, and ensuring adherence to tax compliance across various sectors. By dissecting the implications of these reforms, this article has offered an essential guide for individuals and businesses to navigate the evolving tax landscape, underpinning the necessity to realign tax planning strategies accordingly. These modifications not only seek to enhance the government’s revenue collection efforts but also respond to the dynamic nature of digital transactions and the broader economic environment.
As Kenya strides towards attaining a more sustainable and inclusive economic growth, the alterations proposed by the Finance Bill 2024 are poised to have a profound impact on tax compliance, digital economy participation, and environmental conservation efforts. It underscores the government’s commitment to adapting its fiscal policies to contemporary challenges and opportunities. Stakeholders are hence encouraged to thoroughly assess the changes and adjust their operations to leverage the impending shifts. With the Bill’s implementation on the horizon, the readiness to adapt and comply will be instrumental in harnessing the benefits and mitigating the challenges of Kenya’s reformed tax framework.
