The Finance Act, 2021

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July 2021

HIGHLIGHTS OF THE FINANCE ACT, 2021

Preamble

The Finance Bill, 2021 was passed by Parliament on 23 June 2021, assented into law by the President on 29 June 2021 and gazetted on 1 July 2021. This was consistent with the Public Finance Management Act, which requires the Finance Act to be passed and signed into law by the end of June of every year.

In the Finance Act, 2021 (the Act), Parliament maintained most of the changes proposed in the Finance Bill, 2021, with a few additions and deletions, to incorporate stakeholders’ views as submitted to the Departmental Committee on Finance and National Planning. The Committee ignored a number of key submissions such as the request to suspend the implementation of 16% VAT on liquefied petroleum gas (LPG). The VAT on LPG was introduced by the Finance Act, 2020, with a grace period of one year to, 1 July 2021. The introduction of VAT on LPG has led to the increase in its retail price, which may make it unattractive, despite the global push for use of clean energy.

The Act has introduced amendments to the following Laws: Income Tax Act (ITA), Value Added Tax (VAT) Act, Excise Duty Act, Tax Procedures Act (TPA), the Miscellaneous Fees and Levies Act, 2016, Capital Markets Act, the Stamp Duty Act, Retirement Benefits Act and Insurance Act.

In this circular, we provide highlights of the changes proposed by the Act. Most of the changes introduced took effect at the start of the Government’s fiscal year on 1 July 2021 while a few will be effective on 1 January 2022.

This publication constitutes only a brief guide and is not intended to be a comprehensive summary of the Finance Act, 2021 nor the tax law and practice. No one should act on this publication without appropriate professional advice, following a thorough examination of their particular situation. While all reasonable care has been taken in the preparation of this guide, HLB Cezam accepts no responsibility for any errors it may contain, whether caused by negligence or otherwise, or for any loss, however caused or sustained by any person that relies on it.

AMENDMENTS TO INCOME TAX ACT, CAP 470

  1. Removal of the Tax Loss Carry Forward Limitation

The Act has deleted Section 15(4) of the Income Tax Act (ITA), which limits the carrying forward of tax losses to 10 years. This means tax losses can now be carried forward indefinitely.

This amendment is likely to have been influenced by the introduction of the minimum tax in the Finance Act, 2020. Minimum tax is a base income tax payable by all persons, regardless of whether they are in a profit or tax loss position.

The effective date of this provision is 1 July 2021

  1. Thin Capitalization Provision (Interest Deduction Restriction)

The Act has amended the thin capitalization provision in Section 16 (2) (j) of the ITA, to restrict the interest expense claimable to 30% of earnings before interest, taxes, depreciation and amortization (EBITDA). This amendment applies to both locally and foreign controlled companies. Any income that is exempt from tax is to be excluded in the calculation of EBITDA amount.

The new interest restriction provision shall not apply to banks or financial institutions licensed under the Banking Act and micro and small enterprises registered under the Micro and Small Enterprises Act, 2012.

The effective date of this provision is 1 January 2022

  1. Tax Rebate for Graduate Apprenticeships

The category of graduates for which employers may be entitled for rebates of apprenticeship has been expanded by the Act, to include graduates from Technical and Vocational Education and Training (“TVET”). Currently, the tax rebate scheme is only available to employers who engage university graduates as apprentices. The rebate available is equivalent to 50% of the amount of salaries and wages paid over a period of 6 to 12 months to at least 10 apprentices.   

This is a welcome move, as it will encourage creation of more employment opportunities, not only for those with university education, but also those that have technical and vocational training skills.

The effective date of this provision is 1 January 2022

 

  1. Introduction of NHIF Insurance Relief

The Act has introduced insurance relief for individual taxpayers who make monthly contributions to the National Hospital Insurance Fund (“NHIF”) in a year of income.

The amount of relief to be claimed shall be equivalent to 15% of the contribution to NHIF and insurance premiums paid, subject to a maximum relief of Ksh 5,000 per month or Ksh 60,000 per annum.

The amendment is a welcome move as it will increase employees’ net pay.

The effective date of this provision is 1 January 2022

 

  1. Investment Allowance

The Act has amended the Second Schedule to the ITA, to change the basis of calculating investment allowance from reducing balance basis to straight-line basis. This is a welcome move because taxpayers can easily track investment allowances of each asset and utilize it over a short period.

The Act has expanded the definition of the term “manufacture” in the Second Schedule of the ITA to include generation, transformation and distribution of electricity, both via the national grid and other private grids. What this implies is that an investment in electricity generation for private business use or for sale, qualifies for investment allowance on qualifying costs. Currently the investment allowance is only applicable to electricity producers who supply electricity through the national grid.

The Act has also reintroduced the definition of the term “civil works” in the second schedule of the ITA to include roads and parking areas, railway lines and related structures, water, industrial effluent and sewerage works, communications and electrical posts and pylons and other electrical supply works, and security walls and fencing. The definition of the term “civil works” was deleted by the Tax Laws (Amendment) Act, 2020, which introduced the new second schedule to the ITA. The reintroduction of civil works definition in the second schedule implies that civil works shall be part of the costs qualifying for investment deduction.

The Act reintroduced the definition of the term “farm works” previously deleted by the Tax Laws (Amendment) Act, 2020 when the new Second Schedule to the ITA was introduced. Farm works has been defined to include - farmhouses, labour quarter, any other immovable building necessary for the proper operation of the farm, fences, dips, drains, water and electricity supply works and other works necessary for the proper operation of the farm. The reintroduction of the definition of “farm works” provides clarity on the eligible cost, when computing investment allowance in respect of capital expenditure on agricultural land.

The Business Laws (Amendment) Act, 2020, which came into effect on 18 March 2020, introduced an investment deduction of 150%, where capital expenditure of at least Ksh 5 Billion is incurred in the construction of bulk storage and handling facilities for supporting the Standard Gauge Railway (SGR) operations. The transitional provision had been provided for this deduction to continue to be in force until 31st December 2021. The Act has extended the tenure of the transitional provision by one year, to 31st December 2022.

The Act has introduced a new sub section 1A in the second schedule of the ITA, which states that the investment deduction shall be 100%, where, the cumulative investment value in the preceding three years outside Nairobi City County and Mombasa County is at least Ksh 2 billion; the investment value outside Nairobi City County and Mombasa County in that year of income is at least two hundred and fifty million shillings; or the person has incurred investment in a special economic zone. Before the repeal of the second schedule of the TPA by the Tax Laws (Amendment) Act, 2020, capital expenditure of at least Ksh 200 million made outside Kisumu, Mombasa and Nairobi municipalities qualified for 150% investment deduction.

The effective date of this provision is 1 January 2022

 

  1. Extractive Industries

The Act has aligned the provisions of the investment allowances provided for companies in the extractive industry under the ninth schedule to mirror similar provisions under the second schedule of the ITA.

The effective date of this provision is 1 January 2022

The Act has increased the withholding tax rate for service fees paid by a contractor or a licensee to 10% from 5.625%. Further, the Act has reduced the withholding tax deductible by contractors in the extractive sector, on management, training or professional fees to 10% from 12.5%.

The effective date of this provision is 1 July 2021

 

  1. Digital Service Tax

The Act has expanded the charging section of the ITA to include the following provision: “Income accruing from a business carried out over the internet or an electronic network including through a digital marketplace.”

The Act has also replaced the definition of the term “digital marketplace” appearing in Section 3 (3) (ba) with the following definition: “Digital marketplace” means an online or electronic platform, which enables users to sell or provide services, goods or other property to other users.

The Act has amended Section 12E (1) of the Income Tax Act and explicitly provided that digital service tax shall only be payable by non-resident persons whose income from the provision of services is derived from or accrues in Kenya through a digital marketplace. This is a relief for online platforms which accrue and derive income within the Kenyan legal entity as this allows such entities to only pay corporate income tax when they make profit.

The effective date of this provision is 1 July 2021

 

  1. Taxation of Registered Trusts

Previously income paid out by a trustee to a beneficiary was deemed to be already taxed at the appropriate rate. The Act has now specified that the provision will only apply to:

  1. Any amount that is paid out of the trust income to the beneficiary and is exclusively used for the purpose of education, medical treatment or early adulthood housing;
  2. Income paid by a trustee to the beneficiary which is collectively below ten million shillings in the year income; or
  3. Such other amount as the commissioner may prescribe from time to time shall be deemed to have been subject to tax.

This amendment brings to tax all other incomes of registered trusts paid out to beneficiaries.

The effective date of this provision is 1 July 2021

 

  1. Control in Body Corporates

The Act has amended the interpretation section of the ITA to include a new definition of the term “control”. The new definition has reduced the threshold for control from 25% to 20% and has broadened the definition of control, to include suppliers, consumers, financiers and guarantors with significant influence. There before, the definition of the term “control” only considered shareholding and voting power that influenced the conduct of affairs of a body corporate.

The new definition of the term “control” appreciates the fact that over time, suppliers, consumers, financiers and guarantors have increasingly exercised control over pricing and related business affairs as well as taken positions in governance boards of body corporates.

This new amendment will increase the compliance obligation for the affected taxpayers in a bid to comply with the transfer pricing legislation in Kenya.

The effective date of this provision is 1 July 2021

 

  1. Permanent Establishment

The Act has amended the current definition of the term “Permanent Establishment (PE)” under the ITA, to include a new broad definition. The new definition provides clarity on activities that will culminate in a PE for non-resident entities and the relevant qualifying durations. The new definition further provides clarity on activities that do not constitute a PE in line with the OECD guidelines.

By aggregating the time spent on the various connected activities on construction and installation projects in determining the duration of a project, the amendment seeks to counter the artificial avoidance of PE status through the splitting of contracts. The risk of crystallising a PE will therefore increase, requiring persons to constantly monitor the time spent by employees and consultants in Kenya and the potential tax obligations. Taxpayers will also be required to assess their controlled transactions and ensure that transfer pricing outcomes are well aligned with value creation.

The effective date of this provision is 1 July 2021

 

  1. Submission of Group Return by Multinational Enterprise Groups

The Act has introduced a Country-by-Country Reporting (CbCR) requirement on a Kenyan headquartered multinational enterprise group (MNEG), referred to in the proposed legislation as an “ultimate parent entity” (UPE).

The Act defines the term UPE as “an entity that is resident in Kenya for tax purposes, is not controlled by another entity, and owns or controls a multinational enterprise group.”

The term MNEG has been defined to mean “a group that includes two or more enterprises which are resident in different jurisdictions including an enterprise that carries on business through a PE or through any other entity in another jurisdiction.”

The Ultimate Parent Entity (UPE) of the MNE will submit to the Commissioner a return describing the group’s financial activities in Kenya and in all other jurisdictions where the group has taxable presence. The return will be submitted not later than 12 months after the last day of the reporting financial year of the group.

The return will contain information on the group’s aggregate information on revenue, profit and loss before income tax, income tax paid, income tax accrued, stated capital, accumulated earnings, number of employees and tangible assets with regard to each jurisdiction in which the group operates.

This amendment has been introduced with a view of aligning with the OECD Base Erosion and Profit Shifting (BEPS) Action 13 on Country-by-Country Reporting (CbCR). This provision currently applies to multinational groups whose UPE is based in Kenya.

The effective date of this provision is 1 January 2022

 

 

AMENDMENTS TO THE VALUE ADDED TAX (VAT) ACT, 2013

  1. VAT on Imported Services

The Act has amended section 2, the definition of the term “supply of imported services”, and section 10, treatment of the imported services of the VAT Act. The amendment has removed ambiguities with regard to accounting for VAT on imported services, by entities and individuals receiving services from non-resident persons.

The amendments clarify that reverse charge VAT is applicable to:

  • Any person who is not registered for VAT and imports a service into the country. Reverse charge VAT in this case is payable based on the full value of the imported service; and
  • If the person who imports a service is registered for VAT, then reverse charge VAT is applicable to the extent that the imported service is attributable to exempt supplies.

The effective date of this provision is 1 July 2021

 

  1. Deduction of Input Tax

VAT incurred in hiring or leasing of passenger cars or minibuses is now not claimable as input VAT unless the vehicles are acquired exclusively for the purpose of making taxable supplies in the ordinary course of the business of dealing in or hiring of the vehicles.

The effective date of this provision is 1 July 2021

 

  1. Exported Services

The Act has amended the VAT status of the exportation of taxable services from zero-rated to exempt. The amendment aims to reduce the cases of VAT refund claims arising from the zero-rating of the exported services.

The effective date of this provision is 1 July 2021

       

  1. Due Date for VAT Payment

The Act has amended the provision relating to the due date for VAT payment to allow anyone who is liable to VAT to defer payment of the VAT to the 20th day of the month following the period in which the tax became due.

The amendment aims at aligning the section on the payment due date with the other proposed changes relating to the definition of the term “supply of imported services” and treatment of imported services. The change clarifies that the due date for payment of VAT is 20th of the month following the month the tax became due. This applies to both registered persons making taxable supplies and to the importers of services into the country, liable to reverse charge VAT.

The effective date of this provision is 1 July 2021

 

  1. VAT Rate Changes

The Act has repealed the proposal by the bill to change VAT rate on the supply of ordinary bread from 0% to 16%. The intervention by Parliament following the public outcry maintains the VAT rate on ordinary bread at 0%.

As a response to the Covid-19 pandemic, the Act has exempted medical equipment and inputs used to manufacture equipment such as ventilators, breathing appliances and medicaments from VAT. This move will lower the cost of production due to the lower cost of importation, which should lead to an increase in capacity to fight the pandemic.

The Act has also exempted specialized equipment used for the development and generation of solar and wind energy, including photovoltaic modules, direct current charge controllers, direct current inverters and deep cycle batteries that use or store solar power, upon recommendation to the Commissioner by the Cabinet Secretary for Energy. This is a welcome move since it will promote the development of the clean energy industry, which has great social and environmental impacts. The amendment is a reversal of the introduction of VAT on specialized equipment used for the development and generation of solar and wind energy, introduced by the Finance Act, 2020, a year ago.

The effective date of this provision is 1 July 2021

 

 

 

AMENDMENTS TO THE EXCISE DUTY ACT

  1. Fees or Commission Earned in Respect to Loan

The Act has introduced excise duty on fees and commissions earned in respect of a loan. Excise duty on “other fees” has in the past been a contentious issue between KRA and financial institutions. Previously, the definition of the term “other fees” excluded fees and commissions earned in respect of a loan. The definition of the term “other fees” has thus been amended to reflect KRA’s position of subjecting excise duty on fees and commissions earned in respect of a loan.

The introduction of excise duty on fees and commissions earned in respect of a loan will expand the tax base, while increasing the cost of accessing loans from financial institutions.

The effective date of this provision is 1 July 2021

 

  1. Imported Sugar Confectionery

The Act has increased excise duty on imported sugar confectionery of tariff heading 17.04 from Ksh 20.99 per kilogram to Ksh 35 per kilogram.

This is a welcome move as locally manufactured sugar confectionery will now be competitive in the market. This is in line with the Government’s Big Four agenda of supporting the local manufacturing industry and will also result in increased revenue collection for the Government.

The effective date of this provision is 1 July 2021

 

  1. Increased Excise Duty on Telephone and Internet Data Services

The Act has increased excise duty chargeable on telephone and internet data services from 15% to 20%.

The effective date of this provision is 1 July 2021

 

 

 

AMENDMENTS TO THE TAX PROCEDURES ACT, 2015

  1. Notice of Objection in Electronic Form to be Submitted even on Weekends or Public Holidays

The amendment allows for electronic submission of a notice of objection on a weekend or public holiday where the due date falls on such days. Currently, where a notice of objection falls due on a Saturday, Sunday or public holiday in Kenya, the due date is taken to be the previous working day.

The law currently allows for electronic submission of returns and electronic payment of tax over the weekend or on public holidays via the iTax system.

The effective date of this provision is 1 July 2021

 

  1. Elimination of Exemption from Withholding VAT

The Act has deleted the provision in the TPA, which allow the Commissioner to exempt a supplier from the Withholding VAT if the supplier proves that they are going to be in a continuous credit position for a period of not less than 24 months. While the amendment will improve the government’s cash flow position, it will result in cash flow challenges for taxpayers whose VAT is withheld, especially those in a perpetual refund situation.

The effective date of this provision is 1 July 2021

 

  1. Offsetting Tax Liabilities against Verified Refunds

The Act has empowered KRA to apply a refund against any other outstanding tax liability owed by the taxpayer. In such a case, once KRA notifies the taxpayer of the intention to offset the verified refund application against existing tax liabilities, no interest and penalties shall accrue on the tax liabilities KRA intends to offset with the refund amount due. Where the refund applied is less than the outstanding tax, then the remainder of the outstanding tax continues to accrue interest and penalties. This amendment seeks to alleviate the interest burden on taxpayers as KRA will first utilize tax refund against any outstanding tax and thereafter pursue penalties and interest on outstanding residual tax liabilities.

The effective date of this provision is 1 January 2022

 

  1. Digital Service Providers Required to Register for KRA PIN

The Act amended the First Schedule of the TPA to include the selling of goods and services over a digital marketplace in the list of transactions for with a Personal Identification Number (PIN) is required.

The effective date of this provision is 1 July 2021

Please do not hesitate to contact us, should you require further clarification on the Finance Act, 2021.

Moses Mwendwa             Managing Director                            mmwendwa@czmkenya.com

Benson Njiru                     Director, Advisory & Tax                 benson.njiru@czmkenya.com

Betty Komen                     Tax Associate                                bettykomen@czmkenya.com