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FINANCE ACT 2018
Analysis
Contents
THE FINANCE ACT 2018 1
A. INCOME TAX 2
B. VALUE ADDED TAX 6
C. EXCISE DUTY 9
D. TAX APPEALS TRIBUNAL 11
E. TAX PROCEDURES 12
F. INTRODUCTION OF SPECIAL OPERATING FRAMEWORK ARRANGEMENT 14
G. MISCELLANEOUS FEES AND LEVIES 14
H. OTHER REFORMS 14
BOWMANS - The value of knowing
1
The Finance Act 2018
INTRODUCTION
After much drama, the Finance Act 2018 was finally granted Presidential assent on 21 September 2018.
The new tax provisions will have significant impact on both the cost of living and of doing business in
Kenya; some of those effects are already being felt. The need for these tax increases is driven by two
factors: the debt servicing requirement which by all accounts will require almost half of targeted
collections and the high government recurring expenditure. Steps to reduce these heavy outflows are
going to be difficult in the current economic and political climate. It is also debatable as to whether
revenue collections will actually meet targets which judging by recent history seems unlikely. The upshot
will be an increased deficit which will clearly be a concern.
The Finance Act contains several measures that were to become effective on 1 July 2018, including VAT
on fuel (although this would seem to be a drafting error). However, in a recent case – Okiya Omtatah
Okoiti v Cabinet Secretary, National Treasury & 3 others [2018] eKLR – it was ruled that tax changes
cannot be effected until Presidential assent was in place, which in this case is 21 September 2018. In the
past, the Treasury has relied on legislation from 1959, the Provisional Collection of Taxes and Duties Act,
to give the Finance Bill the force of law from Budget Day. The Courts ruled that this legislation was
unconstitutional and could not be relied upon today. Suffice to say the entire budget process will need
to be revamped which the ruling made quite clear.
In spite of the Court ruling, there remain some areas where the effective date has been left in limbo
pending guidelines either from the parent ministry or the Treasury. One such notable one is the new
Housing Development Levy. There is also some confusion on the effective date for VAT on fuel. These
and other such issues are analysed in detail below.
The economic and political climate, not to mention the weather, over the next few months will clearly
show if the increased taxes will give the desired result. Current indications are that it is going to be
difficult.We highlight the key taxation and financial provisions introduced by the Act and any
developments from the Bill below:
2
A. Income Tax
Amendment Putting it into perspective
New Definitions
i. “Demurrage Charges” means the penalty paid for
exceeding the period allowed for taking delivery of
goods, or returning of any equipment used for
transportation of goods
ii. “Winnings” include winnings of any kind and a reference
to the amount or the payment of winnings shall be
construed accordingly.
Demurrage charges were subject to tax
litigation in Ocean Freight E.A. Limited v The
Commissioner Of Domestic Taxes (2017)
where the Tax Appeals Tribunal held that
demurrage is classified as rent, making it liable
for withholding tax payable to the KRA. This
decision was challenged in the High Court but
judgment is yet to be entered. With this
amendment, KRA seems to have adopted
the global position that demurrage fees are
considered ordinary income subject to the
regular corporate income tax.
Previously, the definition of winnings was the
definition assigned to it in the Betting, Lotteries
and Gaming Act, Cap 131 which definition
has now been adopted into the Income Tax
Act in its entirety.
Dividends: Section 7(1) of the Income Tax Act was amended
to reclassify the following as dividends, with effect from 1
January 2019:
i. any cash or asset transferred by a company to or for the
benefit of a shareholder or any person related to that
shareholder;
ii. the discharge of a shareholder or any person related to
a shareholder from a quantifiable obligation owed to
the company by the shareholder or related person;
iii. an amount used by a company for the benefit of a
shareholder or any person related to that shareholder;
iv. the settlement of a debt by a company to a third party
which is owed by a shareholder or any person related to
that shareholder; and
v. an amount representing additional taxable income or
reduced assessed loss of a company by virtue of a
transaction with a shareholder or a person related to a
shareholder, resulting from an adjustment.
The effect of this amendment is to widen the
definition of dividends bringing various
transactions between companies and their
shareholders, persons related to shareholders,
transactions by a company for the benefit of
its shareholders, or related persons into the
definition of dividends; and thereby
subjecting such income to taxation as a
dividend. The previous definition of dividend
income only included profit distributions in
winding up and the issuance of debentures or
redeemable preference shares to
shareholders for no payment or for less than
their nominal or redeemable value. This
enlargement seeks to tax what were
previously thought to be untaxed shareholder
drawings from companies.
Compensating Tax: Section 7A of the Income Tax Act has
been repealed and replaced with the following provision.
With effect from 1 January 2019, income which is untaxed,
out of which dividends are paid, will be subject to tax at the
resident corporate rate of 30%. The Act repealed the
provisions relating to the maintenance of a dividend tax
account.
Companies will no longer be required to
maintain a dividend tax account. The
provision also clarifies that the rate applicable
on distributions out of untaxed income will be
the resident corporate tax rate. This tax will
be in addition to any dividend withholding tax
that is payable. Unfortunately there is no
definition of untaxed income which is likely to
3
Amendment Putting it into perspective
result in disputes with the KRA.
The amendment focuses on distributions out
of untaxed profits. The rate and consequent
quantum of tax paid on the profits is no longer
the issue it was under the compensating tax
regime. Distributions from capital gains taxed
at 5% would therefore not be caught by the
new provisions. However, where a company
has tax losses (say arising from investment
deduction claims) and makes a distribution
out of available reserves, the 30% tax on
distribution will apply.
In addition, it is possible that dividends paid to
holding companies that own more than 12.5%
of the shares of its subsidiaries which are
exempt (proposed in the Income Tax Bill 2018
to increase to 25%), will be treated as untaxed
income and thus subject to tax on distributions
to ultimate shareholders. This will have a major
impact on the various holding company
structures, particularly in the financial industry
that are currently in place. The aim would
seem to be the increased tax revenue that
will be generated. Under current income tax
law, it is important to note that the
Commissioner has the power to deem what a
distribution is and the new provisions may
mean that this power will be used more often.
The new regime could also impact investment
in tax exempt infrastructure bonds by
companies as any distributions from such
income will be caught. In a time when
government is relying on these bonds to raise
funds this could be an issue.
From turnover tax to presumptive tax: The Act has eliminated
turnover tax with effect from 1 January 2019 and replaced it
with a presumptive tax. The presumptive tax is to be payable
by a resident person whose turnover from business does not
exceed KES 5 million during a year of income.
The presumptive tax shall apply to all persons issued with or
liable to be issued with a business permit by a county
government, and is payable at the rate of 15% of the fee for
the business permit. The tax must be paid at the time of
payment, or renewal of, the business permit.
In a bid to widen the tax net, turnover tax,
which was introduced by Finance Act 2006,
has been replaced by a presumptive tax
applicable to persons who have or are
required to have a business permit issued by a
County.
The success of a presumptive tax in taxing the
informal sector is not clear since business
permits are required to be obtained by
persons operating from business premises,
which the informal sector does not always
have. Additionally, this will require co-
operation with the county governments as it is
intended (presumably) that the tax will be
collected by county governments at the
4
Amendment Putting it into perspective
same time as they are collecting the fees for
the business permits. However, we will need to
wait to see whether the tax will be paid
directly to the KRA or to the county
governments as agents of KRA.
Reprieve for manufacturers: The Act has introduced an
allowable deduction/expense for manufacturers from 1
January 2019, amounting to 30% of their electricity costs, in
addition to the normal electricity expense, subject to
conditions to be set by the Ministry of Energy.
Since manufacturing is one of the pillars of the
Government’s Big Four Agenda, and
electricity costs comprise a major component
of manufacturers’ expenses, it is no surprise
that the Government has agreed to support
this sector by providing relief on electricity
costs.
We are aware that manufacturers were
seeking various tax reliefs including a removal
of all taxes and levies on power bills for
manufacturers, the deduction of electricity
costs as well as the set-off of energy costs
against corporate income tax liabilities. The
new provision will add some relief to
manufacturers but for the sector to achieve its
full potential, more will need to be done.
We understand that in order to qualify for this
deduction, the Ministry of Energy is
considering requiring manufacturers who wish
to benefit from the deduction to meet the
following three conditions:
1. that the manufacturer must demonstrate
increased power usage;
2. that the manufacturer must increase
employment; and
3. that the manufacturer must demonstrate
increased productivity.
Intuitively, these conditions seem at odds with
the objective. It is quite possible that
achieving the conditions will cost more than
the additional 30% deductions on the
electricity bills.
Capital gains tax for insurers: The Act provides for capital
gains tax (CGT) on transfer of property of an insurance
company, other than property connected to life insurance
business, shall be taxed at the current CGT rate of 5%, to be
effective from 1 July 2018.
Section 19 of the Income Tax Act provides for
the determination of the income of insurance
companies. It did not expressly provide for
taxation of capital gains for property transfers
made by general insurance companies. The
amendment to section 19 would indicate that
capital gains tax from property transactions
that have not previously been subject to CGT
for general insurance businesses will now be
5
Amendment Putting it into perspective
applicable. The amendment does not affect
the treatment afforded to life insurance
business.
Property includes real property (land, shares,
and any other property held by an insurance
company).
Withholding tax on insurance premiums and demurrage
charges: The Act expanded the categories of payments
subject to withholding tax from 1 July 2018, by introducing:
(a) 5% withholding tax on insurance premiums paid to non-
resident insurers without a permanent establishment in
Kenya, but excluding payments for aircraft insurance;
and
(b) 20% withholding tax on demurrage charges payable to
non-resident persons without a permanent
establishment in Kenya (demurrage charges means the
penalty paid for exceeding the period allowed for
taking delivery of goods, or returning of any equipment
used for transportation of goods).
This amendment was in response to the
growth of the insurance sector and the need
to seal the tax loophole on payment of
premiums to non-resident persons. The effect
of this provision is likely to increase insurance
premiums given the relatively small
reinsurance market in Kenya.
There will be an obligation for importers to
account for withholding tax on demurrage
payments. Given inefficiencies in clearing
containers, it is clear that import costs are
going to increase.
While the effective date has been set as 1
July 2018, the judgement delivered in the
Okiya Omtatah Okoiti v Cabinet Secretary,
National Treasury & 3 others [2018] eKLR case
suggests that the effective date has to be the
date on which the Finance Act received
Presidential assent – 21 September 2018. In
the absence of an appeal by the
respondents in the case, it would seem that
the latter is the effective date.
6
B. Value Added Tax
Amendment Putting it into perspective
Imposition of VAT on fuel and fuel products: The VAT
Act has been amended by imposing a value added
duty of eight per cent of the taxable value of fuel
and fuel products effective from the date of assent
of the Finance Act 2018.
The amendment however then provides that despite
the date of assent, the amendment would come
into effect upon enactment of the Supplementary
Appropriation (No.2) Act, 2018 whose date of assent
was 4 May 2018 and commencement 7 May 2018.
In Okiya Omtatah Okoiti v Cabinet Secretary,
National Treasury & 3 others [2018] eKLR, the court
made declarations that:
1. the Cabinet Secretary by presenting the Finance
Bill 2018 to the National Assembly on 14th June 2018
violated Section 37 of the Public Finance
Management Act, 2012 which sets the 30th April
deadline for tabling of the budget estimates and its
auxiliary Bills;
2. the Provisional Collection of Taxes and Duties Act,
Cap 415 and the Provisional Collection of Taxes
and Duties Order, 2018 (Legal Notice No. 128 of
21st June 2018) are unconstitutional and, therefore,
invalid, null and void; and
3. the Finance Bill 2018, or its parts, including on
taxation, cannot be implemented before the Bill
becomes the Finance Act after it goes through the
parliamentary legislative process laid out in the
Constitution for approval and adoption by
Parliament, and assent by the President.
This judgment was issued on 19 September 2018 and
was overtaken by the Presidential assent to the
Finance Act on 21 September 2018. However, Petition
Number 327 of 2018, Okiya Omtatah Okoiti v Attorney
General, has been filed seeking to suspend the
Finance Act on constitutional grounds. The petition
will be heard on 9 October 2018. We will keep you
updated on any developments from the case which
may impact the Act and its applicability.
VAT Exemption Reversal: The Finance Act 2017
exempted asset transfers and other transactions
related to the transfer of assets into Real Estates
Investment Trusts (REITs) and Asset Backed Securities
(ABS) from VAT. Now however, the Finance Act 2018
has reversed the exemption whose effect is
reclassifying asset transfers into REITs and ABS and
their auxiliary transactions as vatable supplies.
This will have the effect of subjecting asset transfers
into REITS and ABS schemes subject to VAT.
New exemptions: The Act introduced exemptions on
value added tax (VAT) on the following:
(a) parts imported or purchased locally for the
assembly of computers subject to approval by
the Cabinet Secretary for Finance on
recommendation by the Cabinet Secretary for
When the new VAT Act was enacted in 2013, one of
the primary aims was to reduce the number of items
that were either exempt or zero rated. At date of the
enactment of the VAT Act, there were 39 items listed
as exempt - this number has increased to 104
following the enactment of the Finance Act 2018.
The rationale behind reducing these items was to
prevent erosion of the VAT base. Clearly, we are
7
Amendment Putting it into perspective
Information Technology;
(b) alcoholic or non-alcoholic beverages supplied
to the Kenya Defence Forces canteen
organisation;
(c) equipment for construction of grain storage
facilities. Previously, the exemption was only
applicable to materials for construction of grain
storage facilities;
(d) raw materials for production of animal feeds;
(e) specialised equipment for the development and
generation of wind energy (previously the
exemption only applied to equipment used to
generate solar energy);
(f) postal services provided through the supply of
postage stamps, including rental of post boxes or
mail bags and any subsidiary services thereto.
(g) cereal straw and husks, unprepared, whether or
not chopped, ground, pressed or in the form of
pellets;
(h) lucerne (alfalfa) meal and pellets;
(i) beet-pulp, bagasse and other waste of sugar
manufacture;
(j) hearing aids, excluding parts and accessories;
and
(k) one personal motor vehicle, imported by a
public officer returning from a posting in a
Kenyan mission abroad and another motor
vehicle by his spouse, terms and conditions
applying.
The above amendments are proposed to take effect
from 1 July 2018.
moving back to where we were –prior to VAT Act,
2013.
The rationale for the exemption on computer parts is
to encourage local manufacturing and the local
assembly of computers in a bid to expand the
manufacturing sector. Previously the exemption only
applied to the assembly of laptops for the school
project.
The exemption on equipment for construction of
grain storage facilities expands the current exemption
under the VAT Act which applies only to materials for
the construction of grain storage facilities.
Some of the raw materials used to manufacture
animal feeds are currently VATable. The exemption of
raw materials is intended to make animal feeds more
affordable to farmers and attract more
manufacturers to invest in the sector.
Deleted Exemptions: The Act lifted exemptions on
value added tax (VAT) on the following:
(a) wheat and meslin, and Barley;
(b) maize corn seed;
(c) garments and leather footwear, manufactured
in an Export Processing Zone at the point of
importation.
(d) transportation of cargo to destinations outside
Kenya.
Conditional Exemption:
Nuclear reactors, boilers, machinery and
mechanical appliances and parts thereof and
The lifting of the exemptions may have been
motivated by the general feeling that some of the
exemptions were not necessary as well as the
intention of increasing the tax base.
8
Amendment Putting it into perspective
electrical machinery and equipment and parts
thereof; sound recorders and reproducers, television
image and sound recorders and reproducers, and
parts and accessories of such article shall only be
exempted if they are used for the manufacture of
goods.
Deleted Zero-rated Supplies: Medicaments
containing alkaloids or derivatives thereof but not
containing hormones, or other products of heading
No. 29.37 or antibiotics, put up in measured doses or
in forms or packings for retail sale.
New Zero-rated Supplies: Medicaments: Containing
ephedrine or its salts; Containing pseudoephedrine
(INN) or its salts; and Containing norephedrine or its
salts.
9
C. Excise Duty
Amendment Putting it into perspective
The Excise Duty Act, 2015 has been amended by providing
that exemption from excise duty (a) on exempt goods under
the Second Schedule shall have been received and
consumed by the exempt person and (b) excisable goods or
services for export have not been, and shall not be
consumed in Kenya.
The aim of the amendment is to make it clear
when exemption from excise duty is
applicable. In the case of the export of goods
or services, the effect of the amendment will
be to prevent exported goods and services
being consumed in Kenya. This, in effect, is a
similar test to the use or consumption test for
VAT.
Unlicensed Activities Minimum Penalty: The penalty for a
person undertaking manufacturing of excisable goods or
importation into Kenya of excisable goods requiring an
excise stamp without being licensed shall now be double
the payable excise duty if they were licensed or Kenya
Shillings five million (KES 5,000,000), whichever is higher.
This amendment, by prescribing a penalty of
Kenya Shillings five million (KES 5,000,000),
creates a minimum penalty and effectively
increases the tax penalties payable by
defaulters.
Increased excise duty for private passenger vehicles: The
Act imposed the increase of excise duty for imported private
passenger motor vehicles (above 2,500 cc diesel engine
capacity and above 3,000 cc petrol engine capacity) from
20% to 30%, effective 1 July 2018.
This will result in increased import costs for
higher capacity private motor vehicles.
Adjustment for Inflation: The specific rates of excise duty on
excisable goods specified in Schedule I of the Excise Duty
Act shall now be adjusted for inflation at the beginning of
every financial year. On the enactment of the Excise Duty
Act in 2015, the adjustment for inflation was to be done after
every two (2) years. The 2016 Finance Act amended that
position to an annual adjustment, a position soon after
abandoned by the Finance Act 2017 that returned the
biennial adjustment. The 2018 Act has now amended this
position such that adjustments for inflation under the Excise
Duties Act shall take place every year.
This amendment will enable the government’s
imposition of excise duty to keep up the pace
with real prices that reflect the true market
value which is more accurately reflected
annually than biennially. One hopes that
there will be no further change next year!
Money transfer: The Act (with effect from 1 July 2018):
(a) increases excise duty on fees charged for money
transfer services by cellular phone service providers from
10% to 12%;
Over the last few years excise duty has
become the go to tax for bridging the deficit.
From the traditional “sin tax”, it has become
the go to tax for quick collection.
There is a clear intention for the additional
10
Amendment Putting it into perspective
(b) increases from 10% to 20% excise duty on fees charged
by banks, money transfer agencies and other financial
services providers for money transfer services; and
(c) introduces 20% excise duty on other fees charged by
financial institutions.
The amendment also mandates the Commissioner-General
of the KRA (the Commissioner) to pay sixteen percent (16%)
of the excise duty paid in respect of money transfer by
cellular phone service providers. into the Sports, Arts and
Social Development Fund established under the Public
Finance Management Act to support social development
including universal health care.
excise duty to go towards funding health
care, which is one of the pillars of the Big Four
Agenda.
The increase in excise duty will impact the
cost of money transfer services which are
widely used in the country and is likely to
impact the less privileged. Unfortunately, this
will result in an increase in the cost of doing
business in Kenya.
The aptly named “Robin Hood” tax which
provided for 0.05% excise duty on any
transfers of KES 500,000 or more has been
dropped.
Kerosene and gas oil: The Act imposed a single excise duty
rate for both illuminating kerosene and gas oil of KES 10,305
per 1,000 litres, effective 1 July 2018. Previously, illuminating
kerosene attracted a duty rate of KES 7,205 per 1,000 litres
(while gas oil is subject to excise duty at the rate of KES
10,305 per 1,000 litres). This amendment will be effective on 1
October 2018.
By providing a uniform excise duty rate for
both types of fuels, the Government hopes to
curtail any adulteration of fuel.
The amendment will have the effect of
making kerosene expensive impacting low
income households that rely on kerosene.
Telephone and Internet Data Services: The Act imposes a
15% excise duty on telephone and internet data services.
The previous rate was 10%.
This amendment is aimed at increasing the
revenues collected by the government.
New Exempt Excisable Goods
(a) Alcoholic or non-alcoholic beverages supplied to the
Kenya Defence Forces Canteen Organization; and
(b) One personal motor vehicle imported by a public officer
returning from a posting in a Kenyan mission abroad and
another motor vehicle by his or her spouse, subject to
terms and conditions.
This amendment increases the goods not
subject to excise duty.
11
D. Tax Appeals Tribunal
Amendment Putting it into perspective
The Act deleted the words ‘the proceedings shall be
adjourned, and” in Section 10 (3) of the Tax Appeals Tribunal
Act, 2013 that states as follows:
Where a member of the panel ceases to be such
member, or is not available for the proceedings, the
proceedings shall be adjourned, and the Chairperson
of the Tribunal shall assign another member to the
panel and the proceedings shall continue.
The effect of this amendment is to reduce
time wastage by avoiding unnecessary
adjournments and to ensure the timely
resolution of hearings before the tax appeals
tribunal.
Unfortunately, the Tribunal’s term expired at
the end of March 2018 and a new panel has
yet to be gazetted. The timely resolution of
matters has now been put into question.
The Act amended the Tax Appeals Tribunal Act to allow
parties to an appeal to settle the dispute out of the Tribunal.
The time taken to resolve the matter out of the Tribunal will
not be included in the ninety (90) days period within which
the Tribunal must determine an appeal.
This allows the parties to appeal the option to
resolve the dispute through alternative means
with the time taken for such a resolution to be
excluded from the time the Tribunal is
required to determine an appeal.
12
E. Tax Procedures
Amendment Putting it into perspective
Liabilities and obligations of tax representatives: The Act now
states that, where a taxpayer has more than one tax
representative, each tax representative shall be responsible
for the tax obligation for which the tax representative has
been appointed. Previously, each tax representative was
responsible for all of the obligations of the taxpayer as
required under the Tax Procedures Act or any other tax law.
The aim of this amendment is to enhance
fairness in tax procedures by apportioning
responsibilities as between various tax
representatives of one taxpayer with respect
to the tax obligations for which each tax
representative has been appointed.
Extension of time to submit returns: Pursuant to the
amendment, an application for extension of time for the
submission of tax returns under any tax law must be made at
least fifteen (15) days before the due date for a monthly
return, and thirty (30) days before the due date for an annual
return. The Commissioner must respond to the applicant at
least five (5) days before the deadline, and shall be deemed
to have granted the application if there is no response. An
extension granted will not alter the due date for payment of
tax but the penalties for late submission of a return will not
apply.
This amendment is aimed at clarifying the
procedure and timelines for applying for an
extension of time to submit a tax return. The
inclusion of an implied acceptance if there is
no response from the KRA is a positive move
the KRA commonly does not respond to such
requests.
Rejection of Amended Self-Assessments:
If the Commissioner is rejecting an amended self-assessment,
he shall furnish the taxpayer with the reasons for such
rejection within thirty (30) days of receiving the application.
Previously, the Commissioner only needed to notify the
taxpayer of the decision in writing without setting out the
reasons for rejection.
The purpose of this amendment is to furnish
the taxpayer with the reasons and particulars
of the rejection that justify the rejection
and/or ways of rectifying the assessment at
hand.
Extension of tax amnesty deadline: The Act extended the
deadline for making declarations under the tax amnesty
from 30 June 2018 to 30 June 2019. It further provides that the
income in respect of which the amnesty applies be income
for any period ending on or before 31 December 2017
instead of 31 December 2016.
Pursuant to the amendment, the funds transferred back to
Kenya under the amnesty will be exempt from the provisions
of the Proceeds of Crime and Anti-Money Laundering Act or
any other Act relating to reporting and investigation of
The extension of the deadline and exemption
from investigation under other laws is aimed
at increasing the uptake of the tax amnesty.
Low uptake of the amnesty is most likely
caused by apprehension about investigations
under other laws such as anti-money
laundering laws.
It is unclear from the amendments how those
that have already applied for amnesty will be
13
financial transactions. However, this exemption shall not
apply to funds acquired through terrorism, poaching and
drug trafficking.
treated. Arguably, it could be said that there
are two separate amnesties.
Late submission penalty: the Act imposes and distinguishes
the penalties for late submission of tax returns as follows:
Previous Penalty New Penalty
VAT and excise
duty
The higher of 5%
of the tax
payable or KES
20,000
The higher of 5%
of the tax
payable or KES
10,000
Any other case
for an individual
(besides
employment
income)
The higher of 5%
of the tax
payable or KES
20,000
The higher of 5%
of the tax
payable or KES
2,000
Any other case
for a non-
individual
The higher of 5%
of the tax
payable or KES
20,000
No change
The penalty for late submission of returns for employment
income still remains at 25% of the tax payable or KES
10,000 whichever is higher.
The rationale for reducing the penalty for VAT
and excise duty may be because the returns
for those categories of tax are submitted
more frequently. The reduction of penalties
on returns by individuals would provide a
reprieve to individual taxpayers.
Failure to Pay Tax on Due date: The Act imposes a new late
payment penalty of five percent of the tax due and payable
on persons who fail to pay tax on the due date.
There was previously no payment penalty for
late payment of taxes. Only interest was
applicable. This penalty is meant to
discourage late payment of taxes.
Further, the Commissioner’s Power to collect tax from persons owing money to a taxpayer has been
expanded such that the notice of unpaid taxes can be made to a tax agent to pay the amount
specified in the notice. Previously, such a notice could only be served on a taxpayer’s debtor, that is,
someone holding money on account of the taxpayer or a debt assignee. Lastly, unauthorized access or
improper use of computerized tax systems has now been classified as a bookable offence under the
Act.
The above amendments to the Tax Procedures Act and Tax Appeals Tribunal Act, will take effect from 1
July 2018.
14
F. Introduction of special operating framework arrangement
The Act introduces the concept of a special operating framework arrangement with the government
and by which companies will benefit from a raft of tax breaks. With regard to this arrangement, the
Act provides:
(a) that for income tax purposes, the rate of tax applicable for companies engaged in businesses
under a special operating framework arrangement with the Government shall be included in
that arrangement with effect from 1 January 2019;
(b) the exemptions from VAT and excise duty for goods imported or purchased locally, for direct
and exclusive use in the implementation of projects under a special operating framework
arrangement, will take effect from 1 July 2018;
(c) the exemption from VAT for services imported or purchased locally for direct and exclusive use
in the implementation of projects under a special operating framework arrangement will take
effect from 1 July 2018;
(d) an exemption from import declaration fees for imported goods when imported or purchased
before clearance through customs; and
(e) an exemption from the railway development levy for imported goods when imported or
purchased before clearance through customs.
G. Miscellaneous Fees and Levies
The Miscellaneous, Fees and Levies Act, 2016 is amended by introducing the anti-adulteration levy
on all illuminating kerosene imported into the country for home use. The levy shall be at the rate of
eighteen shillings per litre (KES 18 per 1ltr) of the customs value of the illuminating kerosene and shall
be paid by the importer at the time of bringing the illuminating kerosene into the country.
H. Other reforms
The Act has instituted a number of changes to various statutes, including:
(a) The Betting, Lotteries and Gaming Act: the Act introduced the “fit and proper” criteria for
applicants for licences under the Act. It also mandates the Commissioner to pay all the
proceeds of tax paid under the Act into the Sports, Arts and Social Development Fund
established under the Public Finance Management Act. The Act has also introduced
provisions on late payment of tax that mirror the amendments in the Tax Procedures Act.
Further, “winnings” has been defined to include winnings of any kind and these winnings are
to be subject to the resident withholding tax rates under the Third Schedule of the Income Tax
Act. Lastly, “gaming tax”, which was previously chargeable at the rate of thirty-five per cent
(35%) of the gaming revenue has been reduced to fifteen per cent (15%) effective on 1
October 2018.
(b) The Stamp Duty Act: the Act amended the Stamp Duty Act to exempt all instruments
executed for the purposes of collection and recovery of tax and instruments which relate to
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the business activities of licenced special economic zone enterprises, developers and
operators from stamp duty. Further, effective 1 October 2018, the stamp duty payable for a
policy of life insurance and a policy of insurance against accidents shall be payable monthly
as an aggregate of all policies issued within the month.
(c) The Banking Act: the Act amends the Banking Act by providing that, effective 1 October 2018,
a licensed bank or financial institution shall maintain a register containing particulars of the
next of kin of all customers in respect of all accounts operated at the institution, and shall
update this register on an annual basis. Failure to do the above shall constitute a
contravention and such bank or financial institution shall be liable, for each account in which
there is default, to a fine not exceeding Kenya Shillings one million (KES 1,000,000). Further, the
Act gives the Central Bank of Kenya power to prescribe conditions on deposits or withdrawals.
The Central Bank is to do so by 31 October 2018.
(d) The Central Bank of Kenya Act: The Act has expanded the regulation-making powers of the
Central Bank of Kenya (CBK) to include issuing guidelines, circulars and directives for the
purpose of giving effect to the provisions of the CBK Act and actualizing its objects. The Act
has also expanded the mandate of the CBK to include licensing and supervision of mortgage
refinance companies who engage in mortgage refinance business (defined as the business of
providing long term financing to primary mortgage lenders for housing finance). Further, the
CBK has also been given the powers to (i) determine the capital adequacy standards and
requirements for mortgage refinance companies (ii) prescribe their minimum liquidity
requirements and permissible investments (iii) approve their Board and Management (iv)
approve the appointment of their external auditors and (v) approve the annual audited
accounts of mortgage refinance companies before publication and presentation at the
annual general meetings. Mortgage refinance companies are also required to furnish Bank
with regular information and data.
(e) The Retirement Benefits Act: the Act has amended the Retirement Benefits Act by providing for
penalties payable for the late submission of investment returns and contribution returns by
fund managers and administrators. The amendments are intended to increase compliance
with the requirements on the submission of statutory returns under the Act. Further, the
Retirement Benefits Authority has been granted the power to recover unremitted contributions
from employers.
(f) The Employment Act: The Employment Act has been amended to provide that an employer
shall contribute to the National Housing Development Fund in respect of each of their
employees. The employer will contribute 1.5% of the employee’s monthly basic salary while
the employee will contribute an equivalent amount, both totalling a maximum of KES 5,000.
This amendment imposes an obligation on the employer to remit both employee and
employer contributions to the National Housing Development Fund before the ninth (9th) day
of the following month failure of which will attract a penalty of five percent (5%) of the
contributions payable by the employer for each month or part thereof during which the
contributions remain due and payable to the Fund. The commencement date for this section
as provided for in the Finance Act is 1 July 2018, although given the ruling in the Omtatah
case, the effective date is 21 September 2018. However, the Finance Act provides that the
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section shall become effective upon the gazettement of regulations prescribing the
requirements for qualification to the scheme by the Cabinet Secretary responsible for housing
in consultation with the Cabinet Secretary responsible for finance. From our reading, the
commencement date is the date at which the taxes will begin to apply and the effective
date is when the taxes will become enforceable. These regulations will be critical to
implementing these provisions because as it currently stands it is extremely ambiguous.
Interestingly, no amendments have been proposed to the Income Tax Act regarding
deductibility of the contributions by both the employee and the employer.
(g) The Proceeds of Crime and Anti-Money Laundering Act: the resultant amendments require
reporting institutions to apply enhanced customer due diligence on business relationships and
transactions with any natural and legal persons, legal arrangements or financial institutions
originating from countries identified as posing a higher risk of money laundering, terrorism
financing or proliferation, as well as to apply countermeasures to mitigate money laundering
or terrorism financing risks.
(h) Accountants Act
Notable amendments to the Accountants Act include (i) the definition of ‘Accountant’,
‘Accountancy’ and ‘Trainee Accountant’ (ii) the expansion of ICPAK’s functions to include
prescribing the remuneration order for the accountancy profession with the approval of the
Cabinet Secretary responsible for finance (iii) mandatory registration with ICPAK before
undertaking accounting exams with KASNEB (iv) observation of ethical guidelines and (v) an
increase of the maximum fine imposable on a person guilty of offences under the Act.
For any queries or assistance please contact Nikhil Hira, Tax Director; Alex Mathini, Partner, Tax or the
Bowmans Kenya Tax Team or your relationship partner at Bowmans Kenya.
Cape Town
T: +27 21 480 7800
Dar es Salaam
T: +255 76 898 8640
Durban
T: +27 31 265 0651
Johannesburg
T: +27 11 669 9000
Kampala
T: +256 41 425 4540
Nairobi
T: +254 20 289 9000
