Earlier this year, the Kenyan Government introduced proposed amendments to the Finance Act 2023, aiming to bring content creators, influencers, and crypto traders into the tax net. The Act amends a number of laws by introducing new taxes and changing existing tax rates. The Act was assented to by the President (which is the last step of the legislative process) on 26th June 2023. However, these plans were put on hold as a group of concerned Kenyans filed a petition challenging the constitutionality of the Finance Act 2023. In a recent development, the High Court in Kenya upheld the stay orders against the Act. In this article, we delve into the implications and present nine compelling reasons why you should pay attention to the Kenyan Finance Act, 2023.
- Although the constitutionality of the Act has been challenged at the High Court and conservatory orders suspending its implementation pending the determination of the case have been granted (the ruling is available here), practically, this leaves taxpayers in a precarious position as should the challenge be dismissed the changes introduced by the Act will crystallise on the date they came into force. For this reason, taxpayers are advised to either comply with the changes introduced by the Act or create a provision to account for the new taxes and tax rates that will allow them to have pre-allocated funds to pay the additional taxes introduced by the Act should the challenge be dismissed.
- Introduction of a Digital Asset Tax of 3% of the income derived from the transfer or exchange of digital assets. Digital Assets are defined broadly under the Act to include anything of value that is not tangible that is capable of providing a digital representation of value exchanged and can be transferred, stored or exchanged virtually. This definition covers virtually all digital assets such as cryptocurrencies, and non-fungible tokens. The tax is imposed on the owners of the platforms that facilitate the transfer or exchange of digital assets and requires them to remit the tax to the Kenya Revenue Authority (“KRA”) within 5 days of making the deduction.
- Expansion of VAT Obligations. Non-residents who supply Kenyans with services such as non-resident fintech companies are now required to register for VAT effectively bringing them under Kenyan VAT law.
- New tax regime for foreign companies. Corporate Income Tax rate for branches and permanent establishments was reduced from 37.5% to 30% and a new tax of 15% on repatriated income was introduced.
- Preferential tax regime for eligible startups’ employee share ownership schemes (“ESOPs”). The preferential regime allows their taxation to be deferred to the earlier of the expiry of 5 years, the disposal of the shares by the employees or when the employee ceases to be an employee of the eligible startup.
- Greater tax burden for employees and employers: (a) Introduction of two new tax bands for employees affecting employees earning at least KES 500,000 per month. Employees earning between KES 500,000 - 800,000 per month will now be taxed at 32.5% and those earning more than KES 800,000 will now be taxed at 35% both up from 30%.(b) Introduction of the affordable housing levy requiring employees to contribute 1.5% of their gross salary to the housing fund with employers required to make a matching contribution.
- New thin capitalisation and foreign exchange losses rules: (a) A company is considered thinly capitalised where its total gross interest paid or payable to related and third parties is in excess of 30% of its earnings before interest, taxes, depreciation and amortisation (“EBITDA”) in any financial year. Where the company is considered thinly capitalised they are restricted to deducting only 30% of their interest expense when computing its annual income for tax purposes. (b) Under the Act, interest expenses on loans from resident persons are excluded for the purposes of determining if an entity is thinly capitalised. Interest expenses on loans from non-resident persons whether related or third parties are however still included. Furthermore, the Act allows restricted interest to be carried forward for three years, previously restricted interest could not be carried forward. (c) The Act introduces a limitation of 5 years for deferring foreign exchange losses for thinly capitalised entities. Previously, there was no limitation and companies would defer such losses until they were no longer thinly capitalised.
- Preferential rate for qualifying intellectual property income was introduced but no rate was provided.
- The Act is a mixed bag for the fintech industry with gains, missed opportunities and losses:
- Preferential taxation regime for ESOPs for eligible startups allowing for their deferred taxation. This will, hopefully, incentivise startups to issue ESOPs and create loyalty among employees.
- New thin capitalisation rules exclude interest on loans from residents and allow for restricted interest to be carried forward for three years. This is helpful, especially for companies raising capital through debt.
- Preferential rate for Qualifying Intellectual Property Income. No rate is provided meaning the provision has no practical effect
- Retaining the inclusion of interest on loans from non-residents while only loans from third parties should be included. The idea behind the thin capitalisation rules is to limit profit shifting which is a concern where the loans are issued by related parties.
- New tax regime for foreign companies. By introducing a 15% tax on repatriated income the effective tax rate on foreign companies has actually been increased by the Act despite the reduction of corporate income tax from 37.5% to 30%.
- New foreign exchange losses rules limit deferral to only 5 years. Foreign exchange losses are caused by macroeconomic factors and it is unfair to limit their deferral.
- Expansion of VAT Obligations. Impractical administrative expenses on non-resident fintech companies providing services to Kenyans.
- Digital Assets Tax. Increases the cost, and also creates an impractical administrative burden on owners of digital assets platforms.
- Greater tax burden for employees and employers. At a time when people are still recovering from the effects of the Covid 19 pandemic and also dealing with the effects of a global recession, an increase in the tax burden is not ideal.
- Preferential taxation regime for ESOPs for eligible startups allowing for their deferred taxation.
- New thin capitalisation rules exclude interest on loans from residents and allow for restricted interest to be carried forward for three years.