Wednesday, 28 July 2021 16:32

Analyzing the Tax Changes introduced in the Finance Bill, 2021

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On 5 May 2021, The Finance Bill, 2021 was published in the National Assembly for enactment. The bill has proposed amendments to several laws, including the Income Tax Act (CAP 470), the Value Added Tax Act, 2013,

the Tax Procedures Act, 2015, the Miscellaneous Fees and Levies Act, 2016 and the Excise Duty Act, 2015, among others. This Article therefore aims at analyzing the Bill so as to advise on what could be expected especially on tax matters which hitherto greatly impact Business Owners. Our major focus in this analysis relates to the Income Tax Act and the Tax Procedures Act.

Amendments under the Income Tax Act

Digital Service Tax
Effective 1 July 2021 the Finance Bill has brought in the following proposals on the Digital Service Tax.

First, Section 3(3) (b) of Income Tax Act has been amended to define “digital marketplace” as an online platform which enables users to sell or provide services, goods or other property to other users. Currently, a digital marketplace is defined as “a platform that enables the direct interaction between buyers and sellers of goods and services through electronic means. This move is meant to remove any ambiguity that might have been caused in the current definition. This is motivated by the need of the government to lay a strong basis upon which the novel DST shall be enforceable.

Secondly, Section 12E (1) of the Income Tax Act has expressly excluded persons residing in Kenya from Paying the DST. This means DST will be chargeable to non-resident persons. This appears to be an incentive to welcome foreign persons interested in the Kenyan digital market so that they can be permanent residents. Equally, the proposals have relieved Kenyan content creators who rely on the digital marketplace as a source of their livelihood.

 

If approved, the requirement to pay DST at the time of the transfer of payment currently under Section 12E (2) will be substituted to require that a person subject to DST shall submit a return and pay the tax due to the Commissioner on or before the twentieth day of the month following the end of the month in which the digital service was offered. This is a welcomed move that will enable persons operating business to organize their affairs in a predictable manner. Equally this will enable KRA to periodically monitor compliance as opposed to the daily requirement introduced last year whose enforcement could have been impractical.

Under Section 12E (3), the proposed changes shall not apply to income chargeable under section 9(2) and section 35 of the Income Tax Act. Section 9(2) charges income of a non-resident person carrying on, in Kenya, the business of transmitting messages by cable, radio, optical fibre, television broadcasting, Very Small Aperture Terminal (VSAT), internet, satellite or by any other similar method of communication while Section 35 provides the list of incomes that are liable to withholding tax in Kenya.

The Bill proposes to insert a new Section 18B of the Income Tax Act wherein under subsection 2, an ultimate parent entity of a multinational enterprise group shall submit to the Commissioner a return describing the group’s financial activities in Kenya, where its gross turnover exceeds the prescribed threshold, and in all other jurisdictions where the group has taxable presence, not later than twelve months after the last day of the reporting financial year of the group. The proposal has gone further to prescribe the information that shall be submitted by the affected persons.

 

Under the above provision, a “multinational enterprise group” has been defined as a group that includes two or more enterprises which are resident in different jurisdictions including an enterprise that carries on business through a permanent establishment or through any other entity in another jurisdiction; while an “ultimate parent entity” has been defined 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.

In a bid to address the creaking issue of youth unemployment that affects a majority of university graduates, the Bill has incentivized the employers by giving them tax rebates. Under Section 39B, it is proposed that any employer who engages at least 10 university graduates as Apprentices for a period of 6 to 12 months during any year of income shall qualify for the tax rebate in the year after the year the graduates have been engaged.

Finally, the Ninth Schedule of the Income Tax Act will be amended so as to increase WHT on service fees paid to non-resident subcontractors in the extractive industries from 5.625% to 10%. This applies to non-resident subcontractors in the mining and petroleum sector who do not have a Kenyan permanent establishment (PE) as defined under the Act. However, Subcontractors with a PE will be required to pay tax under the self-assessment regime applicable to resident persons. Under paragraph 15 (d) of the schedule, the rate of WHT on management fees paid to non-resident subcontractors has been reduced from 12.5% to 10%.

Under the Tax Procedures Act,

The Bill has introduced Section 6A and 6B whose full effect is to localize the Common Reporting Standards (CRS) obligations by financial institutions located within Kenya on exchange of financial account information relating to tax matters. This means that Kenya will join the global tax transparent jurisdictions in connection with the exchange of information on foreign accounts for tax purposes. Under section 6B the bill defines a “common reporting standard” as the reporting and due diligence standard for the automatic exchange of financial account information; this introduced section has also given the Cabinet Secretary Powers to prescribe the common reporting standards in line with the Act.

There has been introduced a new section 88A that has provided for penalties for non-compliance with the Common Reporting Standards obligation. If approved, a person who fails to comply with this obligation shall be liable to a penalty of twenty thousand shillings, and twenty thousand shillings for each day during which noncompliance continues for a period not exceeding sixty days.

The Bill has proposed that the period in which the Commissioner may amend a tax assessment be increased from five years to seven years. This means that once the commissioner has issued his intention to audit the tax affairs of any tax payer, the bill, if enacted will allow him/her to investigate retrospectively for 7 years. Currently, Section 31 of the Act allows the commissioner to investigate up to five years. This proposal equally amends Section 23 of the Act to require the taxpayer to maintain any document necessary under a tax law for a period of 7 years as opposed to the current five years.

Thirdly, with effect from 1st July 2021, all persons required to appear before the Commissioner must do so. The Bill has made nonappearance an offence under the TPA for which any person found to be culpable shall be liable to punishment under the Act. Interestingly, if the proposal is approved, Section 99 will be effectively amended to give the commissioner unfettered powers to summon anyone. Currently, the requirement to appear before the Commission is derived from section 59 (1) (c) of the Ta Procedures Act. The motivation for this provision has not been properly explained. It seems to be an unnecessary as currently the law has set a qualifier that if removed shall be prone to abuse by those in charge.

Fourth, effective 1st July 2021, The Bill under Section 108A has proposed that civil and criminal cases arising from the same tax dispute will run concurrently. This therefore means that none of the two shall act as a stay of the other. This is a bid to expedite determination of these cases and to end the unnecessary delay from people with malicious intention to sabotage the course of justice. Effectively, this will improve greatly the amount of taxes that they collect and seal the loophole that very many people ride on to mischievously evade paying taxes.

The Bill proposes that digital service providers will be required to register for taxes. This means everybody who offers services over the digital market place must have a Personal Identification Number. This is refining the regulation relating to the novel DST that was introduced last year.

The Bill also seeks to amend the following laws—

The Capital Markets Act (Cap. 485A)
The Bill proposes to amend the Capital Markets Act to enhance the enforcement powers of the Capital Markets Authority by specifying the period within which the Capital Markets Tribunal shall hear and determine an appeal against administrative action of the Authority. This is intended to improve efficiency in the capital markets and ensure fair administrative action by the Authority.

The Insurance Act (Cap. 497)
The Bill seeks to amend the Insurance Act to provide for the regulation of foreign reinsurance brokers in accordance with the current practice and enable the regulation of the brokers by the Authority. The Bill further seeks to provide for an annual fee to be paid by a registered person who is an insurer.

The Kenya Revenue Authority Act (No. 2 of 1995)
The Bill proposes to amend the Kenya Revenue Authority Act, 1995, to increase the maximum reward to informers who provide information provided that leads to identification and recovery of unassessed taxes in order to enhance tax compliance by encouraging informers to provide intelligence information to the Commissioner. The Bill proposes to amend the Act in order to increase the maximum reward to any person who provides information leading to the;

• Identification of unassessed tax from KES 100,000 to KES 500,000; and
• Recovery of unassessed taxes from KES 2,000,000 to KES 5,000,000.

The Retirement Benefits Act (No. 2 of 1997)
The Bill seeks to amend the Retirement Benefits Act, 1997, to provide for the registration and regulation of corporate trustees that provide services to pension schemes and empower the Authority to extend the timeline for the submission of audited accounts during extraordinary times.

The Central Depositories Act (No. 2 of 2000)
The Bill proposes to amend the Central Depositories Act, 2000, to enhance the regulation of investors in the capital markets and for the opening of omnibus account by a person investing on behalf of others in the securities market.

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