The Proposed Tax Changes in Kenya (Tax Laws bill -2024): Impact on Businesses

The Tax Laws (Amendment) Bill, 2024, and the Tax Procedures (Amendment) (No. 2) Bill, 2024, propose sweeping reforms to Kenya’s tax regime, targeting both revenue enhancement and alignment with international tax practices. These changes could significantly impact businesses by altering cost structures, compliance obligations, and investment incentives. Here, we provide a detailed analysis of the key proposals, their implications.

Key Proposed Changes and Their Implications

1. Withholding Tax on Goods Supplied to Public Entities

The Bill introduces withholding tax for goods supplied to public entities: 0.5% for resident suppliers and 5% for non-residents. This marks a shift from taxing income to a turnover-based tax, increasing the financial and administrative burden on suppliers.

Potential Challenges:

l Increased cost of compliance as suppliers must adjust accounting and invoicing processes to account for withholding tax.

l Potential cash flow issues, as tax is withheld at the source before suppliers receive payment.

l Likely increase in government procurement costs if suppliers factor in these taxes when bidding for contracts.

Example A Kenyan company supplying IT hardware to a public university will face a 0.5% withholding tax on its turnover. For non-resident suppliers providing similar services, the withholding tax increases to 5%, potentially deterring their participation in such tenders or increasing costs for the government.

2. Significant Economic Presence (SEP) Tax

Replacing the Digital Services Tax (DST), the SEP tax imposes a 3% tax on non-resident digital businesses deriving income from Kenya. This change aims to capture revenue from the growing digital economy but lacks clarity in application, particularly regarding cross-border transactions.

Potential Challenges:

l Increased compliance costs for digital businesses, many of which may pass these costs to consumers or local operators.

l Unclear thresholds for economic presence could lead to double taxation or disputes with foreign jurisdictions.

l Risk of discouraging international platforms from engaging with Kenyan users.

Example in Practice: An international online education platform offering services to Kenyan students will now pay a 3% tax on its gross revenues derived from Kenya, regardless of its physical presence in the country.

3. Integration of Electronic Tax Systems

Businesses with annual turnovers exceeding KES 5 million will be required to integrate their systems with the Kenya Revenue Authority (KRA). This requirement aims to enhance transparency and real-time tax reporting but introduces significant costs for small and medium-sized enterprises (SMEs).

Potential Challenges:

l SMEs may struggle to afford the necessary technological upgrades and training.

l Increased scrutiny could lead to inadvertent penalties for non-compliance.

Example in Practice: A small retail chain must upgrade its point-of-sale systems to be compliant with KRA’s digital integration requirements. This may involve hiring IT specialists or purchasing new software.

4. VAT Adjustments and Exemptions

The proposed VAT exemption for the transfer of businesses as going concerns offers relief to entities undergoing restructuring. Similarly, changes to non-cash benefit thresholds provide a welcome adjustment to inflation.

Potential Benefits:

l Encourages mergers, acquisitions, and corporate restructuring without the additional VAT burden.

l Aligns employee benefits with rising costs of living, potentially improving morale and retention.

Example in Practice: A company spinning off a subsidiary to another investor will not incur VAT on the transaction, simplifying the process and reducing costs.

5. Introduction of a Minimum Top-Up Tax

A minimum top-up tax of 15% is proposed for subsidiaries of multinational groups with low effective tax rates. This aligns Kenya with the OECD’s Pillar Two global tax framework.

Potential Challenges:

l Multinational corporations may need to reassess tax planning structures to avoid penalties.

l This may reduce Kenya’s competitiveness as a regional investment hub.

Example in Practice: A multinational with a Kenyan subsidiary operating in a Special Economic Zone (SEZ) at reduced tax rates may now need to pay additional taxes to meet the minimum threshold.

6. Revised Tax Reliefs and Exemptions

The Bill includes enhanced thresholds for employee-related tax reliefs, such as increased tax-free amounts for meal benefits, gratuities, and retirement contributions. While these changes provide relief, they require businesses to reassess payroll structures.

Example in Practice: An employer offering meal allowances to its staff will now benefit from an increased tax-free threshold, allowing more of the benefit to remain untaxed, thereby enhancing employee satisfaction.

How Tax Consultants Help Businesses Navigate the New Tax Landscape

Tax consultants are pivotal in helping businesses understand, plan for, and comply with the proposed changes while optimizing their tax positions. Here’s a detailed breakdown of their role:

1. Ensuring Compliance and Minimizing Penalties

Tax consultants provide expert guidance to ensure businesses meet new compliance requirements, such as withholding tax calculations and electronic system integration, reducing the risk of penalties.

Example: Advising a construction firm on how to restructure invoicing processes to comply with the 0.5% withholding tax on goods supplied to public entities.

2. Optimizing Tax Efficiency

Consultants can help businesses leverage tax exemptions and reliefs to optimize their financial outcomes.

Example: Assisting a company in restructuring its employee benefits to maximize savings under the revised tax-free thresholds for meal allowances and gratuities.

3. Navigating International Tax Complexities

With the introduction of the SEP tax and minimum top-up tax, consultants can provide tailored strategies to avoid double taxation and comply with international tax frameworks.

Example: Helping a digital content platform manage its SEP tax obligations while maintaining compliance with its home country’s tax laws.

4. Managing Tax Disputes and Advocacy

Given the KRA’s enhanced powers, businesses may face disputes over interpretations of the new laws. Tax consultants play a key role in dispute resolution and advocating for clarifications.

Example: Representing a tech startup in negotiations with the KRA regarding the scope of SEP tax on cross-border digital services.

5. Training and Technology Support

Consultants provide training for in-house teams and guidance on technology investments needed to comply with digital integration mandates.

Example: Conducting workshops for a retail chain’s staff on using upgraded point-of-sale systems to meet KRA’s electronic tax requirements.

The proposed tax changes in Kenya reflect the government’s drive to expand the tax base and align with global tax trends. While the reforms aim to increase revenue collection and improve compliance, they also pose significant challenges for businesses. Increased compliance costs, potential tax disputes, and the burden of adapting to new technologies are some hurdles that businesses must overcome.

Tax consultants like David and Associates could serve as indispensable allies, helping your business navigate these challenges while identifying opportunities for savings and efficiency. With their expertise, your business can stay compliant, mitigate risks, and optimize their operations in a rapidly evolving tax environment. For Kenyan businesses, early engagement with us or other tax consultants could make all the difference between thriving under the new regime or struggling to adapt.

About the Author

Dr. David Onguka brings more than 26 years of expertise in finance, tax, audit, and management to his role as Managing Partner at David & Associates - Certified Public Accountants. His extensive experience includes serving as General Manager and Group Chief Financial Officer at Ainushamsi Energy Limited for 6 years, as well as holding similar positions at Jaguar Petroleum Limited for five years. He began his career as an Audit Senior at PKF Kenya and was Finance Manager at Gapco Kenya Limited for seven years. He holds PhD in Finance from University of Nairobi (UON), MBA in Finance, CPA(K) and CPS(K). He is also a researcher, author, publisher and practicing member of ICPAK and Institute of Certified Secretary (ICS).

 For inquiries, you can reach him at david@davidandassociates.co.ke or link to our website: www.davidandassociates.co.ke