By George Maina, Associate partner, Rödl & Partner Limited, Nairobi
The Kenyan budget statement for the fiscal year 2019—2020 was presented to the National assembly on 13 June by the Cabinet Secretary for the National Treasury, Hon. Henry Rotich, as is the tradition, alongside other East African budget policy statements. This was followed by the release of Kenya’s 2019 Finance Bill the next day.
The Kenyan budget statement includes several tax proposals which are anchored on creating jobs and promoting the government’s policy on the ‘Big Four’ plan (manufacturing, housing, infrastructure, and health).
In addition, the fiscal measures are aimed at enhancing Kenya’s competitiveness as an investment hub across Africa and beyond.
A number of the proposed measures will have an impact on multinational enterprises operating in Kenya and, to some extent the larger East African Community (EAC), which is comprised of the Republics of Burundi, Kenya, Rwanda, Kenya, and South Sudan. Kenya tends to be an entry into the EAC for some MNEs.
Upon a closer review of the policy statement, one can analyze the measures in terms of their impact into the sectors of the Kenyan economy such as the growing digital economy, real estate, energy sector, and ease of doing business for MNEs.
Most of the provisions have an effective date of 1 October 2019 onwards. The expectations is that parliamentary debate and passage of the Finance Bill into law will take place within the next there months.
Kenya’s taxation of the digital economy
The Finance Bill has widened the definition of income to include income accruing through a ‘digital market place’.
This amendment, proposed to be effective October 1, would affect many companies and MNEs that have invested in e-commerce and have that leveraged on technology to deliver services, such as Uber and Amazon.
The challenge in the implementation of this legislation, as for other jurisdictions, is how the Kenyan Revenue Agency will determine ‘value-creation’ for services provided on a cloud platform.
Kenya has established itself as an economic hub for innovation and technology in Sub-Saharan Africa, positioning itself as a leader in the financial technology sector and as an investment destination for digital companies who are largely MNEs and foreign private equity firms.
We hope that further clarification will be provided by the Kenyan tax administration on how the digital tax measure will be implemented.
Measures targeting real estate
In a bid to spur growth in the Kenyan real estate sector, the government proposes to extend the exemption of income of real estate investment trusts (REITs) to cover their investee companies that they fully control or own. In addition, the income of the National Housing Development Fund will also be exempted.
These incentives are designed to catalyze foreign direct investment and support the government focus on providing affordable housing under its Big Four Agenda.
However, notwithstanding the proposed incentives, the Cabinet Secretary also proposes to increase the capital gain tax rate from 5% to 12.5% on the transfer of property with an exemption for transfers relating to recapitalization, acquisition, amalgamation, separation, dissolution, or similar restructuring of corporate entities.
With no intentions of introducing an indexation to facilitate the effect of inflation, this proposal will deter investment in the real estate sector and slow down the sector’s growth.
Green economy and renewable energy tax incentives
The growing concern of the hazardous effect of greenhouse gas emissions coupled with the detrimental role of plastics on the environmental has necessitated the need for reform in the green economy and renewable energy sector.
To this effect, the Kenyan government has proposed to lower the corporate tax rate of plastic recycling companies from 30% to 15% for 5 years.
In addition, plant, equipment and machinery used in the construction of a plastics recycling plant will be exempted from value added tax (VAT) to support the financing of this capital-intensive sector.
To promote the use of green energy, the government proposed to lower the excise duty of motor vehicles powered by electricity from 25% to 10%. This will also encourage the use of environmentally friendly vehicles.
However, despite the government’s green campaign, the government proposes also to increase administrative protocols for investors in solar and wind energy that seek VAT exemptions for specialized equipment for the development and generation of energy.
The VAT exemption on this equipment will be hinged on the recommendation of the Cabinet Secretary responsible for matters relating to energy which creates bureaucratic requirements that may slow down the advancements of renewable energy, contrary to the government’s intentions.
Ease of doing business enhanced
To enhance and promote ease of doing business for investors, the government proposes to exclude foreigners from supplying a Kenya Revenue Authority personal identification number (PIN) as a requirement to open a bank account in Kenya.
However, this will require approval from the Commissioner of Domestic Taxes on a case by case basis.
In the 2019/20 budget reading, the Cabinet Secretary also acknowledged the negative impact of loan interest capping legislation which had reduced credit access for small and medium enterprises and microbusinesses.
He has therefore recommended scrapping of the legislation to allow market forces to dictate interest rates as advocated by the International Monetary Fund.
However, a similar proposal was rejected in parliament a year ago and it’s likely that this new proposal will face similar opposition from the National Assembly.
In a bid to support its manufacturing agenda, the government also proposes to reduce import fees and transport levies of raw material and intermediate goods and increase those of finished goods which will support the competitiveness of locally manufactured goods.
In sum, the Kenya budget statement provides an array of tax incentives for MNEs to promote and support their operations in Kenya. The proposed tax measures are also in tandem with Kenya’s reform agenda which will transform its economy into a newly industrialized, middle–income country.
– George Maina is an Associate partner at Rödl & Partner Limited, Nairobi, Kenya.
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