By Samuel Okumu, Tax Consultant at Rödl & Partner Limited, NAIROBI in Kenya
The Kenyan Finance Act 2021, which was enacted on 29 June, includes numerous amendments to the Income Tax Act, VAT Act and Tax Procedures Act that focus on taxation of cross-border transactions by multinational enterprises plying their trade in the Kenyan jurisdiction.
The tax policies introduced by the Finance Act to cushion the public against the adversities of the COVID-19 pandemic and to lessen the budget deficit have received more attention, but the Act’s shifts in the government’s tax policy towards multinational enterprises are equally important and include both welcome and unwelcome elements.
Exemption of exported services
Under the VAT Act, service providers who focus on clients outside Kenya have been dealt a big blow by the reclassification of exported services from zero-rated to exempt. This amendment prevents service providers from recovering any input taxes incurred when offering exported services, unlike in the case of the export of commodities.
The VAT Act amendment also cuts short the reprieve that taxpayers obtained in two notable rulings recently made by the High Court of Kenya and Tax Appeals Tribunal.
In May 2019, the High Court ruled in an appeal made by Panalpina Airflo Limited that challenged an earlier ruling by the Tax Appeals Tribunal regarding the definition of services exported out of Kenya. According to the High Court, to determine the export of a service, it does not matter whether a service is performed inside or outside Kenya but rather that the location of service consumption is outside Kenya.
The High Court’s ruling is in line with the destination principle under the OECD guidelines on neutrality of VAT, which require that internationally traded services be taxed according to the rules of jurisdiction of consumption.
The same position was adopted by the Tax Appeals Tribunal in its March 2020 ruling on an appeal made by the Coca-Cola Central East and West Africa Limited. Here it was added that the relevant factor in determining an exported service is the location of the consumer and not the place where the service is performed.
The identity of the consumer or customer has also been clarified as the party in a business agreement. In essence, any Kenyan entity that is engaged to provide a service by an entity outside Kenya qualifies to declare the transaction as an exported service.
Prior to Finance Act 2021, all exported services were zero-rated and the Kenyan providers qualified for a refund of all input tax attributable to delivery of the service. This has now been changed, despite the court’s stance that Kenya ought to abide by the international trade rules on neutrality of VAT under the OECD platform.
According to the OECD’s international VAT guidelines, the burden of VAT should not lie on taxable businesses, and foreign businesses should not be disadvantaged or advantaged compared to domestic businesses in a jurisdiction.
The exemption of exported services is clearly a tariff barrier targeting Kenyan service providers (professionals, business process outsourcing practitioners, creatives, among others) and excluding them as preferred providers of choice in the global arena. This will harm employment, Kenya’s favourable position under the ease-of-doing-business scale, and Kenya’s balance of trade. As such, the amendment is detrimental to the economic cooperation that Kenya seeks to attract internationally.
Adoption of OECD recommendations
On the flip side, the amendments to both the Income Tax Act and Tax Procedures Act confirm Kenya’s adoption of the OECD base erosion and profit shifting (BEPS) action plans.
The OECD is a unique forum where governments work together to address the economic, social and environmental challenges of globalisation. The OECD is also at the forefront of efforts to help governments to understand and respond to new developments and concerns, such as corporate governance, the information economy and the challenges of an aging population.
While Kenya is not a member of the OECD, it has realized it cannot be left behind in efforts by tax jurisdictions in the developed world to tackle disputes and potential double taxation of multinationals that result from inconsistent domestic tax rules.
Finance Act 2021 has rolled out the recommendations under BEPS Action Plans 2, 4, 7, 12 and 13 in various amendments to the Income Tax Act and Tax Procedures Act. Kenya has introduced information collection mechanisms for multinationals, such as country-by-country reporting, tax information sharing and establishment of common reporting standards for Kenyan financial institutions.
Conclusion
Kenya seems to have boldly spelt out its tax policy at the same level as developed OECD member states such as France, Germany, Israel, Italy, Japan, Korea, the Netherlands, Turkey, the United Kingdom and the United States. This move should give foreign multinational enterprises confidence in investing in Kenya. However, the exemption of exported services harms instead of protecting the various hubs of local professionals and requires speedy rethinking and repeal.
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