Kenya’s Finance Bill 2020 proposes new digital services tax, amnesty, other measures

George Maina

By George Maina, Tax Partner, Rodl & Partner, Kenya

On 5 May, the Kenya government submitted its revenue-raising proposals in the Finance bill 2020, in line with the Public Finance Management Act requirements.

The new bill includes proposals that will have an impact on businesses in Kenya and, in particular, multinationals, including proposals for a digital services tax and a minimum tax.

The finance bill is normally prepared with the 30 April deadline in mind.

Some measures were already addressed in the recently enacted Tax Laws (Amendment) Act.

New digital service tax

From an income tax perspective, the bill proposes to introduce a digital services tax on income derived or accrued in Kenya.

Kenya has experienced a lot of growth in e-commerce and digital services, as is the case in many parts of the world.

The bill proposes that revenue from services provided through a digital marketplace in Kenya will be taxed at the rate of 1.5% on the gross transactional value.

The bill proposes that revenue from services provided through a digital marketplace in Kenya will be taxed at the rate of 1.5% on the gross transactional value.

The digital services tax deducted from resident entities and branches is to be treated as an advance tax, available for set-off against the tax payable for the year of income.

The Finance Act, 2019 provided that the introduction of the tax was subject to the Cabinet Secretary for the National Treasury and Planning publishing regulations for the implementation of the tax. These regulations have not yet been published.

Even as we await the regulations,  this new digital services tax will be difficult to implement due to the complex nature of digital transactions, which many times may involve many parties and occur in more than one tax jurisdiction.

To operationalize and enhance the administration of the digital services tax, the bill proposes the appointment of digital service agents by the Commissioner of Income Tax.

Introduction of a minimum tax

In an effort to widen Kenya’s tax base, the Finance Bill also proposes to introduce a minimum tax.

The idea is to target loss-making taxpayers and peg the tax payment on turnover as opposed to profitability.

The idea is to target loss-making taxpayers and peg the tax payment on turnover as opposed to profitability.

The minimum tax that shall be payable by a person who either has exempt income or income that is not from employment, residential rent, and mining or oil exploration. In addition, the income must not be subject to capital gains or turnover tax.

The minimum tax payable is lower than the installment tax that may be payable by the taxpayer who is subject to the tax.

The minimum tax will be imposed on 1% of gross income and payable on the 20th day of the fourth, sixth, ninth, and twelfth months.

The proposed introduction of the minimum tax is an attempt to tax businesses that are in a loss-making position. The question remains on whether the minimum tax would be considered an advance tax as is the case for the installment tax regime.

The Voluntary Tax Disclosure Programme

Another key proposal is Kenya’s introduction of a Voluntary Tax Disclosure Programme for a period of three years, with effect from 1 January 2021. Persons volunteering for the program will enjoy immunity from prosecution.

The tax disclosure arrangement also proposes to grant a waiver of the tax penalty and interest arising from inadvertent instances of non-compliance between 30 June 2015 to 1 July 2020.

The waiver is designed to reward taxpayers who make the application earlier. For example, a waiver application made in 2021 will guarantee the taxpayer full remission. Applications made in 2022 and 2023 will qualify for a 50% and 25% percent remission, respectively.

The taxpayer and the Commissioner shall enter into an agreement setting out the terms of payment of the tax liability, including the timeframe for the settlement, which shall not exceed one year from the date of the agreement.

While the proposal provides that the taxpayer cannot appeal against the relief granted, a taxpayer may appeal against the Commissioner’s decision to withdraw it. Taxpayers who are under audit or have received notification of a proposed audit will not be eligible for the programme.

This amounts to a local tax amnesty and hence a  good initiative that may enhance tax collection and

improve compliance.

VAT automatic assessments

The bill also proposes to legislate VAT automatic assessments. This amounts to the transfer of the obligation to verify input VAT to taxpayers before they claim VAT on supplier invoices; in practice, it is the obligation of the revenue authority to undertake verifications.

Tax procedures proposals

Another area of interest is the proposal to introduce a time limit for suing the Kenya Revenue Authority to 12 months from the date the action arose or six months from the cessation of a continuing damage or injury.

The bill further introduces a requirement to give the tax authority a one month notice to sue, which should be served on the Commissioner General before instituting legal proceedings against Kenya Revenue Authority.

The legality of this proposal is subject to debate since it may not be in line with other constitutional provisions.

Other measures

Other proposals include the reduction of tax deductibility expenses on items such as member associations and legal costs and the widening of the definition of a license from an excise duty perspective to include business activities gazette by the Commissioner.

These measures are geared towards enhancing tax collection with the dwindling tax collections due to COVID-19 and economic slowdown and the huge budget deficit.

It is important to note that the proposals are not effective until approved by Parliament and enacted into law.