Kenya Business Tax Newsletter Budget News June 2015

Transcription

1 In this issue, we cover: BUDGET THEME & ECONOMIC OVERVIEW... 2 BUDGET SPEECH THEMES... 2 ECONOMIC BACKDROP... 3 GOVERNMENT REVENUE AND EXPENDITURE PERSONAL TAXATION BUSINESS TAXATION... 7 BUSINESS INCOME TAX CHANGES... 7 GAMING AND LOTTERIES TAXATION... 8 CAPITAL GAINS TAX VALUE ADDED TAX VAT RATES CHANGES SUMMARY CUSTOMS & EXCISE DUTIES AND MISCELLANEOUS TAXES CUSTOMS DUTY RATES CHANGES CUSTOMS DUTIES CHANGES SUMMARY ROAD PETROL LEVY EXCISE DUTIES PROPOSED LAW FINANCIAL SECTOR REGULATION BANKS INSURANCE COMPANIES PENSIONS FUNDS OTHER ARTICLES & UPDATES PERSONAL INCOME TAX RETURNS DUE BY 30 TH JUNE REAL TIME MARKET INSPECTIONS FBT RATES YOUR BUSINESS TAX ADVISORY SERVICES TEAM BDO EA KENYA SERVICES & CONTACTS

2 KENYA 2015 BUDGET COVERAGE BUDGET THEME & ECONOMIC OVERVIEW 6.7% - 7% expected GDP growth rate for Expansionary fiscal policy 2T budget against 1.3T income Increased borrowing to close 644B gap BUDGET SPEECH THEMES Cabinet Secretary Henry Rotich s Budget speech lasted 110 minutes and was tailored to address economic growth under the six themes below to which significant resources were allocated: 1. National security 2. Infrastructure 3. Agriculture and industrial 4. Entrepreneurship 5. Education and healthcare 6. Devolution capacity building The expansionary fiscal policy (government spending that is higher than revenues) proposals were made on the basis of prudent monetary policies and controlled funding of the budget deficit. The CS also outlined measures to increase the spread and scope of electronic based transactions with the government including in tendering, service provision, and payments under thee-citizen and other platforms measures aimed at improving Kenya s rating on the World Bank s doing business country rankings. Financial sector reforms were announced and these are summarized in this paper. The CS also addressed businesses concerns about arbitrary County government levies and mentioned that the National Treasury will issue guidelines for County finance bills and business activity and charges regulation between the national and regional governments. 2

3 ECONOMIC BACKDROP 1. GDP growth rate: GDP increased from 7.1% in 2006 to 8.4% in 2010, before declining to 5.7% in In 2014, GDP growth was estimated at 5.3%. 2. Average annual inflation: AAI fell from 6.3 % in 2006 to 3.9% in 2010 before increasing to 5.7% in 2013 and an estimated 7% in 2014 and forecast at 7.5% for

4 3. Total public debt: total debt increased from US$ Bn in 2006 to US$ Bn in 2010 and to US$ Bn in The total debt had increased to an estimated US$ Bn by March Domestic Debt as % of GDP rose from 18.77% in 2006 to 20.15% in 2010 and to an estimated by end of March During the same period, External debt rose from 22.62% in 2006 to 24.2% by end of March

5 4. Exchange rate: The Exchange Rate has seen a steady depreciation from KShs 72 per US$ in 2006 to KShs by end of March GOVERNMENT REVENUE AND EXPENDITURE Budget revenues and expenditure summary 2015/2016 KShs(billions) 2014/2015 KShs(billion) Total revenue 1,358 1,238 Total expenditure (2,002) (1,581) Deficit Budget deficit funding 2015/2016 Shs(billions) 2014/2015 Shs(billions) External financing Loan repayment receipt 0 2 Grant 73 0 Domestic borrowing Total

6 2. PERSONAL TAXATION 12% rent tax & landlords amnesty Left-hand drive cars duty exemption No changes in direct personal taxation but There was no direct personal income tax changes announced in the Budget speech. Any changes to the personal taxation regime will perhaps be contained in the fresh income tax act promised by the CS to be submitted for debate in parliament in September Nevertheless several of the other tax announcements covered in this newsletter touch directly on individuals including the following: Landlords earning gross rental income below KShs 10 million per year from residential property will be taxed at 12% on the gross rental income so as to simplify the taxation regime. Rental income amnesty for landlords who own up undeclared rental income Capital gains of sale of shares CGT removed and replaced by a withholding tax of 0.3% on the gross transaction value Duty free passenger car importation for Kenyans returning home from countries with left hand drive cars they will be allowed to import a right-hand-drive car of equivalent value Fuel levy increase by Shs 3; from Shs 9 to 12 per litre on fuel 6

7 3. BUSINESS TAXATION Rent income tax amnesty announced Business tax losses c/fwd period extended to 10 years New gaming sector tax regime BUSINESS INCOME TAX CHANGES Rental income taxation The Finance Bill proposes to introduce a residential rental income tax (effective January 2016) for rent income of up to KShs 10 million per year. Landlords earning gross rental income of up to Shs 10 million per year from residential property will be taxed at 12% on the gross rental income. A landlord may elect to continue accounting for tax under the present criteria which is reporting rent income on a net-of-expenses basis supported by income and expenditure statements (or a full set of financial statements). Tax amnesty on undeclared rental income An official pardon of tax arrears and fines will be granted to landlords who have previously not complied with tax obligations. To qualify the landlords will need to immediately report income for 2014 and subsequent years by June 30 th, The tax amnesty will cover tax arrears and fines for rental income tax liability for the years up to and including This amnesty will not apply to tax assessments already made. Where a taxpayer does not have records to support rent business expenditure, they will allowed a 40% deduction of the stated expenditure. Tax rebate for employment of interns A tax rebate scheme will be introduced for employers who shall engage and train at least ten fresh graduates for a period of six to twelve months. Employers will qualify for tax rebates in the following year by way of set-off against income tax liability. This is to be effective January 2016 subject to the passing of the finance Bill. Training levies consolidation Training levies will be consolidated into a national job fund to benefit the youth on initiatives such as job training and attachment. The training levies currently charged are National Industrial Training Authority levy (NITA) and the catering training levy. Film industry incentives Payments made by foreign film producers to local actors and crew members will be exempted from withholding tax. A fund will also be set up for rebates of expenses by producers in the film industry. 7

8 Extractive Industry Withholding tax is introduced on training and sub-contractor services rendered to the extractive sector (oil, mining & minerals). The applicable rates will be: 12.5% and 5.6% for training and contractual services respectively. Shipping industry incentive Ships weighing 125 tonnes will now qualify for investment deduction. This is a reduction from the previous minimum weight qualification of 495 tonnes. Investment deduction rate will also be increased from 40% to 100%. Business losses carry forward period The limit for carrying forward business tax losses (for set-off against future profits) has been increased to 10 years. This is up from 5 years and this will provide relief for losses that were at risk of expiry in Newly listed companies corporate tax rate 25% The finance Bill proposes to lower the corporate income tax rate to 25% for companies introducing its shares through listing on a securities exchange by introduction. GAMING AND LOTTERIES TAXATION A new simplified gaming tax is to be introduced that will be based on gross gaming revenues as opposed to winnings. The proposed rates are set out in the table below. Target gaming activity Tax base Rate (%) Public lotteries Lottery turnover 5 Bookmakers Gross betting revenue 7.5 Prize competitions (with premium entry costs) Gross revenue 15 The cabinet secretary also proposed to introduce amendments requiring the appointment of technology providers as withholding agents for purposes of remitting 15% of revenue from lotteries into a public sector services fund under rules to be specified. 8

9 CAPITAL GAINS TAX Capital gains tax on sale of shares The cabinet secretary proposes to remove capital gains tax at 5% on sale of listed (quoted) shares and replace it with 0.3% withholding tax on the transaction value of the shares. No expense or prior losses (on sale of investment shares) will be deductible and the tax will be on the gross value. The tax will require be deducting and remitting by stockbrokers as agents of the sellers. Capital gains tax for sale of private company (unquoted) shares and other qualifying property sales remains at the rate of 5%. Exempt land sales value increased Capital gains tax (CGT) applies at 5% on land sales by individuals where the transfer value is more than KShs 30,000. Below this CGT does not apply. The finance Bill proposes to increase this tax-free threshold to KShs 3 million with effect from January Exempt rural land sales size reduced CGT does not apply on sales by an individual of rural- or farm-land of up to 100 acres in size. The finance Bill has introduced a change in law to review this land size threshold downwards to 50 acres with effect from January There is no taxfree threshold for urban land; this attracts CGT irrespective of the size - unless below the tax-free value above. 9

10 4. VALUE ADDED TAX Film industry incentives Goods in transit services zero rated VAT refund claims period defined Changes proposed on the VAT regime have added some goods and services to the exempt list and a few to the zero rate categories. The period by which a business must submit a refund claim has been set and these changes are detailed below. Film industry Goods and services purchased for use in film making will be exempt from VAT. A fund is proposed to be set up for payment of rebates of expenses incurred producers in the film industry. Biogas digesters Plastic biogas digesters are to be exempt from VAT. Goods in transit services Services in respect of goods in transit are to be zero rated. Industrial parks Vatable goods and services for use in the construction of infrastructure works in industrial and recreational parks of 100 acres or more are to be exempt. This applies to developments located in five cities: Nairobi, Mombasa, Kisumu, Nakuru, and Eldoret. ICT local assembly input Inputs imported or purchased locally for the assembly of ICT devices are to be exempt from VAT. Personal imported cars for returning Kenyans A returning Kenyan national who has owned a left-hand motor vehicle abroad for at least 12 months may sell the motor vehicle and import a right- hand drive car of equivalent value free of VAT import duty as well. VAT refund claim period An amendment has been proposed to limit the period by which a business must lodge a VAT refund claim. These claims will require to be filed within 12 months from the date repayable credits arise. (VAT refunds apply where a business makes zerorated supplies mainly by way of exports.) 10

11 VAT RATES CHANGES SUMMARY Item Proposed rate Previous rate Film industry: goods and services Exempt 16% Plastic bag biogas digesters Exempt 16% Goods in transit services 0% Exempt Goods and services for industrial and recreational parks infrastructure works ICT inputs imported or purchased locally for assembly of IT devices for school laptops Exempt 16% Exempt 16% Returning resident left hand vehicle replacements Exempt 16% 5. CUSTOMS & EXCISE DUTIES AND MISCELLANEOUS TAXES CUSTOMS DUTY RATES CHANGES Duty rates reductions for manufacturers Road petroleum levy up Bill to overhaul excise taxes The changes proposed to import and export duty rates are largely supportive of local manufacturing lowering raw materials duty rates and increasing rates for readymade imports. The changes proposed are covered in the following paragraphs. The standard customs import duty rates are: 0% - Raw materials, plants, machinery, bulk medicaments 10% - Intermediate goods and medicaments in doses 25% - Finished goods 1.5% - Railway levy added to the above rates Fishing and aquaculture The duty rate is to be reduced on importation of nylon yarn and synthetic twine used in the manufacture of fishing nets from 10% to 0%. Importation of readymade fishing nets will attract a duty rate of 25% up from 10%. 11

12 Sugar industry Duty rate on imported sugar has been increased from USD 200 to USD 460 per metric tonne. The ad valorem rate (based on value) remains at 100% of customs value. Paper industry The stay of application for Common External Tariff (CET) on paper and paper board products at a rate of 25% is proposed to be withdrawn and instead be subject to duty at 10%. Manufacturers of plastic tubes The import duty rate on plastic tubes for packaging toothpaste and cosmetics will increase from 10% to 25%. Pasta manufacturing Importation of semolina, the raw material for making pasta, will be zero-rated for import duty down from a 25% rate. This 0% category will only apply to licensed (gazette) pasta manufactures. Manufacturers of aluminum milk cans Importation of aluminum milk cans is going to attract import duty at the rate of 25%. This is up from 10%. Gas cylinders Gas cylinder imports will attract duty at a rate of 25% - up from 0%. Import declaration fee (IDF) The IDF fee has been lowered from 2.25% to 2%. Prisons authorities Prisons authorities have been incorporated into the duty-free importation category. This exemption will apply to goods and equipment for official use and will bring the prisons department at par with the KDF and police department. Export duty on raw hides and skins exports The export duty rate on hides and skins will be at 80% of free on board (FOB) value or USD 0.52 per kg, whichever is higher. 12

13 CUSTOMS DUTIES CHANGES SUMMARY Item Proposed import duty rate Previous rate Nylon yarn and synthetic twine for 0% 10% fishing nets Readymade fishing nets 25% 10% Paper and paper board products 10% 25% CET Sugar $460 per tonne & 100% ad volerum $200 per tonne and 100% ad volerum Plastic tubes for toothpaste and 25% 10% cosmetics Pasta ingredient semolina by 0% 25% licensed manufacturers of pasta Aluminum milk cans 25% 10% Gas cylinders 25% Exempt Prison authority official supplies Exempt Charged VAT and import duty IDF (import declaration form) fee 2% 2.25% Raw hides and skins export duty Higher of 80% of FOB or USD 0.52 per kg 80% of FOB ROAD PETROL LEVY The road maintenance petroleum levy has been increased by Shs per litre to Shs per litre from Shs per litre - to be collected and paid into the Road Annuity Fund. 13

14 EXCISE DUTIES PROPOSED LAW A new Excise Duty Bill has been tabled in parliament and is expected to simplify excise tax administration by separating it from the (East Africa-wide) customs duty regime and by levying the tax largely on units of production or purchase. It is anticipated that upon passage of the new law excise tax will generate Shs 25 billion in revenues. Harmful products An underlying principle in the Bill is to tax consumption of harmful products including cigarettes and tobacco, alcoholic beverages, sugar sweetened beverages, polluting fossil fuels, aged motor vehicles and environmentally damaging plastic bags. Goods that have no harmful effects that were previously taxable will not be taxable under the new law including bottled water and ice blocks. Non-barley alcohol The proposed Excise Bill grants the Cabinet Secretary National Treasury to grant remission of excise duty in respect of beer or wine made from sorghum, millet or cassava or any other agricultural products (excluding barley) that is grown in Kenya. This is to provide safe and affordable alcoholic drinks. Motor vehicles and motorbikes Motor vehicles and motorcycles will in the proposed law be taxed according to vehicle age with older vehicles attracting higher excise tax rates. 14

15 6. FINANCIAL SECTOR REGULATION Banks core capital increased & perpetual licenses Insurance businesses core capital levels increased New pension funds governance & investment rules BANKS Banks minimum core capital increased The National Treasury CS proposed to increase the minimum core capital of banks progressively from the current KShs 1 billion to KShs 5 billion by December Perpetual licensing for banks proposed with risk based CBK supervision The Budget speech contained a proposal to remove the requirement for annual licensing of banks by CBK - and eliminate the repetitive annual application procedures. The CBK will continue to monitor banks using risk based approaches to safeguard financial stability. SACCOs governance - management vetting Directors and key management executives of deposit taking Saccos will now be subject to vetting by the Sacco Societies Regulatory Authority (SASRA). In addition Saccos can now share creditor information with other Saccos as well as with other financial institutions. INSURANCE COMPANIES Insurance companies capital base The minimum capital base for insurance companies is set to be increased from KShs 300m to 600m for general business. And for long term business (life insurance) the core capital will increase from KShs 150m to 400m. Insurance companies investment guidelines In order to bring the insurance industry in harmony with the framework applicable to retirement benefits and collective investment sectors, insurance companies will be required to prepare and submit investment policies that are subject to broad prescribed investment rules and guidelines. 15

16 Insurance agents Insurance agents will now be licensed by the IRA (Insurance Regulatory Board) without the need for prior recommendation by an insurance company. The prior recommendation rule was given as the reason why only 5,000 out of the qualified 25,000 have so far been registered. PENSIONS FUNDS Retirement benefits schemes Retirement benefit schemes will be permitted to invest up to 10% their assets in private equity and venture capital funds licensed by the CMA (Capital Markets Authority). This will allow pension schemes to invest in emerging investment vehicles. Pension fund surpluses To address the current contentious issue where scheme members do not benefit from the surplus funds, the distribution of surplus in case of defined benefits schemes upon winding up or conversion will be shared equally between members and employers on a 50:50 basis. Pension schemes trustees limitation of tenures Trustees of retirement benefit schemes will serve for a maximum of two terms of three years. Pension schemes audited FS presentation period reduced The period of preparation and presentation of pension schemes annual audited accounts will be reduced from six months to three months. Pension funds expanded investment scope Retirement benefit schemes investment guidelines will be expanded to allow these schemes to invest up to 10% in CMA licensed private equity funds and venture capital funds. REITS & ABS stamp duty exemptions Assets transfers and other transactions relating to the transfer of assets into Real Estate Investment Trusts (REITS) and Asset Backed Securities (ABS) will be exempt from stamp duty. This is to ensure tax neutrality with other forms of debt. M-Akiba government securities The government plans to introduce a bond which individuals can purchase on mobile phones. The minimum purchase will be for KShs 3,

17 OTHER ARTICLES 7. OTHER ARTICLES & UPDATES PERSONAL INCOME TAX RETURNS DUE BY 30 TH JUNE 2015 All individuals will be required to prepare and submit their 2014 income tax returns by 30 June The filing can be done on paper or electronically. Online preparation and submission of returns will be on the KRA I-Tax platform. Employment pay and PAYE tax should be supported by employer pay and tax deduction documents (form P9A) whilst personal business and rent income is supported by income and expenditure statements. REAL TIME MARKET INSPECTIONS The revenue authority placed a public notification to say that that they are rolling out market surveillance operations that entail real-time tax compliance inspections. The notification states that KRA officers will be inspecting goods and sales transactions to confirm compliance in particular with: Micro-business turn-over tax Value added tax to ensure valid (ETR) invoices are issued Excise duties to ensure stamps are affixed Customs duties to ensure import duties have been paid One immediate risk is having imposters turning up at businesses posing as tax inspection officers. The revenue authorities have said that officers should carry and make available for inspection identification badges: where in doubt one can call the KRA for verification. FBT RATES The below table contains the FBT (fringe benefit tax) and DI (deemed interest) rates for the first half of Where interest is charged at these rates or more, no taxable benefit or charge arises. Period FBT rate Deemed interest rate Jan-March % 9% April-June % 9% 17

18 Your business tax advisory services team Charles Muchuha Henry Sang Ruth Kamaru Wycliffe Oloo Jeremy Shunguh Hildah Ongaga Lucia Khaemba BDO EA Kenya Services & Contacts Audit & assurance Internal audit, investigations & due diligence Integrated client services (accounting & payroll) Business tax compliance & advisory Corporate registration and advisory Funds management & advisory Business financial & IT advisory: IT, corporate finance, strategy, mergers & acquisitions Audit and accounting Clifford Ah Chip Audit and investigations Sayyida Nusrath Business tax compliance & advisory Charles Muchuha Corporate registration & advisory Robert Ndungu Funds management & advisory Peter Githongo Business financial & IT consulting Sandeep Khapre BDO EA Kenya Sameer Park Block C 1, 1 st Floor Mombasa Road Nairobi This publication has been written in general terms and should be read as providing broad guidance only. Professional advice should be obtained on any of the areas covered in this publication. References have been made to Budget 2015 statements by the National Treasury Cabinet Secretary and the respective tax acts. BDO East Africa Kenya does not assume any responsibility for any consequences arising from decisions taken from information contained in this publication. BDO East Africa Kenya is a member of BDO International, a UK company limited by guarantee, and forms part of the worldwide network of independent legal entities. 18