KENYA 2007/08 BUDGET LEGISLATIVE CHANGES PERTINENT TO BUSINESS PEOPLE AND INVESTORS

1. KENYA 2007/08 BUDGET LEGISLATIVE CHANGES PERTINENT TO BUSINESS PEOPLE AND INVESTORS Presentation to Members of the Barclays Bank Business Club

2. Tax Regimes Affected by Changes and Proposed Amendments • Value Added Tax as a result of amendments proposed to the Value Added Tax Act Cap 476. • Direct Taxes Turnover Tax introduced by the Finance Act 2006, although more guidelines are expected. Income Tax following amendments to The Income Tax Act Cap 470. Advance Tax on commercial vehicles • Customs & Excise Tax following amendments to the Customs and Excise Act Cap 472. • Stamp Duty following amendments to the Stamp Duty Act Cap 480. • Retirement Benefits

3. Changes affecting all tax regimes Enhancement of Commissioner’s powers (w.e.f 15/6/2007) Freezing of Tax defaulters funds Commissioner empowered to freeze funds of a person who: • Has made an income on which tax has not been charged • Is likely to frustrate recovery of tax due from him. The Commissioner does this by an ex-parte application to the High Court seeking a Court Order directed at anyone holding the funds of such a person prohibiting transfer, withdrawal, or disposal of such funds. Such Court Order lasts 30 days but may be extended. During the 30 days the Commissioner issues a Notice of Assessment and commences recovery of the tax. A person wishing to raise Objection to the Order must do so within 15 days of its issue. Realisation of securities for Tax created by the Commissioner Commissioner also empowered to dispose of the property of a Tax defaulter over which the Commissioner has already created a security. Previously, he could not dispose property.

4. Value Added Tax regime VAT is a tax levied on value added to the price of goods and Services. It was introduced in Kenya in 1990 to replace sales tax. VAT payable arises from subtracting the Input tax paid on purchases from the output tax charged on sales. (VAT Payable =Output tax –Input Tax ) • Input tax is the VAT paid by a business on purchases of goods & services. • Output tax is the VAT a business charges on its sales. There are several classifications of VAT rates including: • Standard rate-Generally levied VAT rate (currently 16%) • Zero rate-refers to goods and services which are considered taxable at a rate of 0%, the effect being a supplier of such can claim input tax and is required to register for VAT • Exempt supplies-goods& services under this classification are not subject to VAT, a supplier of solely exempt supplies cannot claim input tax and is not required to register for VAT.

5. Changes to VAT on Rental Income and the Construction Industry • Standard rate VAT is to be imposed on the renting, leasing, hiring and letting of non-residential buildings with an annual rental income exceeding Ksh. 5 million w.e.f. 1/1/2008. As a result deduction of Input tax on development and maintenance costs is now allowable to the owner of the property who must register for VAT. The tax was initially introduced in 2001 but owing to resistance was not passed by parliament. • Taxable goods and services supplied to projects for the construction of at least 20 houses in planned low-income housing development schemes now zero-rated.(15/6/07) • Taxable goods and services supplied to projects for construction of buildings and facilities for private universities now zero-rated (residential facilities for students and staff excluded)-15/6/2007

6. Other VAT related Changes Zero-rated goods increased The following goods granted zero-rated status Insecticides, fungicides and related products; Milk and cream; Specialized solar equipment; Locally assembled bodies of buses that carry over 25 passengers; Pyrethrum extract. Removal of VAT Remission to NGOs W.e.f 15/6/2007 the remission of VAT on taxable goods donated to, purchased or imported by NGOs for the use or for free distribution to the poor and needy or for use in medical treatment, education, religion or rehabilitation works has been removed

7. VAT ceases to be Chargeable on the following: Insurance claim proceeds: • Receipt of insurance proceeds for loss of taxable goods or services will no longer be subject to VAT. • VAT on insurance compensation, was controversial as it conflicted with the insurance principle on indemnity and meant that the taxpayer was left with less than the value of the loss and therefore would not have been adequately compensated for the loss incurred. Providers of Vatable Supplies below Ksh. 5 million turnover Threshold: • 4th Schedule of the VAT Act requiring all providers of Vatable Supplies to register for VAT regardless of their turnover has w.e.f 15/6/2007 been repealed, hence providers of Vatable services below a turnover threshold of Ksh. 5 million will now not be required to register for VAT. Such persons will be subject to Turnover tax.

8. Direct Taxes Turn Over Tax • This tax was introduced by the Finance Act 2006 and is chargeable on businesses with a turnover below Ksh. 5 million per annum. • Persons to whom turnover tax apply should prepare by formally applying to the Commissioner for de-registration by submitting a return showing details as to the value of his supplies over a 12 month period. Where satisfied, the Commissioner deregisters a person after payment of tax on supplies on which tax has not been paid. • Turn-over tax operation commences on 1/1/2008 and more guidelines are awaited on its implementation and administration. Advance tax • Advance tax paid on commercial vehicles is now specifically included among the taxes that are to be applied to set off the final tax payable. • The tax is to be set off against tax liability and where no tax liability exists it is recoverable from KRA.

9. Other changes to Income Tax Capital Allowance for Construction of Residential Properties • W.e.f 1/1/2008, Industrial Building Allowance has been introduced at a rate of 5% per annum on a straight line basis to persons constructing rental houses for low income earners that are approved by Housing Minister. • Industrial building allowance is a capital allowance granted to a person who incurs capital expenditure on construction and serves to reduce taxable income of the person to whom it is granted. Changes to taxing of Company Car Benefit • W.e.f 1/1/2008, the Commissioner if satisfied that the benefit received by an employee from the use of his Employer’s motor-vehicle is restricted, shall determine a lower rate of benefit depending on usage of the motor-vehicle. • Previous treatment failed to cater for instances of little or no private use of vehicle

10. Other Pertinent changes to the taxing of income Medical Insurance Insurance contributions paid by an employer to an insurance provider approved by the Commissioner of Insurance are now a tax free medical benefit. Tax free monthly pension Applies to pensioners over 65 yrs of age and took effect on 15/6/2007. For other persons monthly pension payments in excess of Ksh.15,000 are taxable Share Options These arise from an offer made by an employer to an employee to purchase a fixed number of shares at a fixed price which is paid for at the end of a vesting period. Where this fixed price is lower than the market price then a taxable benefit accrues to the employee

11. Other Pertinent changes to the taxing of income Share Options The timing of accrual of a tax benefit arising from share options is now stated to be the earlier of the date of vesting or the date of exercise. 5% Dividend Withholding tax rate for EAC The 5%dividend withholding tax rate previously enjoyed by a Kenyan resident only has been extended to all EAC residents. Bad Debts The Finance Bill 2007 empowers the Commissioner to prescribe rules for the purposes of determining bad debts that qualify for tax deduction. Guidelines should clarify previous uncertainty as to the provisions that are tax deductible, how such provisions are to be determined and support records needed. Commissioner also expected to harmonize the tax guidelines with existing industry guidelines and accounting standards

12. Customs and Excise Tax regime Pertinent Changes • Reduction of Import Declaration Fee (IDF) from 2.75 percent to 2.25 percent for goods imported from non-EAC countries, while IDF has been abolished for imports from EAC countries. • Exemption from import duty of medical equipment imported by licensed hospitals. • Imports of used motor vehicle spare parts are to attract excise duty of 20 percent.

13. Changes to the Stamp Duty Act • Exemption from stamp duty of the amount of share capital increase of a company listed on a stock exchange approved by the Capital Markets Authority. • Any instrument executed in respect of transfer of family property to a limited liability company whose shares are wholly owned by the family is exempted from the Stamp Duty Act’s provisions.

14. Retirement Benefits • Amendment of the Retirement Benefits Act to allow assignment of a prescribed proportion of the benefits accruing to a member in a scheme as security for mortgage loans. • Exemption of monthly pension from income tax for persons above sixty five years. • Amendment of the Retirement Benefits Act to provide that upon the death of a scheme member, the benefits payable shall not form part of the estate of the member for the purpose of administration and shall be paid by the trustees in accordance with scheme rules. • The period within which a member must receive benefits on retirement or withdrawal has been reduced from ninety to sixty days. (Effective 14/06/2007)

15. Retirement Benefits • Retirement schemes allowed to invest, within RBA guidelines, in non-listed bonds and instruments issued by private companies provided that the instruments have received an investment grade rating by an approved credit rating agency. Scheme investments in Uganda and Tanzania government securities to be treated as domestic investments. (Effective 14.06.2007) • Benefits arising from employer contributions must now fully vest in the member within a maximum period of one year, rather than three years as before. (Effective 14.06.2007) • Casual workers or self-employed individuals may voluntarily register or be registered as members of the National Social Security Fund.

16. Insurance • Raising the paid up capital for insurance companies in various lines of business. (a) long-term insurance business from Kshs 50m to Kshs 150m, (b) general insurance business from Kshs 100m to Kshs 300m, (c) Composite insurance business from Kshs 150m to Kshs 400m. These increases to take effect over two years. • Introduction, for all classes of insurance business, of the cash and carry rule that requires brokers to remit to insurers premiums on the day the premiums are received by the broker, upon receipt of which the insurer shall assume the risk of the policy holder.

17. Advantages that may be explored by persons seeking to invest Incentives to Investors in the Construction Industry • Investors in projects for the construction of at least 20 houses in planned low-income housing development schemes will benefit from credit of their input VAT arising from zero-rating of taxable goods and services supplied to such projects w.e.f 15/6/2007. However, registration for VAT is mandatory to benefit. • Investors in approved low income rental houses will benefit from the granting of a 5% Industrial Building Allowance w.e.f 1/1/2008. • However, investors should await the publication of guidelines by the Minister on the criteria for granting the Capital Allowance and on what qualifies as a low income house approved by the Minister. • Investors in non-residential buildings with rental income over 5 million per annum, upon registration for VAT will benefit from allowance of input VAT spent on development and maintenance.

18. Other Advantages Introduction of VAT on non-residential buildings • The Finance Bill 2007 introduces a new definition of “residential buildings” which serves to limit the category of buildings that will be subject to VAT. • Ideally, any building which is not a residential building would be a non-residential building, however, the new definition of residential buildings as “ dwellings built or used to accommodate persons for residential purposes”, limits the category of commercial buildings that would be subject to VAT • By this definition a dwelling built to accommodate persons for residential purposes from which business is conducted should not be subject to VAT hence an VAT exempt business would gain a tax benefit by relocating to one of the many residential buildings that allow for business occupancy. Registration for VAT • Registration for VAT is now set at the taxable turnover of Ksh. 5 million for any registrable person irrespective of the supplies being provided. • Exempt consumers may therefore avoid incurring non-deductable VAT by obtaining their supplies from non- registered providers who are subject to Turnover Tax.

19. Possible pit-falls arising from the changes Possible abuse of enhanced powers of Commissioners Though showing the governments resolve to stamp out tax evasion they appear draconian in that: • Insufficient safeguards have been provided for realization of securities by the Commissioner. The procedure prescribed before the sale includes publication of a 21 day notice in Gazette and local newspaper and the taking of reasonable steps by the Commissioner to notify, in writing, the persons with registered interest in the land. These are open to abuse. A Court Order obtained inter-partes before sale is better.

20. Ameli Inyangu and Partners 2nd Floor, Kenya Charity Sweepstakes Hse Mama Ngina Street www.amelinyangu.net mail@amelinyangu.net