Kenya cuts corporate tax rate and proposes digital services tax

25 April 2020, Kenyan President Uhuru Kenyatta signed the Tax Laws (Amendment) Act into law to introduce a reduction in Kenya’s corporation tax rate from 30% to 25% per annum. The rate, which will apply from the financial year 2020, will be the lowest corporate tax rate in East Africa.

The reduction in the corporation tax rate will help mitigate any adverse impact of Covid-19 pandemic, but it is not a temporary measure. It is designed to attract foreign direct investment and improve the ease of doing business in Kenya, especially for investors that operate as subsidiaries in Kenya. The non-resident tax rate, which applies to branch companies and permanent establishments of foreign companies, remains at 37.5%.

Multinationals that have subsidiary operations in Kenya may be affected by an increase in the withholding tax rate from 10% to 15% on dividend payments made by resident companies to non-resident shareholders. However lower rates will still apply if Kenya has a double tax agreement with the recipient’s country of residence.

Another significant change to income tax is the reduction of the turnover tax from 3% to 1% and the extension of the registration threshold and range. The tax will now apply only to companies that have a turnover of between KES1 million to KES50 million.

The Kenya government published its revenue proposals in the Finance Bill 2020 on 5 May, which includes a digital services tax on income derived or accrued in Kenya. 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. Regulations for the implementation of the tax have not yet been published but the Bill provides for the appointment of digital service agents by the Commissioner of Income Tax.

To broaden Kenya’s tax base and target loss-making taxpayers, the Finance Bill also proposed to introduce a minimum tax based on turnover rather than profitability. The minimum tax would be imposed on 1% of gross income and would be payable quarterly by a person who either has exempt income or income that is not from employment, residential rent, and mining or oil exploration. The income must not be subject to capital gains or turnover tax.

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 under the programme would enjoy immunity from prosecution and receive a waiver of the tax penalty and interest arising from inadvertent instances of non-compliance between 30 June 2015 to 1 July 2020. Taxpayers who are already under audit, or have received notification of a proposed audit, will not be eligible.

The waiver is time-sensitive. An application made in 2021 would qualify the taxpayer for full remission, while applications made in 2022 and 2023 would qualify only for a 50% and 25% remission respectively. The the terms of payment of a tax liability must be agreed between the taxpayer and the Commissioner of Income Tax. The time offered for settlement may not exceed one year from the date of the agreement.

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