CORPORATE TAXES

RESIDENT COMPANIES

The Tax amendment Act reduced the corporation tax rate from 30% to 25% for the year of income 2020 and subsequent years.

The reduced rate will cushion the resident companies from the economic effects of covid-19, and at the same time businesses, to be a competitive destination in our country. The corporation Tax for non resident companies remains at 37.5%

Other changes are in preferential corporate income tax rates listed below and will now be subjected to 25% corporate tax.

A) FOR COMPANIES NEWLY LISTED UNDER APPROVAL CAPITAL MARKET AUTHORITY IN STOCK EXCHANGE

1. In the case of the company newly listed in the security exchange with at least 20% of issued share capital listed then is 27% for the period of 3 years commencing immediately after the year of income following the date of such listing.
2. In the case of the company newly listed in the security exchange, with at least 30% of its issued share capital listed then is 25% for the period of 5 years commencing immediately after the year of income following the date of listing.
3. In the case of the company newly listed in the security exchange, with at least 40% of its share capital listed then is 20% for the period of 5 years commencing immediately after the year of income following the date of listing.
4. In the case where a company introducing its share through listing or any securities exchange via introduction then is 25% for the period of 5 years commencing immediately after the year of income following the date of listing.
5. In the case of a company engaged in the business under a special operating framework arrangement(SOFA) , the rate of tax shall be to the extend provided in the arrangement. (Companies which are currently under SOFA will continue enjoying the agreed preferential CIT rate for the specified period in the agreement)
6. In the case of a company operating a plastic recycling plant, 15% for the first 5 years from the year of commencement of its operation.

The Tax Laws(Amendment Act) 2020, has revised the definition of "qualifying interest"

Previously, qualifying interest only referred to interest received by a resident individual from a bank, building society, central bank and from housing bonds.

The ACT now classifies any interest received by a resident individual as qualifying. As such, the withholding tax of 15% on such interest will be the final tax.

COMMENT: This may encourage individuals to save and invest in debt instruments or non-financial institutions.

 

TURNOVER TAXES

The Act has extended the turnover tax provisions to persons with annual turnover between KES 1 million and KES 50 million(from the current upper limit of KES 5 million). It has also extended turnover tax to include the income of incorporated companies which were previously excluded. Lastly, the Act has reduced the turnover rate from 3% to 1%.

COMMENT: This has effect on reduction of the tax liability and compliance obligation for business below KES 50 million.

However, it is significantly not clear on certain areas:

1. If the business turnover is below KES 1 million, is it exempt from tax?
2. What is the treatment of incorporated companies earning professional fees and Rental izncome
3. No clarification on whether the tax payer can switch between income tax and turnover tax depending on their income

 

ELECTRICITY REBATE

The Tax amendment Act has scrapped the electricity rebate for manufacturers which was to be effective 1st January 2019 as indicated in the finance bill 2018. This was a big blow to the manufacturing sector.

 

INCOME ACCRUED, DERIVED FROM OR RECEIVED IN KENYA WHICH WAS EXEMPT FROM TAX SUBJECT TO TAX

There is major overhaul of exempt taxes, which was previously seen in First schedule Part 1. Most are related to contracts and agreements.

1. Profits or gains of an agricultural society accrued in or derived from Kenya or show held for the purpose of society
2. The emoluments of any officer of the Desert Locust Survey who is not resident in Kenya.
3. Employment income under contract which was entered into consequent upon financial assistance being received from the international co-operation administration for enterprise in respect of which contract was entered and which provided the income shall be exempt from taxes.
4. Interest earned on contribution paid into deposit Protection Fund under the Banking Act.
5. Dividends received by registered venture capital company.

Furthermore, the Act has deleted the introduction of corporation tax rate on companies operating a plastics recycling plant. The reduced rate was 15% for the first 5 years from the time the company started operating. Consequently, such companies shall be subject to corporation tax of 25%.

 

TRANSACTION EXEMPT FROM CAPITAL GAIN TAX NOW TAXABLE

The Act now brings to tax the following income that were previously exempt from Capital Gains Tax(CGT)

1. Shares in stock funds of the Government, the authority established under the organization, or community.
2. Shares of local authority.
3. Land which has been adjudicated under the Land Consolidation Act

INVESTMENT DEDUCTION	(All on Reducing Balance Basis) RBB
DESCRIPTION	NEW RATES	OLD RATES
Commercial building*	10%	25%
Education buildings i.e. schools, hostels*	10%	50%
Hospital buildings*	50% first year	nil
	25% RBB
Hotel buildings*	50% first year
	25% RBB
Building used for manufacture	50% first year
	25% RBB
Petroleum or gas storage facilities	50% first year	nil
	25% RBB

 

NOTE

* Cost of land excluded from qualifying cost

 

INVESTMENT ALLOWANCE ON MACHINERY

	NEW RATES % on Reducing Balance Basis	OLD RATES %
Machinery used for manufacture	50% for first year	100%
	25% on RBB
Hospital equipment	50% for first year	12.50%
	25% on RBB
Ships	50% for first year	100%
	25% on RBB
Aircraft	50% for first year	25%
	25% on RBB
Motor vehicle (Qualifying cost is now 3million from 2million)	25% on RBB	25%
Heavy earth moving equipment	25% on RBB	37.50%
Computer peripheral (Computer hardware, copiers, calculators, duplicating machine)	25% on RBB	30%
Software	25% on RBB	20%
Furniture & fittings	10% on RBB	12.50%
Telecommunication Equipment	10% on RBB	20%
Filming equipment purchased by local producer and licensed	25% on RBB	100%
Machinery used to undertake operation under mining rights	50% first year	37.50% or 12.50%
	25% on RBB
Other machinery	10% on RBB	12.50%
Purchase or an acquisition of an indefeasible right to use a fiber optic cable by telecommunication operator	10% on RBB	20%
Farm works	50% first year	100%
	25% on RBB

 

OUR COMMENTS

Overall, the Act has made major changes in second schedule and this has impacted the major areas of business and other sectors.