Taxation of gains from financial derivatives
The Act has amended the Income Tax Act by introducing tax on gains accruing to non-residents from financial derivatives. The Act defines a financial derivative as:
“A financial instrument is linked to the value of another instrument underlying the transaction which is to be settled at a future date.”
The gains accruing to non-residents shall be subject to withholding tax at 15% subject to Regulations to be issued by the Cabinet Secretary National Treasury. It is important to note that the gains accruing to non-resident persons from derivatives listed on the NSE shall be exempt from the tax.
The Financial derivatives market went live on 4th July 2019 in Nairobi, making it the second derivatives market in Sub-Saharan Africa after the Johannesburg market. The desk has traded over KES 168M since its launch, making it a soft target for the taxman.
This amendment took effect on 1st July 2022.
The Act has introduced an amendment to the Income Tax Act to the effect that a non-resident person with a permanent establishment in Kenya shall be exempt from DST.
Non-resident persons with a PE in Kenya shall no longer be required to account for DST on services rendered through a digital marketplace. This amendment took effect on 1st July 2022
The Act has increased the capital gains tax (CGT) rate from 5% to 15%. Kenya has enjoyed a lower CGT rate compared to its counterparts in the East African region. The sharp increase has elicited an outcry from real estate industry players struggling with reduced spending due to increased inflation.
The amendment is set to take effect on 1st January 2023.
Transfer-Pricing implications for entities operating in a preferential tax regime.
The Act has amended section 18 (A) of the Income Tax Act (ITA) to include within the ambit of transfer pricing (TP) transactions between resident persons and the following persons located in a preferential tax regime:
• A related resident person;
• A non-resident person;
• An associated enterprise of a non-resident person; and
• A permanent establishment of a non-resident person.
• Any Kenyan legislation, regulation or administrative practice which provides a preferential rate of tax to such income or profit, including reductions in the tax rate or the tax base; or
• Does not tax income;
• Taxes income at a rate that is less than 20%;
• Does not have a framework for the exchange of information;
• Does not allow access to banking information or Lacks transparency on corporate structure, ownership of legal entities located therein, beneficial owners of income or capital, financial disclosure or regulatory supervision.
The amendments will not only expand the tax scope to net in non-residents operating in preferential tax regimes but is also in line with the implementation of the global minimum tax provisions under Pillar 2 of the BEPs Action Plan.
Enhanced reporting for Multi-national Enterprises
The Income Tax Act currently provides that a reporting Multi-National Enterprise shall provide key financial information concerning each jurisdiction in which the group operates. In addition, the Income Tax (Transfer Pricing), Regulations 2006, impose a requirement to provide transfer-pricing documentation upon request by the Commissioner. Such information usually contains the master and/or local files and other financial reports.
The Act has introduced a requirement to file master and local files annually as opposed to the current request. The master file and local file shall include the following information:
• A detailed overview of the group;
• The group’s growth engines
• A description of the supply chain of the key products and services
• The group’s research and development policy
• A description of each constituent entity’s contribution to value creation
• Information about intangible assets and the group intercompany agreements associated with them
• Information on any transfer of intangible assets within the group during the tax period, including the identity of the constituent entities involved, the countries in which those intangible assets are registered, and the consideration paid as part of the transfer
• Information about financing activities of the group
• The consolidated financial statements of the group
• Tax rulings, if any, made in respect of the group and;
• Any other information that the Commissioner may require.
• Details and information on the resident constituent entity’s activities within the multi-national enterprise group
• Management structure of the resident constituent entity
• Business strategies including structuring, description of the material controlled transactions, the resident constituent entity’s business and competitive environment
• The international transactions and amounts paid to the resident constituent entity or received by the entity and;
• Any other information that the Commissioner may require.
The reporting requirements aim to align Kenya to international standards as outlined in the OECD Transfer Pricing Guidelines, 2022.
The Act has introduced a series of amendments in relation to VAT on digital supplies as follows:
Amend the definition of a digital marketplace by deleting the expression “sell or provide services, goods or other property” and substituting it with the words “sell goods or provide services”.
The amendment shall provide clarity on the scope of the tax on digital supplies as it removes the ambiguity created by the broad use of the term other property
Exclude an import of services made over the internet or an electronic network or through a digital marketplace from reverse VAT under Section 10 of the VAT Act.
The exemption from reverse VAT means that all non-resident persons must register and account for VAT irrespective of the recipient of the goods or services.
The Act has amended the VAT Act by excluding persons supplying imported digital services over the internet, an electronic network, or through a digital marketplace from meeting the KES 5 million VAT registration threshold.
The exemption from the registration threshold means that all persons providing digital supplies over a digital market place shall be required to register and account for VAT on the digital supplies regardless of the value of the supplies made to persons located in Kenya.
The amendments took effect on 1st July 2022.
The Finance Act has amended the VAT Act by deleting the provision on exemption of export of service and introducing a provision on zero rating of export of service in respect of business process outsourcing.
This means that any service, which does not fall within the definition of business process outsourcing, shall be subject to VAT at the standard rate of 16%.
The Finance Act does not define what shall be classified as business process outsourcing. We expect that the Kenya Revenue Authority shall release guidelines to this effect.
The amendment took effect on 1st July 2022
