Kenya Business Tax Newsletter
2015-2016 Budget News June 2015
In this issue, we cover:
1. 2015 BUDGET THEME & ECONOMIC OVERVIEW ...................................................... 2
BUDGET SPEECH THEMES ....................................................................................................... 2
ECONOMIC BACKDROP ............................................................................................................ 3
GOVERNMENT REVENUE AND EXPENDITURE ........................................................................ 5
2. PERSONAL TAXATION.................................................................................................. 6
3. BUSINESS TAXATION ................................................................................................... 7
BUSINESS INCOME TAX CHANGES.......................................................................................... 7
GAMING AND LOTTERIES TAXATION ...................................................................................... 8
CAPITAL GAINS TAX .................................................................................................................. 9
4. VALUE ADDED TAX .................................................................................................... 10
VAT RATES CHANGES SUMMARY ........................................................................................... 11
5. CUSTOMS & EXCISE DUTIES AND MISCELLANEOUS TAXES.................................. 11
CUSTOMS DUTY RATES CHANGES ........................................................................................ 11
CUSTOMS DUTIES CHANGES SUMMARY .............................................................................. 13
ROAD PETROL LEVY ................................................................................................................ 13
EXCISE DUTIES PROPOSED LAW ............................................................................................ 14
6. FINANCIAL SECTOR REGULATION ............................................................................ 15
BANKS ..................................................................................................................................... 15
INSURANCE COMPANIES ....................................................................................................... 15
PENSIONS FUNDS ................................................................................................................... 16
7. OTHER ARTICLES & UPDATES .................................................................................. 17
PERSONAL INCOME TAX RETURNS DUE BY 30TH JUNE 2015 ................................................ 17
REAL TIME MARKET INSPECTIONS ........................................................................................ 17
FBT RATES - 2105 .................................................................................................................... 17
YOUR BUSINESS TAX ADVISORY SERVICES TEAM ...................................................... 18
BDO EA KENYA SERVICES & CONTACTS ...................................................................... 18
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Kenya Business Tax Newsletter
2015-2016 Budget News June 2015
KENYA 2015 BUDGET COVERAGE
1. 2015 BUDGET THEME & ECONOMIC OVERVIEW
6.7% - 7% expected GDP Expansionary Increased borrowing
growth rate for 2015- fiscal policy – 2T to close 644B gap
2016 budget against
1.3T income
BUDGET SPEECH THEMES
Cabinet Secretary Henry Rotich’s 2015-2016 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.
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ECONOMIC BACKDROP
1. GDP growth rate: GDP increased from 7.1% in 2006 to 8.4% in 2010, before
declining to 5.7% in 2013. 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
2015.
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2015-2016 Budget News June 2015
3. Total public debt: total debt increased from US$ 10.68 Bn in 2006 to US$ 14.96 Bn
in 2010 and to US$ 19.28 Bn in 2013. The total debt had increased to an
estimated US$ 28.96 Bn by March 2015. Domestic Debt as % of GDP rose from
18.77% in 2006 to 20.15% in 2010 and to an estimated 25.26 by end of March
2015. During the same period, External debt rose from 22.62% in 2006 to 24.2%
by end of March 2015.
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2015-2016 Budget News June 2015
4. Exchange rate: The Exchange Rate has seen a steady depreciation from KShs 72
per US$ in 2006 to KShs 91.49 by end of March 2015.
GOVERNMENT REVENUE AND EXPENDITURE
Budget revenues and expenditure summary
2015/2016 2014/2015
KShs(billions) KShs(billion)
Total revenue 1,358 1,238
Total expenditure (2,002) (1,581)
Deficit 644 343
Budget deficit funding
2015/2016 2014/2015
Shs(billions) Shs(billions)
External financing 341 150
Loan repayment receipt 0 2
Grant 73 0
Domestic borrowing 230 191
Total 644 343
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Kenya Business Tax Newsletter
2015-2016 Budget News June 2015
2. PERSONAL TAXATION
12% rent tax & Left-hand drive cars
landlords amnesty 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 2015.
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
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2015-2016 Budget News June 2015
3. BUSINESS TAXATION
Rent income tax Business tax losses New gaming sector
amnesty announced c/fwd period extended tax regime
to 10 years
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 30th, 2016. The
tax amnesty will cover tax arrears and fines for rental income tax liability for the
years up to and including 2013. 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.
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Kenya Business Tax Newsletter
2015-2016 Budget News June 2015
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 2014-2015.
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 Gross revenue 15
entry costs)
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.
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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 2016.
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 2016. There is no tax-
free threshold for urban land; this attracts CGT irrespective of the size - unless
below the tax-free value above.
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Kenya Business Tax Newsletter
2015-2016 Budget News June 2015
4. VALUE ADDED TAX
Film industry Goods in transit VAT refund claims
incentives services zero rated 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 zero-
rated supplies – mainly by way of exports.)
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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 Exempt 16%
parks infrastructure works
ICT inputs imported or purchased locally for Exempt 16%
assembly of IT devices – for school laptops
Returning resident left hand vehicle replacements Exempt 16%
5. CUSTOMS & EXCISE DUTIES AND MISCELLANEOUS TAXES
CUSTOMS DUTY RATES CHANGES
Duty rates Road petroleum levy Bill to overhaul
reductions for up excise taxes
manufacturers
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%.
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Kenya Business Tax Newsletter
2015-2016 Budget News June 2015
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.
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CUSTOMS DUTIES CHANGES SUMMARY
Item Proposed import duty Previous rate
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 & $200 per tonne and
100% ad volerum 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 80% of FOB
or USD 0.52 per kg
ROAD PETROL LEVY
The road maintenance petroleum levy has been increased by Shs. 3.00 per litre
to Shs. 12.00 per litre from Shs. 9.00 per litre - to be collected and paid into the
Road Annuity Fund.
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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.
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2015-2016 Budget News June 2015
6. FINANCIAL SECTOR REGULATION
Banks core Insurance businesses New pension funds
capital increased core capital levels governance &
& perpetual increased investment rules
licenses
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
2018.
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.
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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 3,000.
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OTHER ARTICLES
7. OTHER ARTICLES & UPDATES
PERSONAL INCOME TAX RETURNS DUE BY 30TH JUNE 2015
All individuals will be required to prepare and submit their 2014 income tax returns
by 30 June 2015. 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 - 2105
The below table contains the FBT (fringe benefit tax) and DI (deemed interest) rates
for the first half of 2015. Where interest is charged at these rates or more, no taxable
benefit or charge arises.
FBT rate Deemed interest rate
Period
Jan-March 2015
9% 9%
April-June 2015 9% 9%
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Kenya Business Tax Newsletter
2015-2016 Budget News June 2015
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
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compliance & advisory
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(accounting & payroll) advisory & acquisitions
Audit and accounting Clifford Ah Chip clifford.ahchip@bdo-ea.com
Audit and investigations Sayyida Nusrath sayyida.nusrath@bdo-ea.com
Business tax compliance & advisory Charles Muchuha charles.muchuha@bdo-ea.com
Corporate registration & advisory Robert Ndungu robert.ndungu@bdo-ea.com
Funds management & advisory Peter Githongo peter.githongo@bdo-ea.com
Business financial & IT consulting Sandeep Khapre sandeep.khapre@bdo-ea.com
BDO EA Kenya |Sameer Park Block C 1, 1st 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
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