Global Daily Tax News, Kenya Announces Tax System Overhaul In New Budget, (Jun 17, 2024)

Kenya has announced various proposed changes to the country's corporate income tax and value-added tax laws in its newly released Budget, to boost revenue collections for the territory.

The Government has confirmed that it will legislate to implement the Pillar Two minimum tax framework on the profits of large multinational enterprises. Further, the Budget confirms the territory will newly offer advance pricing agreements.

The Budget also announces plans to redesign the digital services tax, to prevent avoidance of the levy by businesses establishing an online presence outside Kenya, and relaunch it as the Significant Economic Presence Tax.

Further, it announces that telecommunications network operators will newly be allowed to deduct spectrum licenses fees over a period of 10 years.

The capital gains tax rate is to be lowered to five percent, from 15 percent, for firms certified by the Nairobi International Financial Centre Authority.

Withholding tax will apply to all payments of management fees, professional fees, training fees, and contractual fees, the Budget announces, rather than applying only to payments of more than KES24,000 (USD186.8) per month.

A new annual motor vehicle tax will be introduced with a 2.5 percent rate, with a minimum amount payable of at least KES5,000 per year.

The Budget also announces, to prevent double taxation under the PAYE system, the new Affordable Housing Levy will be made a deductible expense.

In the area of value-added tax, the Budget announces that the value-added tax registration threshold will be raised from KES8m from KES5m. Further, rules will change for taxpayers making both taxable and exempt supplies. Currently, input VAT credits are allowed in full providing the taxpayer's exempt supplies make up less than 10 percent of their total supplies. This arrangement will be removed, with input tax credits to be available only for taxable supplies.

Finally, the Budget includes a number of changes regarding the taxation of pension contributions and pension income. The Government intends to amend the Income Tax Act to exempt all retirement benefits paid from a registered pension fund, registered provident fund, registered individual retirement fund of National Social Security Fund, and the Public Pension Scheme, upon attainment of the retirement age.

For those taking early retirement, the exemption will apply only if the individual has contributed to the pension scheme for a period of at least 20 years.

The maximum annual pension contribution that qualifies from exemption will be KES360,000, or 30 percent of individual income, whichever is lower, up from KES240,000. Further, a new deduction will be introduced for contributions to a post-retirement medical fund, subject to a limit of KES10,000 per month.