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Tax Alert The 2015

The Finance Act, 2015 was assented into law on 11 September 2015 (“the Finance Act”). The Act has introduced some new provisions that were not contained in the Finance Bill, 2015 (“the Finance Bill”), provided clarifi cation on some issues that were potentially confusing as contained in the Finance Bill and dropped some proposals that are considered harmful to the economy and businesses.

In this Alert, we provide a comparative Carry forward of tax losses analysis of the changes between the Finance The Finance Act has now clarifi ed that tax Bill and Finance Act and provide insights on losses may be carried forward for the next nine how the changes could impact your business. succeeding years of income from the year the tax losses arise. The tax losses may be extended Income tax beyond ten years upon application to the Capital gains on sale of listed securities Treasury Cabinet Secretary. Due to operational challenges in accounting This a welcome move because the earlier for tax on capital gains tax on sale of listed limitation period of fi ve years was extremely securities following the re-introduction short for companies engaged in capital of capital gains from 1 January 2015, the intensive projects especially in infrastructure, Finance Bill had introduced changes requiring energy and manufacturing businesses. stockbrokers to account for a levy/withholding However, it is noted that for tax losses that were tax of 0.3% on the transaction value of listed incurred in 2010 and prior years, an application securities. to the Treasury Cabinet Secretary for the The Finance Act scrapped the proposed levy/ carry forward of the tax losses would still be withholding tax of 0.3% and there will be required. September 2015 no tax on gains from sale of listed securities. However, the Finance Act still retained some Tax on residential rental income of the changes on the withholding tax/levy on The Finance Bill proposed to introduce a sale of listed shares which however become simplifi ed tax on residential rental income for superfl uous. resident persons with rental income of KES 10m or less. Persons eligible for this could still Investment deduction allowance of 150% elect to continue being subject to tax under the retained general tax provisions. The Finance Bill had proposed to abolish the To give effect to the proposal simplifi ed tax on 150% investment deduction allowance granted residential rental income, the Finance Act has for investments of KES 200million or more provided for a rate of 10% of the gross rental outside the cities of Nairobi, Mombasa and receipts. Kisumu.

The Finance Act has retained the 150% Withholding tax on consideration for use of investment deduction allowance and this will immovable property continue being an incentive for businesses The Finance Bill proposed to introduce to invest outside the main Kenyan cities and withholding tax on consideration for use of promote development, urbanization and immovable property by persons paying the industrialization in the Counties. consideration or agents appointed by the Commissioner. However, no rate was prescribed.

The Finance Act has deleted the provision enabling the application of WHT and appointment of agents but has at the same time introduced WHT at a rate of 12%. This should also have been deleted if the intention was to remove the WHT provisions.

Tax amnesty on rental income extended to enterprises The Finance Bill proposed to grant 100% tax amnesty on principal , penalties and interest in respect of rental income for the year 2013 and earlier and 100% amnesty on penalty and interest for the years 2014 and 2015. This amnesty was restricted to individuals. The Finance Act has extended the same amnesty to enterprises including companies.

The Finance Bill had proposed to allow a deduction of 40% of expenses relating to rental income where a person seeking to benefi t from the amnesty does not have the Finance Act are as follows: The Finance Act has clarifi ed that the supporting documentation. The Finance reduced tax will be for a period of fi ve Act has changed this proposal and • The supply of taxable goods years following the date of such listing. provided that in determining the taxable and services to SEZ enterprises, rental income, a person seeking to benefi t developers and operators licensed Wear and tear allowance on petroleum from the amnesty on rental income will under the SEZ Act are exempt from pipeline be allowed a deduction of 40% of the VAT; gross rent as opposed to 40% of the The Finance Act 2014 had introduced a • SEZ enterprises, developers and expenses. The proposal in the Finance wear and tear allowance for petroleum operators will be subject to a reduced Bill would have encouraged fi ctitious and pipeline. However, the changes were rate of 10% for the fi rst non-existent expenditure to the extent of not properly implemented due to 10 years of operation and 15% for the wiping out taxable income especially for typographical errors. As a result, next 10 years; and the 2014 and 2015 year of income where it appeared as if the wear and tear principal tax has not been waived. The • The applicable WHT rate for allowance for petroleum pipeline should changes introduced by the Finance Act payments for services and interest to be 37.5%. mitigate this. non-residents (other than payments for dividends) by SEZ enterprises, The has corrected the developer and operators shall be typographical errors and clarifi ed that Incentives for businesses operating in 10%. the applicable wear and tear rate for Special Economic Zones (“SEZ”) petroleum pipeline should be 12.5% as The Special Economic Zones Act, 2015 The limited tax incentives introduced by opposed to 37.5%. The Finance Bill 2015 (“SEZ Act”) was assented into law on the the Finance Act seem to be inconsistent had not rectifi ed the errors. same date with the Finance Act. with the SEZ Act which grants a blanket exemption on all taxes. The Income Withholding tax on bookmakers The SEZ Act contains a general Tax Act provides that tax exemptions tax exemption for all licensed SEZ provided in other acts of parliament are The Finance Act introduces a defi nition enterprises, developers and operators legally valid. This confl ict will need to of winning in respect of betting and on all taxes and duties payable under be resolved prior to licenses being issued gaming that restricts the withholding tax the Duty Act, Income Tax Act, under the SEZ Act. provisions to payments by bookmakers to East African Community Customs punters (players). Management Act and the Value Added Tax incentive for companies listing on the Tax Act on all SEZ transactions. Whilst the intentions of the changes securities exchange by introduction introduced by the Finance Act are The Finance Act has amended the The Finance Bill introduced a reduced understood, the changes regarding the Income Tax Act and the VAT Act, 2013 tax rate of 25% for companies listing applicable withholding tax rates and the and introduced tax incentives for SEZ. on a securities exchange by way of persons to whom the withholding tax The tax incentives for SEZ enterprises, introduction. The Finance Bill was silent rates are applicable are less clear. developers and operators introduced by on the duration of the reduced rate. It appears that payments by bookmakers Clarity on Withholding VAT and Exemption of supply of sewerage services to non-resident players will not be subject revocation of already appointed agent The Finance Act has exempted from to withholding tax whilst the winnings of The Finance Act has now clarifi ed VAT the supply of sewerage services non-resident bookmakers will be subject that the tax base for the calculation by the national government, a county to withholding tax at 7.5% of gross of withholding VAT is 6% of the government, any political subdivision profi ts. The use of terms winnings in the taxable value as opposed to 6% thereof or a person approved by the context of a bookmaker are contradictory of the tax payable. The change is Cabinet Secretary responsible for water to the defi nition of winnings provided aimed at removing ambiguity in the development. This is a welcome move in the Finance Act and it is unclear how implementation of withholding VAT as it will encourage the development withholding tax on the gross profi t obligations. of sewerage infrastructure and lower of a non-resident book maker will be the cost of sewerage related services determined and enforced. Additionally, the Finance Act has which will improve on the waste empowered the Commissioner for disposal initiatives meant to preserve the Payments by bookmakers to resident Domestic Taxes to appoint any ‘other environment. players will be subject to 20% person’ apart from government withholding tax whilst the winnings the ministries, departments and agencies as a Exemption of taxable supplies to fi lm winnings of resident bookmakers will withholding VAT agent. This amendment industry be subject to withholding tax at 7.5% of will expand the withholding VAT net gross profi ts. Similarly, the use of terms to persons who were not previously While the Finance Bill proposed to winnings in the context of a bookmaker within scope and we have already exempt from VAT goods and services are contradictory to the defi nition of witnessed several such appointments acquired by the Kenya Film Commission, winnings provided in the Finance Act by the Commissioner. Similarly, the the Finance Act has amended this and again it is unclear as to the purpose Commissioner has been granted proposal by replacing Kenya Film of a withholding tax on gross profi ts of discretionary powers to revoke the Commission with local fi lm producers a resident bookmaker who is subject to appointment of any withholding VAT and local fi lm agents. This amendment Kenya income tax. agent. This is welcome amendment will retain the initial intention of as it will allow for the exclusion from providing incentives to the fi lm industry Valued Added Tax withholding VAT agents who face to spur its growth. This is a welcome The Finance Act, 2015 has retained all implementation challenges owing to amendments as it focuses the VAT the changes proposed in the Finance factors such as complexity of business exemption on the actual taxpayers in Bill, 2015 but also includes several systems. the fi lm industry as opposed to their amendments not included in the Finance umbrella organization, the Kenya Film Bill, 2015. As general observation, the Commission. Finance Act, 2015 has kept with the Exemption of plastic bag biogas digesters, National Treasury’s recent trend of VAT biogas and leasing of biogas producing equipment Exemption of taxable supplies to Special exemptions being preferred over zero- Economic Zone (SEZ) enterprises rating as the means to VAT reprieve for While the Finance Bill 2015 only The Finance Act exempts from VAT any deserving products/sectors. proposed to exempt from VAT plastic bag biogas digesters, the Finance Act has taxable goods and services supplied The above said, we reiterate our view expanded the VAT exemption scope to to the SEZs entities, developers and that VAT exemptions do not necessarily include biogas and the leasing of biogas operators licensed under the Special translate to the desired cost savings for producing equipment. The change will Economic Zones Act. This is amendment the end consumers of the affected goods encourage the use of clean and affordable was not included in the Finance Bill and services; VAT exemptions have a biogas energy system for cooking and 2015, which meant the VAT exemptions distortive effect on the supply chain and lighting for rural households. envisaged in the SEZ Bill did not have result in non-recoverable VAT for the force of law. The amendment now ensures a harmonized position in both suppliers as opposed to VAT being borne Exemption of inputs or raw materials the VAT and the SEZ legislation. It is by the end users. The ‘sticking’ VAT is for use in manufacture of agricultural hoped that the certainty around tax ultimately passed on to the consumers in machinery and implements the form of increased prices. exemption will encourage the set-up of The Finance Act has, subject to approval industries in the specially designated by the Cabinet Secretary responsible for zones which will in turn spur economic Broadening the defi nition of “money” Industrialization, exempted from VAT the growth. The Finance Act has expanded the inputs or raw materials locally produced defi nition of money to include any or imported by manufacturers of Zero rating of inputs or raw materials for amount paid through an ‘electronic agricultural machinery and implements. manufacture of medicaments payment system’. This change provides This amendment will hopefully further clarity on what constitutes encourage the set-up of industries for the Inputs or raw materials for manufacture ‘consideration’ in the determination to manufacture of agricultural machinery of medicaments were VAT exempt under the taxable value for VAT purposes. and implements. the current VAT Act. The Finance Act has zero-rated raw Some of medicaments that now enjoy are expected to come through the Excise materials (either produced locally or the zero-rated status include vaccines for Duty Act, 2015 currently awaiting imported) supplied to pharmaceutical human medicine, vaccines for veterinary President assent while the Customs duty manufacturers in Kenya for the medicine, medicaments containing changes were already effected through manufacture of medicaments as hormones, alkaloids, penicillin and other the East African Community (EAC) approved by the Cabinet Secretary for the antibiotics, vitamins and medicaments Gazette dated 19 June 2015 issued by the National Treasury in consultation with for therapeutic or prophylactic use EAC Secretariat in Arusha, Tanzania. the Cabinet Secretary responsible for among others. matters relating to Health. The shift from Other Sectoral Reforms The shift from exemption to zero- exemption to zero rating will help reduce The minister’s proposal to increase rating will help reduce the cost of the the cost of the medications. minimum core capital for banks and medications. mortgage fi nance companies has been Zero rating of medicaments excluded from the act. This is in line with Customs and Excise Duty Medicaments which were previously CBK’s view that a risk-based approach The Finance Act did not make any exempted have now been zero-rated should be applied when determining amendments in the existing Customs under the Finance Act. capital requirements for these and Excise Act, the excise duty changes institutions on an ongoing basis.

Other sectoral reforms highlighted in the PwC Budget Bulletin following the budget reading were retained in the Finance Act (see previous PwC Budget Bulletin).

For further information on this issue, please contact any of the people below or your usual PwC contact.

Steve Okello Partner [email protected] 020 285 5000

Rajesh Shah Partner [email protected] 020 285 5000

Job Kabochi Partner [email protected] 020 285 5653

Titus Mukora Partner [email protected] 020 285 5000

This publication has been prepared as general information on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specifi c professional advice. © 2015 PricewaterhouseCoopers Limited. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Limited which is a member fi rm of PricewaterhouseCoopers International Limited, each member fi rm of which is a separate legal entity.