Alert Minimum tax – The frequently asked questions

Introduction December 2020 The Act, 2020 amended the Income Titus Mukora Tax Act (“ITA”) by introducing minimum tax Partner (“MT”) under Section 12D of the Act. The MT [email protected] provisions raise a number of interpretation and +254 20 285 5395 implementation difficulties. These difficulties LinkedIn are likely to pose challenges to taxpayers’ level of compliance owing to the complexities and Obed Nyambego lack of guidance therein. This alert attempts to Partner highlight some of the frequently asked questions [email protected] in relation to the implementation of the MT. +254 20 285 5331 LinkedIn The changes relating to MT are effective from • Capital gains chargeable to tax under the 1 January 2021. MT is intended for taxpayers Eighth Schedule to the ITA; and Leonard Shalakha carrying on business and earning revenues but Senior Manager • Persons undertaking mining or upstream where their payable is lower than oil and gas activities taxed under the Ninth [email protected] 1% of their gross turnover. +254 20 285 5640 Schedule to the ITA. MT will be payable at the rate of 1% of an LinkedIn We provide some guidance below to some of entity’s gross turnover and will be a final tax. the frequently asked questions. Andrew Wanjiru MT will be payable in four instalments payable Senior Associate by the twentieth day of the fourth, sixth, ninth [email protected] 1. Is MT payable only where the and twelfth month of a year of income. These +254 20 285 5510 instalment tax is higher than the MT? due dates are similar to those relating to LinkedIn The MT provisions stipulate that MT will normal instalment . be payable by a person if their instalment However, MT will NOT be applicable to: tax payable is higher than the MT. It is our understanding that this is an error in the • Exempt income under the ITA; drafting of the MT provisions given that the • Employment income chargeable to tax intention of the law was to levy MT where a under Section 5 of the ITA; person’s instalment tax is less than the MT • Residential rental income chargeable to tax payable. under Section 6A of the ITA; It is our understanding that this provision will • Persons paying turnover tax (“ToT”) as be shortly amended to reflect the intention of provided under Section 12C of the ITA; the introduction of MT.

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 specific professional advice. 2. Does MT apply to business 4. Is MT applicable to a taxpayer be minimal challenges in estimating and sectors that are currently taxed ‘other income’? paying MT. However, businesses falling under a separate regime? There is no clarity on whether other in the below categories will need to As noted above, the MT provisions incomes declared as such in the consider their tax obligations carefully exempt certain incomes and sectors financial statements would form part of and more regularly in order to comply from paying MT. There are other the gross turnover that is subject to MT. with their tax obligations: business/sectors that are taxed under This may be the case where a taxpayer • Taxpayers with low profit margins a different regime under the ITA, for has other streams either may oscillate between instalment example, the life insurance sector. taxed as business income or assessed tax and MT payments in a year of separately as specified sources of While it’s still unclear how MT will income. income. apply, it is our understanding that • Taxpayers in their first year of consideration is being given to Some of these incomes include operation will now be required to exempting businesses in the agricultural rental, interest, agricultural income, assess their business performance and insurance sectors from MT. management or consultancy fees, for purposes of paying MT. realised exchange gains etc. There • Agricultural companies that 3. What is the definition of gross are instances where a taxpayer will be ordinarily pay two instalments in a turnover for the purposes of paying income taxes on income from applying MT? year will now be required to pay four one source while it is in an income tax (4) minimum tax instalments. Currently, there is no definition for the loss position in relation to income from term “gross turnover” in the ITA or other other sources. • Entities remunerated on a cost-plus pieces of tax legislation that taxpayers model may need to assess their In view of the above, taxpayers will have can rely on. mark-up ratios. to grapple with the decision on whether In the absence of a definition, taxpayers to compute MT on gross turnover as In addition, persons with year ends may have to rely on the accounting declared in the financial statements or other than 31 December falling within standards when determining their gross the aggregate income from all sources. the MT regime may have to pay less turnover for purposes of computing Where there is lack of clarity as to than four (4) MT instalment payments MT. The accounting standards may still the revenue base for the purpose of for periods falling after 1 January 2021. create some confusion depending on applying the MT, it may be worthwhile It is however not clear how such MT their adoption by different taxpayers, for a taxpayer to seek a ruling from the instalments will be determined. sectors, and business operations. KRA. Some of the sectors that may be Furthermore, the final MT instalment significantly impacted will include 5. When will MT be due? payment is payable by the twentieth of the twelfth month in a year of income. It telecommunication companies, clearing As noted above, MT provisions will be is not clear how whether any additional and forwarding agents, joint venture effective from 1 January 2021. However, tax arising thereafter should be paid as companies etc. there are no transitional provisions for ordinary balance of tax payable within MT payments. Where there is lack of clarity as to four months after the year end. . the revenue base for the purpose of For taxpayers who fall within the MT Given the above challenges, the onus is applying the MT, it may be worthwhile regime (e.g. those reporting tax losses on the KRA to provide proper guidelines for a taxpayer to seek a ruling from the in the prior year and estimate to report to avoid confusion and tax disputes. KRA. tax losses in the current year) there may 6. Can MT be set off against thus the tax payable by an entity. Since the recognition of MT expense in corporate income tax credits? MT is based on turnover, taxpayers the financial statements remains a The MT provisions do not explicitly stand to lose the ability to benefit from challenge. capital allowance deductions and tax stipulate whether an MT income tax In addition, the above challenges losses for a year where they pay MT. liability can be offset against corporate relating to capital allowances and To exacerbate the situation, the tax tax overpayments/credits including tax losses may have an impact on loss carry-forward period is fixed at ten withholding tax, advance tax and estimation and recognition of deferred years meaning that taxpayers who are approved tax overpayments. tax assets as provided by IAS 12. unable to utilise these tax losses for Further, taxpayers whose income years when they were paying MT stand Taxpayers should therefore review gross turnover is subject to withholding to lose them after the expiry period. the IAS 12 provisions for guidance on tax falling within the MT regime may determination and recognition of the The National Treasury may consider find themselves in a perpetual tax income tax expense reportable in the repealing the ten-year carry forward overpayment position. financial statements where they fall period for tax losses. It is recommended that where a within the MT regime. taxpayer has such income tax credits 8. What is the impact of MT on Conclusion and is expecting an MT liability, such accounting for income taxes a taxpayer should make an application under IAS 12? Whilst the introduction of MT aims to widen the tax base, it creates to the KRA to offset such credits to the With the introduction of MT, it is not challenges that taxpayers will need to expected MT liability. clear how taxpayers falling within the navigate. Furthermore, the ambiguities MT regime should account for MT 7. What is the impact of MT on are likely to create compliance expense in the financial statements. IAS capital allowances and tax difficulties. It is understood that there 12 provides guidelines on accounting losses? may be further amendments to the for income taxes, that is, taxes based tax legislation and the introduction of Tax losses and capital allowances are on net taxable profit and after making guidelines to assist the taxpayer to ordinarily considered as “utilised” if the necessary deductible and non- navigate the MT provisions. they reduce the taxable income and deductible expenses. Therefore,

1% Rate of minimum tax payable of an entity’s gross turnover and will be a final tax

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