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TAX LAWS(AMENDMENT) ACT, 2018

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TAX LAWS (AMENDEMENT) ACT, 2018 PAGE ii

IntroductionTax changes are usually introduced annually through the Finance Bill, but in a break with tradition, the Tax Laws (Amendment) Act, 2018 (No 9 of 2018) (the Tax Laws Act) was assented to on 18 July 2018 and published on 25 July 2018. The changes introduced need to be understood in the broader context of the overhaul of the Income Tax Act, Cap 470 and the Government’s Big Four Agenda announced in June 2018. The overhaul of the Income Tax Act is meant to modernise Kenya’s tax code, while the Big Four Agenda is focussed on enhancing manufacturing, food security and nutrition, universal healthcare and affordable housing.

THE TAX LAWS ACTThe Tax Laws Act amends the Stamp Duty Act (Chapter 480, Laws of Kenya), Income Tax Act (Chapter 470, Laws of Kenya) and the Value Added Tax Act (No. 35 of 2013).

The content of this alert is intended to be of general use only and should not be relied upon without seeking specific legal advice on any matter

TAX LAWS (AMENDEMENT) ACT, 2018 PAGE 1

20% withholding tax on betting winningsThe Tax Laws Act introduces a new definition to the term “winnings” to mean the “positive difference between pay-outs made and stakes placed in a given month, for each player, payable to punters by book makers licenced under the Betting, Lotteries and Gaming Act (Cap 131 (the BLGA))”.

The Income Tax Act had previously adopted the definition of “winnings” under the BLGA as “winnings of any kind and a reference to the amount or to the payment of winnings shall be construed accordingly”. The Income Tax Act however has a proviso that the definition shall only apply in the case of winnings payable to punters (players) by bookmakers. The tax on winnings is applicable to both resident and non-resident persons with or without a permanent establishment in Kenya.

The Tax Laws Act introduces a 20% withholding tax on winnings as a final tax. As is the case with say withholding tax on dividend distributions which is a final tax, it is not compulsory for the bookmaker to have the winner’s Personal Identification Number (PIN) for purposes of deducting and remitting the withholding tax thereon.

This is in contrast to the previous position where winnings were tax-free for the punters while a bookmaker paid a 35% tax on gross revenue, in addition to corporate tax at 30% on adjusted net income which is still applicable to companies. Income tax or tax of a similar nature, including compensating tax paid on income, is not an allowable deduction.

By way of background, the 35% betting, gaming, lottery and prize competition tax provided for under the BLGA, is a separate tax from the corporate tax obligations under the Income Tax Act. It would be useful for the Kenya Revenue Authority (KRA) to provide clarity on whether the 35% betting tax is a tax deductible expense incurred wholly and exclusively in generating business income, and treated like a regulatory fee and not an income tax.

It would also be useful to get clarification on whether the 20% withholding tax applies on winnings from lotteries, gaming and prize competitions.

Effective Date: 1 July 2018


Affordable housing schemeAs part of the Government’s measures to fulfil its pledge to promote low-cost housing, the Tax Laws Act has enhanced the tax deductible contributions by a depositor to a registered home ownership savings plan (HOSP) from KES 48,000 to KES 96,000 annually. A registered HOSP is a savings plan established by an approved institution (such as a bank, insurance company or building society) and registered with the Commissioner of Income Tax for receiving and holding funds in trust for depositors for the purpose of enabling individual depositors to purchase a permanent house. Registered HOSP plans also allow for a tax exemption on interest earned from deposits made up to a maximum of KES 3 million.

The Tax Laws Act has introduced the “affordable housing relief” which is applicable to a resident individual who satisfies the Commissioner of Domestic Taxes that in a year of income, the person:

a. Is eligible to make an application under an affordable housing scheme;

b. Has applied and is awaiting the allocation of a house under the affordable housing scheme; and

c. Is saving for a purchase under an affordable housing scheme approved by the Cabinet Secretary for Housing.

The amount of affordable housing relief is 15% of the gross emoluments with a cap of KES 108,000 per annum. For example, where a person earns a gross pay of KES 100,000 per month the calculation will be as follows:

Breakdown Without HOSP With HOSP

Gross Pay 100,000 100,000

NSSF Contribution (200) (200)

HOSP contribution 0 15,000

Taxable pay 99,800 84,800

PAYE (before relief) 24,004 19,504

Monthly Personal Relief 1,408 1,408

Insurance Relief 0 0

Affordable housing relief 0 9,0001

PAYE DUE (22,596) (9,096)

Net Pay 77,204 90,704

1The affordable housing relief is capped at KES 9,000 per month but calculated as 15% of the employee’s gross emoluments.


To ensure that the affordable housing relief benefits the most deserving demographics, the Tax Laws Act further provides that a person who has been allocated a house under the affordable housing scheme and has benefitted from the affordable housing relief is not re-eligible for a subsequent relief.

The financing of home ownership in Kenya has been characterised in the past by low government support, high cost of finance and an underdeveloped mortgage market. The affordable housing scheme therefore demonstrates the Government’s commitment to provide decent, affordable housing to Kenyans, recognising that a majority of urban households live in informal settlements.

We note that this scheme is a potential ground for private public partnerships (PPPs) as the Government is keen to work with financial institutions, development finance institutions, private developers, manufacturers of building materials and cooperative societies to implement this key project under the Big Four Agenda. More thought should also be put into the place of low-cost and social housing within the affordable housing scheme, as these sub-sectors offer a significant social safety net for the urban poor.


Compensating tax for power producersEvery company is required to maintain a memorandum dividend tax account. Where a company has earned exempt income or income which is subject to a tax rate lower than the corporation tax rate of 30% and such income is distributed to shareholders by way of dividends, the dividend tax account would require a payment of compensating tax at a rate of 42.86% so as to reduce the dividend tax account balance to zero.

The Tax Laws Act now provides that compensating tax does not apply to a power producer under a power purchase agreement. Whilst this is a welcome move for the energy sector, it is important for power producers to further analyse the financial impact of this tax exemption in light of existing structures and other applicable tax incentives and exemptions such as investment deductions and withholding tax on interest on foreign loans.

In addition to this amendment by the Tax Laws Act, the Income Tax Bill is proposing to replace the current compensating tax provisions with a straight 30% tax on dividends paid out of untaxed profits if passed into law in the current state.



Amendment to the Value Added Tax Act Through amendments to the Value Added Tax Act, 2013, some zero rated items will now have VAT exempt status. The main difference between zero rate and exempt supplies is that the suppliers of zero-rated goods and/or services can still claim all their input VAT, but suppliers of exempt goods are either not registered for VAT or if they are, they cannot claim their input VAT.

As a result of the amendment, the suppliers of these goods and services will no longer be in a position to claim input VAT against their output VAT and are therefore likely to pass on this input VAT to consumers, potentially increasing prices. This potential price increase will however be dictated by the quantum of input VAT currently incurred in the value chain for the supply of these specific goods or services. Some of the notable goods and services which are now VAT exempt include:

1. Transfer of a business as a going concern (TOGC) by a registered person to another registered person. This is in contrast with the previous position where such a transaction was zero-rated. The impact of this change is that all input tax incurred by the business seller for the TOGC transaction would not be deductible for VAT purposes and would be passed on to the buyer as an additional cost. While this is not expected to have a significant impact, it should be noted that VAT incurred on transaction costs for the TOGC cannot be claimed for input VAT purposes by the seller.

2. The supply of maize (corn) flour, cassava flour, wheat or meslin flour and maize flour containing cassava flour by more than 10% in weight.

3. The supply of natural water, excluding bottled water, by a National Government, County Government, any political subdivision thereof or a person approved by the Cabinet Secretary for the time being responsible for water development (the CS), for domestic or for industrial use. More clarity will need to be provided on the requirements for approval by the CS, noting the critical role the supply of potable water plays in health and sanitation.

4. Articles of apparel, clothing accessories and equipment specially designed for safety or protective purposes for use in registered hospitals and clinics or by county government or local authorities in firefighting.

5. Taxable goods supplied to marine fisheries and fish processors upon recommendation by the relevant state department.

6. Goods imported by adult passengers arriving from places outside Kenya (whether on first arrival or by a returning resident of Kenya), subject to certain limitations and conditions.

7. Taxable goods for emergency relief (such as household utensils, food stuffs, materials for the provision of shelter or equipment and materials for health, sanitary or educational purposes) purposes for use in officially recognized refugee camps in Kenya and within a specified period, supplied to or imported by the Government or its approved agent, a non-Governmental organization or a relief agency authorised by the Cabinet Secretary for disaster management.


In addition to the above, the Tax Laws Act has zero rated ordinary bread and inputs or raw materials for electric accumulators and separators including lead battery separator rolls supplied to manufacturers of automotive and solar batteries in Kenya.


Amendments to the Stamp Duty ActThe Tax Laws Act exempts first time home owners from stamp duty, specifically for houses purchased under the affordable housing scheme. Stamp duty is ordinarily charged at a rate of 4% in urban areas and 2% in rural areas on the value of the house, as approved by a Government Valuer. By way of illustration, an apartment that would be sold for KES 10million in the city suburbs would otherwise attract stamp duty of KES 400,000 payable by the buyer. This amount now stands waived for first time home owners.

This is a welcome move. Additional clarity, however, will be required on what the “affordable housing scheme” is, given that it is not defined under Kenyan law as is the case with the “first time home owner”. Additionally, the process of identification of first time home owners will need to be thought through and guidelines issued by the Ministry of Transport, Infrastructure, Housing and Urban Development to this end.

The Stamp Duty Act has also been amended to provide that the Collector of Stamp Duty can delegate the valuation of properties to registered and practicing valuers appointed by the Chief Government Valuer. This is relevant to the sale of any immovable property in order to determine the true open market value of a property as at the date of transfer. The impact of this amendment is twofold: on one side there will be more valuers which may lead to speeding up of land registration, while on the other side there may be a conflict of interest where a valuer who has done a market valuation for a client is engaged to carry out the same exercise for the Government.

Guidelines on how appointments will be done and which valuer will be provided for a valuation exercise will need to be provided in order to have a clear understanding of how this new section will be implemented. Previously, the Chief Government Valuer was the only person authorised to determine the true open market value of properties. Apart from fast tracking the review and valuation of properties, this move will also ensure that there is no revenue leakage for the Government.

Effective Date: 1 October 2018


The VAT Act, 2013SUMMARY OF CHANGES TO

Supply (Goods and Services) Previous VAT Status

Current VAT Status

1 Transfer of business as a going concern by a registered person to another registered person.

0% Exempt

2 The supply of natural water, excluding bottled water, by the government, county government or any political sub-division thereof.

0% Exempt

3 Articles of apparel, clothing accessories and equipment specifically designed for safety or protective purposes for use in registered hospitals/clinics or by county governments in firefighting.

0% Exempt (it appears that Paragraph 9, Part B of the Second Schedule was inadvertently left in while making this amendment)

4 Taxable goods supplied to marine fisheries and fish processors.

0% Exempt

5 Supply of maize (corn) flour, cassava flour, wheat or meslin flour and maize flour containing cassava flour by more than ten percent in weight.

0% Exempt

6 Agricultural pest control products. 0% 16%

7 Goods imported by passengers arriving from places outside Kenya.

0% Exempt

8 Taxable goods for emergency relief purposes for use in specific areas supplied to or imported by the government, NGOs or relief agencies.

0% Exempt

9 Inputs or raw materials for electric accumulators and separators including lead battery separators rolls whether or not rectangular or square supplied to manufacturers of automotive and solar batteries in Kenya.

16% 0%


THE TEAM

Daniel NgumyPartner

E: [email protected]

Kenneth NjugunaSenior Associate

E: [email protected]

There are a number of ongoing tax reforms to the Kenyan income tax regime. It would be important for the progressive tax amendments introduced by the Tax Laws Act to be included in the Income Tax Bill before it is passed into law.

Should you require more information, please do not hesitate to contact Daniel Ngumy at [email protected], Kenneth Njuguna at [email protected] or the Tax team at [email protected]

Anjarwalla & Khanna3rd floor, The Oval

Junction of Ring Road Parklands & Jalaram Road WestlandsNairobi, Kenya

T +254 203 640 000 | +254 703 032 000 | +254 203 640 201Email: [email protected]

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