The current administration is committed to bringing legislative amendments to the fiscal policy through the Finance Bill, 2023, and the Budget Policy Statement.

President William Ruto noted that the changes in the fiscal policy would introduce the National Tax Policy within the next three months (effective on July 1, 2023) to encourage investment in Kenya by ensuring that investors can anticipate a predictable and clear tax environment.

After the President’s speech during the regional business summit in Nairobi, the review of the Framework for the Digital Service Tax (DST) has been a hot discussion in the country. The DST came into effect on January 1, 2021, and is applicable to earnings from businesses conducted online or through electronic networks, including digital marketplaces. The scope of taxable items under DST is outlined in our previous article herehttps://vellum.co.ke/digital-transformation-3/?utm_source=rss&utm_medium=rss&utm_campaign=digital-transformation-3

President Ruto’s assertion to eliminate DST in Kenya and evaluate its strategy, and harmonize it with the two-pillar model promoted by the OECD (Organisation for Economic Co-operation and Development) and Inclusive Framework (IF). Pillar one deals with the taxation strategy for multinational companies with annual profits of over 10% and global revenue of over €20 billion. It enhances the taxing rights of market jurisdictions, which are primarily where users are situated, if there is a business’s intentional and ongoing participation in the economy through activities in, or remotely directed at that jurisdiction. Pillar two presents a methodical approach known as the income inclusion and undertaxed payments guidelines that are intended to ensure that globally functioning businesses pay a minimal level of tax regardless of where their headquarters are or the jurisdictions they operate in (the GloBE rules).

President Ruto stated that a thorough assessment of the enabling legal framework of SEZs (Special Economic Zones) and EPZs (Export Processing Zones)  is presently underway with the goal of offering greater tax benefits while removing barriers to attract investors. Currently, supplies made to SEZs and EPZs are zero-rated. Any input tax incurred on such supplies is claimable. We anticipate the changes to be brought about that will enhance the role of SEZs and EPZs in luring investments.

There is an anticipation of the removal of VAT on exported services from the Finance Bill 2023 that will result in either an exemption from or a zero-rating of the VAT on services exported. Currently, VAT on exported services is subject to 16% VAT. This is a contradiction to the Destination Principle & the Universal VAT/GST Guidelines. This has proved to make Kenya less competitive and prevented investors from using Kenya as their regional hub to serve regional markets. 

Additionally, all validated tax refund claims must be paid within six months starting in June 2023. The taxpayer will be entitled to offset their claim against future tax liability without additional application to the KRA in circumstances where a refund is not made by the KRA within this window for any reason. Delays in tax refunds have been a big issue for many taxpayers, as currently, the Tax Procedures Act provides that the Commissioner shall repay the overpaid tax within a period of two years from the date of application, failure to which the amount due shall attract an interest of 1% per month or part thereof of the such unpaid amount after the period of two years.  Since the government is making a policy shift on the issue of Tax refunds, we anticipate additional details on the mechanics of this provision’s implementation.

Another anticipated change in the policies is the reversal announced by the President on the 30% equity participation. The National Information Communications and Technology (ICT) policy guidelines, 2020 provide that only companies with at least 30% substantive Kenyan ownership, either corporate or individual are the ones licensed to provide ICT services. Currently, companies without majority Kenyan ownership are not considered Kenyan, and thus not calculated as part of the 30% Kenyan ownership calculus. Licensees normally have 3 years to meet the local equity ownership threshold to apply to the Cabinet Secretary for a one-year extension with appropriately acceptable justifications. This clause was added to the policy to promote Kenyan participation in the ICT and science and technology sectors through equity ownership however, it restricted foreign investment in Kenya’s ICT industry and made it more difficult for tech firms to raise money over the required level of equity and to comply with regulatory requirements for the establishment, which hampered the expansion of tech startups in the nation.  Crapping off this requirement has its own merits and demerits. 

The President stated that this was a step that would make it simpler for international businesses to open in Kenya without having to worry about ownership status and create investment opportunities for international companies which will be of benefit to Kenya.