On January 1, 2022, several key tax amendments contained in the Finance Act, 2021 (the Act) took effect. We take a look at these changes and the likely impact on taxpayers.

Requirement for multinational enterprises to file returns on activities in other jurisdictions

An ultimate parent entity of a multinational enterprise group will be required to submit to the Commissioner a return describing the group’s financial activities in Kenya, where its gross turnover exceeds the prescribed threshold, and in all other jurisdictions where the group has a taxable presence.

The provision only captures MNEs headquartered in Kenya; hence most international corporations that have subsidiaries in Kenya will not be impacted by the amendment.

The disclosure requirement is likely to increase transparency and assist the revenue authority in undertaking transfer pricing audits.

Interest restrictions

The Act restricted interest deduction to a maximum of 30% of Earnings Before Interest Tax, Depreciation and Amortization (EBITDA). It exempted banks and micro and small enterprises registered under the Micro and Small Enterprises Act, 2012.

This exemption is vital as interest expense forms a significant percentage of the total expenses of banks.

The restriction will also apply to payments that are economically equivalent to interest and expenses incurred to raise the finance.

Offsetting future tax liabilities

Taxpayers will now offset future tax liabilities with overpaid tax under section 47 (4C) of the Tax Procedures Act.

The change will offer relief to taxpayers as it automatically creates a tax credit that can offset future tax liabilities whenever the Commissioner is satisfied that there is an overpayment of tax. It also does not appear to limit the type of tax that such tax credits can be offset against.

Tax rebate for graduate apprenticeships

The provision under the Income Tax Act granting tax rebates to employers has been expanded to include apprenticeships provided to graduates from technical and vocational institutions. It was previously restricted to university graduates.

This amendment is a welcome move for employers who employ persons from these institutions as eligible employers will be allowed to deduct a tax rebate equal to 50% of the amount of salaries and wages paid to at least 10 apprentices. The rebate is in addition to 100% of the expense incurred on salaries and wages already allowed under Section 15 of the Income Tax Act.

Insurance relief

Resident individuals will begin enjoying insurance relief of 15% of the contribution made to the National Hospital Insurance Fund. An individual contributing KSh1,700 per month will enjoy a tax relief of KSh255 per month against the tax payable to the Kenya Revenue Authority.

This change is likely to increase the uptake of the NHIF insurance cover amongst Kenyans, potentially boosting the government’s efforts towards providing Universal Health Coverage in the country.

Capital allowances

    i. Definition of manufacture to apply to all distributors of electricity

The Act amended the definition of “manufacture” to allow electricity distributors who do not supply to the national grid to be eligible for investment allowances of 50% on the buildings and machinery used to generate electricity.

    ii. Definition of civil works

Civil works have been defined to include roads and parking areas; railway lines and related structures; water, industrial effluent, and sewerage works; communications and electrical posts and pylons and other electrical supply works; and security walls and fencing.

The definition provides clarity as to what civil works cost can be included to claim capital allowances.

  iii. Definition of farm works

Farm works has been defined to include farmhouses, labour quarters, any other immovable building necessary for the proper operation of the farm, fences, dips, drains, water and electricity supply works, and other works necessary for the proper operation of the farm.

The definition will provide clarity when computing capital allowance.

  iv. Investment allowance on certain capital expenditure

Investment deduction at 100% shall be applicable where the cumulative investment value in the preceding three years outside Nairobi City County and Mombasa County is at least two billion shillings. It will also apply where the investment value outside Nairobi City County and Mombasa County is at least 250 million shillings in that year of income.

In addition, investments in a special economic zone (SEZ) will attract an investment deduction at 100%.

This change aims to incentivize investments in SEZs as well as in locations outside Nairobi and Mombasa.