Introducing the Finance Act 2016: A Brief Commentary

By Gatuyu Justice

The Finance Act 2016 (the Act) is now in force. The Act makes introduces key changes in business and taxation laws in Kenya, changing the terrain, significantly. I have gone through the Act and extracted ten key changes that you need to know. Stay tuned.

1. Local shareholders, go away

The Companies Act 2015 has been amended removing the 30% Local Shareholding Requirement for foreign companies. This was effected by deleting Section 975 (2) (b) of the Companies Act which stated that for a foreign company to be registered in Kenya, it needed to have at least 30% of its shareholding being held by Kenyan citizens by birth. The provision was ‘toxic’ and almost impractical to implement. The national assembly seemed not to appreciate the differences between a branch and a subsidiary. But this is now water under the bridge.

changes

2. Let the commodities trade flourish

The Capital Markets Act has been amended by adding provisions introducing the commodities market. The market will be regulated by the CMA. The process of starting the commodities markets have been moving on at snail pace. Rwanda has already established a very robust commodities exchange which is the premier in East Africa.

It is hoped this amendment will fast-track the process of establishing commodities exchange, which will provide efficient avenue for trading in agricultural commodities such as coffee, tea and sugar and also the minerals. It will probably be linked up with the upcoming Futures Exchange of the Nairobi Securities Exchange for purposes of trading in agricultural futures contracts.

3. Online Forex Brokers, you are tamed!

The Act has brought the carnival of online Forex brokers to unfortunate end. These were generally unregulated and operated on freelance basis. The Finance Act introduced provisions in the Capital Markets Act, bringing online trade in Forex under the radar of the Capital Markets Authority (the CMA). This will ensure the sector is regulated.

The CMA had already drafted regulations for regulating these Forex traders, which provided that they would be regulated by the Central Bank of Kenya. It is not clear what brought the change of heart. Forex trading is generally in the realm of money markets which is under the ambit of the CBK. It would have thus been appropriate to have the CBK regulate the Forex traders, and CMA concentrate in its role mandate of ensuring efficient and stable capital markets.

4. Let me transfer to my spouse

The Act has introduced changes in the capital gains tax regime. Some of the transactions now exempt from the capital gains tax include the following:

a) transfer of assets between spouses, between former spouses as part of a divorce settlement or a separation agreement;

b) transfer of assets to immediate family; and

c) the transfer of assets to a company where the spouses or spouse and immediate family hold 100% shareholding, from capital gains taxation.

These amendments have a retroactive application, with effective date being 9th June 2016.

5. Removing specialties on special zones

The Special Economic Zones Act 2015 created Special Economic Zones (SEZ), were established as distinct tax territories, with goods or services supplied to SEZs being exempt from all taxes. The word “import” and “export” includes not only international trade, but also goods exported out of and goods imported in to the Special Economic Zones. However, the blanket exemption of all taxes on SEZ has been tempered with, providing that exemption would be as outlined in the respective tax statutes.

6. More teeth to Njoroge: The Governor can now bite!

The Central Bank Governor has been complaining penalties provided in the banking laws to streamline errant banks are too mild. The Act has introduced new penalties. Now, any person or institutions and persons who fail to comply with directions of the Central Bank under the Banking Act or the Prudential Guidelines will now be liable for 20 million shillings penalty for institutions and credit reference bureaus. For natural persons, the penalty is 1 million shillings and further 100,000 shillings in each case for each day in default.

7. Supporting the builders of the nation

The Act has reduced the corporation tax payable for companies constructing at least four hundred residential units annually to 15% subject to the approval of the Lands, Housing & Urban Development CS. This benefit is effective as from the 1st of January 2017.

8. Milking the gamer

Legislator Jakoyo Midiwo has been on the case of gamers for some time, demanding they be taxed. The Act has reacted positively to Midiwo’s pursuit. It introduces a 7.5% betting tax on gaming revenue, which has been defined as the gross turnover less the amount paid out to customers as winnings. Also introduced are the lottery tax at 5% of the lottery turnover and a gaming tax at 12% of the gaming revenue.

9. Where is my refund?

A tax payer who has overpaid tax, the tax payer is entitled to refund within 2 years. If this is not done, the refund will attract an interest, chargeable to KRA. This has corrected an anomaly where KRA takes years to refund overpaid taxes. The time period for application for a refund on overpaid tax has been added from 1 year to 5 years from the date on which the tax was paid. Further, the Commissioner has 90 days to notify the taxpayer of a decision in relation to the refund of overpaid tax application.

10. Nits and bits

Other minor changes include:

a) With approval from the Cabinet Secretary for Sports, Corporate entities sponsoring sports activities will be allowed to deduct all the expenses. This will be effective 1st January, 2017.

b) You can now file return in different currencies other than the Kenyan shilling

c) Pay As You Earn rates have been increased. More taxes.

d) There is a new formula for calculating inflation adjustment. The formula is A (1+B) where A is the rate of excise duty before adjustment for inflation and B the average rate of monthly inflation of the preceding year.

The author is an Advocate of the High Court of Kenya.

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