1. What is the most significant change to your region/jurisdiction’s tax legislation or regulations in the past 12 months?
Over the last 12 months, the East Africa region has witnessed significant macroeconomic challenges, including declining agricultural production, high inflation, dwindling forex reserves, weakening local currencies, rising cost of living, and increasingly vulnerable debt positions. With the aim of balancing between addressing these concerns and maintaining fiscal stability, the region’s tax legislation has witnessed significant changes.
For Kenya, such changes include administrative measures to grow VAT collections through the full roll-out of the electronic tax invoice management system (eTIMS) and extending similar invoicing requirements to corporate income tax in determining the deductibility of expenses. There are also increases in taxation, including higher individual tax rates, increase in turnover tax rates, increased VAT and excise duty rates on multiple products – most notably, VAT on petroleum products – and tax base expansion into income derived from the monetisation of digital content, as well as tax on transfers of digital assets. Kenya has also witnessed additional levies on employment income, including the introduction of the Affordable Housing Levy on employees towards the government’s affordable housing programme.
From a tax controversy standpoint, a significant development in Kenya has been the repeal of waiver provisions on penalties and interest, accompanied by increases in the penalties levied for non-compliance with tax laws. At the same time, the government has introduced an amnesty of interest, penalties, or fines on unpaid tax accruing before 31 December 2022. The tax legislation has been further amended to increase the timelines for the settlement of tax disputes via alternative dispute resolution (ADR), which will likely encourage more amicable tax dispute resolution between taxpayers and the Kenya Revenue Authority.
In Tanzania, the government has also amended tax legislation to boost revenue collection, including expanding taxes on items such as tobacco products, increasing excise duty rates on products such as aged motor vehicles and imported energy drinks, as well as introducing new VAT measures aimed at incentivising sectors such as tourism and the local textile industry. Other measures include the simplification of tax regimes for certain sectors, such as the transportation of passengers and cargo; and a widening of the tax base to tax gains from transactions such as offshore transactions that dispose of interests locally.
Regarding tax administration, the applicable legislation has been amended to allow taxpayers to maintain records in virtual servers out-of-country and to also allow taxpayers to use other electronic means, such as mobile phones, as fiscal devices for purposes of complying with electronic tax invoice requirements. In addition, seeking to make the refund process more efficient, the Tanzanian Finance Act, 2023 amended the applicable legislation to allow taxpayers to apply for refunds within three years from the date of payment of tax in excess or from the date of a decision that gives rise to a credit.
From a Ugandan perspective, in the last two years, we have seen the government refocusing its efforts on reforms in tax administration and compliance, rather than on introducing new taxes or increasing tax rates. Such efforts include increased revenue authority audits, integration with other government systems for greater transparency, digitalisation, and the requirement for tax identification numbers for licensing under other regulatory bodies. While these efforts have invariably led to a higher number and quantum of assessments and tax disputes, the government has also enacted ADR regulations to allow taxpayers to resolve tax disputes with the revenue authority via mediation. To further enhance compliance, the government has also introduced a voluntary disclosure programme to encourage taxpayers to disclose unpaid tax in exchange for a full or partial waiver of interest and penalties. Finally, reflective of global developments in addressing base erosion and profit shifting, Uganda has also ratified the Convention on Mutual Administrative Assistance in Tax Matters Act to enhance cooperation with other countries to tackle tax avoidance and evasion.
2. What has been the most significant impact of that change?
From a Kenyan perspective, recent amendments to obligate all taxpayers carrying on business to issue electronic tax invoices, as well as to limit the deductibility of input VAT and allowable expenditure for corporate tax purposes to expenses supported by electronic invoices, aim to seal revenue leakages and help the revenue authority gain visibility of transactions with tax implications. However, such changes have had the effect of increasing compliance costs to businesses, especially the informal sector, small and medium-sized enterprises, and micro, small and medium enterprises. Increased consumption taxes on products such as petroleum products have also led to a surge in the prices of commodities and consumer goods. This increase has, in turn, had a detrimental impact on consumption taxes collected due to reduced consumption, particularly in the petroleum sector.
From a tax administration standpoint, the repeal of waivers of penalties and interest may prove to be needlessly punitive, especially to taxpayers whose non-compliance may be non-deliberate or occasioned by extraneous factors. Consequently, regular tax compliance reviews may be required to uncover non-compliance with tax legislation at the earliest opportunity to avoid the accumulation of interest and penalties. Nonetheless, the amnesty of penalties and interest accruing up to December 2022, which will run till June 2024, affords taxpayers an opportunity to regularise their affairs and comply with their tax obligations.
In Tanzania, efforts to rationalise the refund application process have been favourable for taxpayers, whose refund applications would have previously been rejected on technicalities surrounding timelines, in disregard of the amount of time taken to resolve tax cases with the revenue authority. Additionally, changes to the electronic tax invoice requirements to allow taxpayers to use technologies such as mobile phones, as an alternative to the conventional electronic fiscal machines, are likely to enhance tax compliance and alleviate the burden of low-income taxpayers who cannot afford to purchase electronic fiscal machines.
For Uganda, the voluntary disclosure programme will provide an opportunity for taxpayers who are not certain of their compliance status vis-à-vis their different tax obligations to voluntarily disclose and remit any unpaid principal tax, with the added incentive of obtaining a waiver of the attendant penalties and interest. Furthermore, the enactment of the ADR regulations is likely to encourage more amicable tax dispute resolution between taxpayers and the Uganda Revenue Authority.
3. How do you anticipate that change impacting your work and the market moving forwards?
Changes in tax legislation, especially those with actual or perceived adverse impacts on taxpayers, are likely to result in more tax disputes, as revenue authorities continue ramping up their efforts across the region to enhance compliance and tax administration. From a tax controversy perspective, this development will create opportunities for tax consultants to provide professional guidance and representation, which facilitates speedy and amicable resolution of tax disputes.
With revenue authorities integrating technology into enforcement measures, as well as enhancing their number and quality of audits, the changes also provide an opportunity for taxpayers to review their tax affairs proactively and routinely, with the help of tax consultants, to check that compliance with tax obligations is above board.
4. How has this changed the way you offer tax advice?
With the increasing number of tax disputes, frequent changes in tax legislation, and increased pressure from the revenue authorities, coupled with increasing adoption of ADR as a dispute resolution mechanism, we leverage our experience and understanding of the revenue authority’s processes and escalation protocols to enhance dispute resolution through ADR. This provides opportunities for clients to resolve tax disputes in a more efficient manner.
We focus on fast-tracking the dispute resolution process to avoid lengthy disputes. This is done by advising clients to proactively engage revenue authorities to expeditiously resolve matters. We also assist clients by analysing the issues under dispute to advise if the issue is suitable for ADR or should be submitted to the Tax Appeals Tribunal for adjudication. In addition, to help our clients keep up with the number and far-reaching implications of changes in tax laws, we have organised training sessions on both general and sector-specific tax compliance matters. Finally, in response to the revenue authorities’ continued reliance on technology, as the Deloitte East Africa team, we have developed technology solutions to enhance our clients’ competence in areas such as routine compliance, transfer pricing documentation, and tax reconciliations.
5. What potential other legislative/regulatory changes are on the horizon that you think will have a big impact on your region/jurisdiction?
In Kenya, the government is finalising the National Tax Policy, whose main aim is to set broad policy guidelines to guide tax reforms and review tax legislation over a period of five years. The government has also published a draft Medium-Term Revenue Strategy (MTRS), which aims to provide a four-year roadmap from 2023–24 to 2026–27, to allow stakeholders to have foresight of the planned tax measures towards enhancing domestic revenue mobilisation. The key proposed tax measures include the reduction of the corporate tax rate to 25%, the introduction of a carbon tax and motor vehicle circulation tax, and increased use of technology for transaction monitoring and tax compliance.
6. What are the potential outcomes that might occur if those changes are implemented?
If implemented, the National Tax Policy in Kenya will guide tax reforms and the review of tax legislation over a period of five years, resulting in a more predictable, fair, and equitable tax system, and precluding some of the challenges arising from annual changes in tax legislation, including uncertainty in the tax regime and tax and/or legal disputes. The MTRS, on the other hand, contains radical tax and policy measures which, if implemented, will help in raising the tax-to-GDP ratio, increase tax compliance rates, and reduce market distortions through reviews of tax rates, incentives, and tax expenditures.
7. Do you think that change will have a positive effect on both your practice and the wider regional/jurisdictional market?
If properly implemented, the National Tax Policy and MTRS in Kenya will enhance domestic revenue collection over the medium term, and position tax policy, revenue administration, and legal reforms around an articulate plan led by the government and supported by stakeholders. However, some of the proposed tax and policy reforms – such as reviews of tax reliefs and incentives, alongside increases in tax rates on various services like insurance – could have the counterproductive effect of discouraging investment and tax compliance. We would encourage the review of proposed changes with stakeholders’ input to ensure the successful implementation of the regulations, as well as to enhance the accountability of the policy-making process.
8. Are there any regulatory/legislative changes you believe should be implemented in your region/jurisdiction?
From a tax administration and controversy perspective, there is a need to rationalise the refund process across the region, by ensuring strict adherence to timelines by revenue authorities and establishing an efficient funding structure for the settlement of approved refunds to prevent delays.
In addition, while the increased adoption of ADR across the region is welcome, there is a need to guarantee the autonomy of the process from revenue authorities to ensure fairness for taxpayers.
Furthermore, even as the East Africa region’s revenue authorities enhance their tax audits, it may be necessary to legislate the time within which the audits should be concluded. To achieve this, revenue authorities should embrace sampling and demand documents for examination in line with the sample.
In the wake of increased trade among the East African countries, the region lags behind in the ratification of the East Africa double tax agreement. Several big financial institutions in Kenya have established subsidiaries across the region. This has given rise to numerous issues with related-party transactions.
Finally, recent efforts by some countries, like Kenya, to limit waivers of penalties and interest run against conventional practice around the world and could prove to be needlessly punitive to taxpayers. Such measures should therefore be reviewed to provide for a waiver process guided by a defined policy or legislative framework.
9. How do you believe those changes would help improve the tax landscape in your market?
Ensuring adherence to specific timelines for tax refunds will provide much-needed certainty in the refund process and allow taxpayers to obtain refunds of overpaid tax, which can be redirected towards income-generating uses. Additionally, an efficient funding structure with respect to approved refunds will serve to ensure the availability of resources to settle approved refunds in a timely manner.
Guaranteeing the autonomy of the ADR process will build taxpayer trust, thus encouraging more taxpayers to resolve their disputes amicably with revenue authorities through ADR. An independent ADR process also serves to protect taxpayers’ rights, including the right to a fair hearing.
The establishment of a sound legislative or regulatory framework to govern the tax audit process will ensure that the conduct of tax audits by revenue authorities is efficient, effective, and predictable, with clearly stipulated timelines, and is further guided by conventional audit standards.
The ratification of the East Africa double tax agreement would help navigate the complex issues and tax disputes arising from related-party transactions among multinational enterprises in the region.
Finally, a review of the framework guiding waivers of penalties and interest would help prevent the needless penalisation of taxpayers with genuine cases that would warrant tax relief. Such cases include the erroneous imposition of tax, penalties, or interest due to changes in law. In addition, tax disputes often translate to complexities – for instance, differing legal interpretations of tax statutes – that result in erroneous/overstated penalties and interest. A well-framed waiver process would ensure that such cases do not unnecessarily place taxpayers at a disadvantage.
10. How are issues surrounding the taxation of the digital economy affecting your work?
In the last four years, tax legislation across the region has witnessed multiple amendments pertaining to the taxation of the digital economy. In Kenya, this has taken the form of digital service tax (DST); VAT on electronic, internet, and digital marketplace supplies; digital asset tax; and withholding tax on digital content monetisation. Tanzania has also adopted similar measures, including DST and VAT on electronic services. In Uganda, there was also a proposal in 2023 to introduce a digital tax on non-residents, although this was not enacted into law.
The upshot of the above-mentioned developments is that the taxation of the digital economy is an area of focus for revenue authorities in the East Africa region. We assist clients in undertaking reviews of their activities to ascertain whether tax obligations pertaining to digital services are applicable. We also support clients with registration and routine compliance with tax obligations. Crucially, the tax teams in the region have proactively engaged the public and other stakeholders to continuously provide training on the tax implications to their businesses.
11. How would you describe the tax authorities’ approach in your region/jurisdiction?
With the rising pressure to enhance revenue collections, tax authorities have generally centred their approach toward taxpayers around two key areas: enhancing compliance and improving tax administration measures.
On compliance, tax authorities have digitised their systems, increased taxpayer education and stakeholder engagement, and simplified processes such as filing returns and making payments. Tax authorities, such as in Kenya, also have revenue officers assigned to individual taxpayers or clusters of taxpayers, to help them manage and comply with their tax obligations.
Regarding tax administration, tax authorities have adopted measures such as electronic tax invoicing requirements, the use of data analysis to identify high-risk areas, increased tax audits, and integration of revenue administration systems with both government and taxpayer systems for enhanced visibility. Revenue authorities have further implemented measures to seal tax leakages by modernising the taxation framework, including in taxing novel transactions and forms of business in the digital economy and related-party transactions. On the resolution of tax disputes, revenue authorities are also increasingly adopting ADR and other collaborative measures, indicating a positive shift towards cooperation with taxpayers.
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