1 What is the most significant change to your region/jurisdiction’s tax legislation or regulations in the past 12 months?
The most significant changes in Kenya, in the past 12 months, were the Tax Laws (Amendment) Act, 2024, and the Tax Procedures (Amendment) (No.2) Act, 2024 (TPA), which were assented into law on 11 December 2024 and became effective on 27 December 2024.
Among other changes, the new laws introduced a domestic minimum top-up tax rule. This provision allows Kenya to impose an additional tax on excess profits from large multinational enterprises (MNEs), operating within the country, with a consolidated annual turnover of $782 million (€750 million) or greater, if the combined effective tax rate in a year is less than 15%. This amendment is in line with the Global Anti-Base Erosion Rules spearheaded by the OECD to ensure that MNEs pay a minimum effective tax rate of 15% in all the countries they operate in.
The new laws also repealed the digital service tax (DST) regime, replacing it with a significant economic presence (SEP) tax. The SEP tax applies to income earned by a non-resident person from the provision of services through providing services in a digital marketplace within Kenya, specifically when the user of the service is located in Kenya. The taxable profit of a person liable to pay the SEP tax shall be deemed to be 10% of the gross turnover, which will then be taxed at a rate of 30%.
Additionally, the act extended the deadline for payment of unsettled principal taxes under the tax amnesty programme from 30 June 2024 to 30 June 2025. Furthermore, the TPA was amended to extend the time covered by the tax amnesty from periods prior to 31 December 2022 to 31 December 2023. This is a step forward that grants taxpayers additional time to re-evaluate their tax compliance status for periods up to 31 December 2023, clear any outstanding principal taxes, and obtain a full waiver of the penalties and interest.
2 What has been the most significant impact of that change?
MNEs with operations in Kenya will be required to monitor their effective tax rates to comply with the minimum top-up tax requirement. The law has not yet been implemented as it is still awaiting regulations to be issued by the cabinet secretary for the National Treasury.
Regarding the introduction of SEP, Kenya joined other African jurisdictions, such as Nigeria, which have introduced SEP tax to their tax laws. SEP tax is similar to DST in administration; however, while DST was chargeable at 1.5% of the gross turnover, SEP tax will apply at an effective tax of 3% of the gross turnover. Non-resident individuals with less than KES5 million (approximately $38,000) annual turnover are exempt from SEP tax. Being a new law, it is unclear whether the threshold is based on the company’s global turnover or turnover on services provided to users in Kenya.
The extension of the tax amnesty is beneficial for taxpayers as they have more time to review potential areas of non-compliance, as well as resolve outstanding tax disputes, with the aim of settling any principal tax due by 30 June 2025 and potentially having the penalties and interest waived. The tax amnesty will also result in revenue collection for the government, considering that the previous tax amnesty programme yielded $338,469 million in the fiscal year 2023–24.
3 How do you anticipate that change impacting your work and the market moving forwards?
The legislative changes mentioned are intended to enhance compliance through the adoption of anti-base erosion measures and broadening the tax base.
4 How has this changed the way you offer tax advice?
International tax standards have significantly reformed in the last decade to curb base erosion and profit shifting. Tax changes, such as pillar two, are now being adopted in the Kenyan legislation. It is critical to keep abreast of the global tax landscape and build in-country capability in terms of teams to support clients in navigating the complex tax environment. Importantly, tax advice is also focusing on the possible impact in other jurisdictions where the MNE operates.
5 What potential other legislative/regulatory changes are on the horizon that you think will have a big impact on your region/jurisdiction?
There is an emphasis on strengthening the tax administration processes and expanding the tax base using technology. The TPA was amended to allow the Kenya Revenue Authority’s commissioner to require taxpayers to integrate with the revenue authority’s authorised electronic systems for purposes of transmitting electronic documents. As a result, it is anticipated that the revenue authority will continue to implement digital transformation initiatives by requiring taxpayer systems to be integrated with its systems. This will enable the revenue authority to access information on a real-time basis. The focus will therefore shift from the provision of documents to the interpretation of the data and its overall impact on tax.
6 What are the potential outcomes that might occur if those changes are implemented?
The proposed integration of taxpayer systems aligns with international tax practices and the global shift toward digital tax administration. This initiative is driven by the need to obtain real-time data access on the taxpayer’s information in order to increase revenue collection by changing from manual systems of tracking and enforcing compliance to fully digitalised platforms.
7 Do you think that change will have a positive effect on both your practice and the wider regional/jurisdictional market?
Digitalisation of tax administration is a positive move aimed at simplifying tax compliance and expanding the tax base. Most taxpayers have stated adopting tools and technologies into their business processes improves the quality of their tax data and enhances compliance.
The system integration process should be implemented gradually to comply with data privacy laws and provide sufficient time for taxpayers to invest in appropriate systems and acquire the right skills to manage the change effectively.
8 Are there any regulatory/legislative changes you believe should be implemented in your region/jurisdiction?
Yes. The introduction of advance pricing agreements (APAs) that allow taxpayers to enter into binding agreements with the revenue authority on the determination of transfer prices for future intercompany transactions.
There is an increased focus on transfer pricing audits, resulting in several disputes between multinational companies and the revenue authority. Adopting APAs would provide certainty for businesses by enabling companies to agree with the revenue authority on the determination of transfer prices before the transactions happen. An APA process would also be beneficial to the tax authority by reducing administration costs and assisting in the reallocation of resources currently engaged in performing transfer pricing audits.
9 How do you believe those changes would help improve the tax landscape in your market?
Managing transfer pricing disputes is a key area of concern for multinationals in Kenya.
Apart from the complex tax landscape, multinationals also face audits, dispute resolution mechanisms, and potential reputational concerns. An effective APA process would provide certainty by pre-agreeing the determination of transfer prices with the revenue authority rather than dealing with transfer pricing audits several years after the intercompany transactions have taken place.
10 How are issues surrounding the taxation of the digital economy affecting your work?
The changes in the taxation of the digital economy present opportunities for us to assist clients. We continue to keep abreast with global trends and understand the impact of tax changes on our clients’ businesses. We are also engaging with the revenue authority and policymakers to confirm that the proposed changes are coherent and create certainty for the businesses.
11 How would you describe the tax authorities’ approach in your region/jurisdiction?
The Kenyan government has faced pushback regarding the implementation of certain tax measures, primarily due to concerns about the increasing tax burden on the taxpayers. While the overall goal of raising revenue and reducing the fiscal deficit is appropriate, the challenge lies in the choice of measures to be implemented, while taking into account the existing taxation requirements on the taxpayers. The Kenyan tax authority is balancing the requirement to meet its revenue targets with an economy that is grappling with reduced disposable income for its citizens and reduced business margins due to rising borrowing costs, currency depreciation, and other macroeconomic factors.
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