On 5 May 2021, the Parliament of Kenya has published the finance bill 2021 providing the following tax measures:
Reintroduce the definition of the term ‘‘Control”
The definition of the term “control” was deleted with the repeal of the second appendix to the ITA. The Finance bill 2021 aims to amend Section 2 of the ITA to provide a new definition of control in relation to a person to mean. Control currently means that a person owns at least 25% of the shares or voting rights. The bill proposes to reduce this to 20%. Control would also arise when a person grants a company to an entity that is at least 70% of the book value of the person’s total assets, or when a person has guaranteed at least 70% of a company’s total debt, and when a person has a mandate to appoint more than half of the board of directors or at least one executive director.
CbCR requirement
The bill proposes CbCR to be enacted in line with the requirements of the members of the OECD / G20 Inclusive Framework on BEPS. The ultimate parent company of a multinational group based in Kenya must file an annual return within 12 months of the last day of the group’s financial year if the company’s gross sales exceed a prescribed threshold. The bill is silent on the threshold.
New “permanent establishment” definition
The bill proposes to repeal the current definition of “permanent establishment” (PE) and introducing a new definition that adapts to the international best practices of the OECD and UN model tax treaties as well as the BEPS project. According to the proposed definition, the use of the specific exceptions to the existing definition would be discontinued, particularly in the area of digitized companies. In addition, the proposed definition includes an explicit recognition of services that are preparatory or supportive in nature, which are not covered by the existing definition and which have given rise to disputes between the tax authority and taxpayers.
Extend the scope of Digital Services Tax (DST)
The bill extends the scope of DST to all income generated by businesses over the Internet or electronic networks. This is a deliberate attempt to broaden the tax base of the digital economy.
Indefinite carryforward of tax loss
The Bill proposes to omit the 10-year time limitation. If the Bill is passed, taxpayers will utilize a tax loss arising in a year of income to reduce taxable business income in subsequent years indefinitely.
Deductibility of interest expense on loans
The bill aims to tighten the thin capitalization requirement from a simple 3: 1 ratio to 30% of EBITDA, thereby capping all borrowing expenses. Interest paid or payable to related parties and third parties is limited to 30% of earnings before interest, taxes, depreciation and amortization (EBITDA). Free income is excluded from the income.
Amendment to statute of limitations
The Bill proposes to extend the time period that a taxpayer is required to maintain their records from 5 to 7 years. The time limit within which a taxpayer can amend a tax return is also to be increased from five to seven years.
