Unraveling the Financial Act 2023: Kenya Tax Changes Taking Center Stage

Introduction:

In a landmark move, President William Ruto signed the Finance Act 2023 into law on June 26, 2023. This significant legislative development ushers in a new era for Kenya\’s financial landscape, bringing forth crucial updates on KRA regulations, income tax reforms, and implications on rental income. In this comprehensive blog post, we\’ll dissect the key highlights of the Financial Act 2023 and explore how these changes will impact individuals, businesses, and the broader economy.

1. Income Tax Act Reforms: Navigating the Adjustments The Finance Act 2023 introduces noteworthy amendments to the Income Tax Act, particularly in the taxation of employment income. Changes include the exclusion of amounts received by employees as payment for official travel from taxation, provided they align with the approved standard mileage rate by the Automobile Association of Kenya. Additionally, the act addresses the taxation treatment of club entrance and subscription fees, offering clarity on how these expenses will be taxed and allowing for certain deductions against the employer\’s income. The timing of the market value of shares for taxation purposes has also been clarified, offering a more precise framework for taxing employee benefits.
2. Taxation of Repatriated Income for Non-residents: A Paradigm Shift A significant paradigm shift comes in the form of the taxation of repatriated income for non-residents with a permanent establishment in Kenya. The act imposes a 15% tax on such income, concurrently reducing the Corporate Income Tax (CIT) rate for these entities from 37.5% to 30%. This change aims to strike a balance between attracting foreign investment and ensuring a fair contribution to the Kenyan tax base.
3. Turnover Tax: Adjustments in Thresholds and Rates Small and medium-sized enterprises face notable changes in the turnover tax arena. The upper threshold for turnover tax has been halved to KShs 25 million, accompanied by a rate hike to 3% from the previous 1%. These adjustments prompt SMEs to reassess their financial strategies and adapt to the evolving tax landscape.
4. Cryptocurrencies: Tax Implications Unveiled The Finance Act 2023 addresses the burgeoning world of digital assets, introducing a 3% tax on income derived from the transfer or exchange of digital assets, including cryptocurrency transactions. This move reflects the government\’s commitment to regulating and deriving revenue from the rapidly expanding digital economy.
5. Interest on Mortgages: Maximizing Deductions for Homeowners. Homeowners stand to benefit from the Finance Act 2023, which allows individuals to claim mortgage interest expenses up to a maximum of Kshs 300,000 per year, specifically on funds borrowed from a co-operative society. This provision aims to incentivize home ownership and provide financial relief to those servicing mortgages.
6. Filing of Income Tax Returns: E-TIMS Compliance Mandate The act introduces a stringent mandate for the filing of income tax returns. Expenditures or losses will not be deductible if the transactions\’ invoices are not generated from electronic tax invoicing management (e-TIMS). This digital initiative aims to enhance transparency and streamline tax filing processes.
7. Withholding Tax: Widening the Net Withholding tax sees a broadening of its scope under the Finance Act 2023. New withholding tax obligations apply to payments for sales promotion, marketing, and advertising services for residents at 5%, digital content monetization to residents at 5%, and a higher rate of 20% for non-residents. Additionally, the act introduces withholding tax on rental income, with specific guidelines on deduction responsibilities.
8. Exemptions from Tax: Navigating Special Cases Amidst the changes, the Finance Act 2023 provides exemptions from tax in certain cases. Notable exemptions include royalties and interest paid to a non-resident person by a company involved in manufacturing human vaccines. The act also extends exemptions to investment income from post-retirement medical funds and income earned by non-resident contractors involved in projects financed through a 100% grant under government agreements.

Conclusion:

In effect from July 1, 2023, the Finance Act 2023 brings sweeping changes to Kenya\’s tax landscape. Businesses, individuals, and investors must proactively adapt to these amendments to navigate the evolving financial terrain successfully. As we delve into this new era shaped by the Financial Act 2023, staying informed and seeking professional advice will be instrumental in ensuring compliance and harnessing opportunities in this transformed fiscal environment.