Introduction
- The Finance Act of 2023 has brought significant changes to Kenya’s corporate tax structure, impacting businesses across various sectors. These amendments include modifications to the taxation of repatriated income for non-residents, adjustments to turnover tax, and other significant changes that reshape how businesses will handle their fiscal responsibilities.
- In this piece, we take a look at some of the critical introductions that are likely to impact businesses and which business owners must take into account as they continue to drive their business.
The imposed tax reforms in the Employment Sector and their implications
- Revision of withholding tax remittance due date
- The Act imposes a requirement to remit withholding tax within 5 working days of deduction. This compressed timeline for remittance may pose difficulties in ensuring timely and accurate tax compliance, especially for businesses with numerous transactions or limited resources.
- While the new requirement may facilitate the government's cash flow needs by ensuring faster receipt of tax revenues, it may also burden taxpayers with additional administrative burdens and potential penalties for non-compliance if they are unable to meet the strict deadline.
- Revised individual rates of tax bands
- According to the Government, a significant majority of the employed workforce in Kenya, around 79.7%, currently falls below the 30% tax bracket. With the introduction of two new tax bands, approximately 0.8% of the total employed workers, equivalent to around 26,676 employees, will be affected.
- The impact of these changes on tax revenue remains uncertain, and it remains to be seen if the government's objective of creating a more progressive tax system will be fully realized.
- Reimbursement for mileage/ transport costs
- The introduction of an express provision in the Income Tax Act to exclude mileage/transport reimbursements from being taxed provides clarity and aligns with the existing industry practice.
- By utilizing the standard mileage rate approved by the Automobile Association of Kenya (AA), the provision ensures consistency in the computation of mileage reimbursements for tax purposes.
- This amendment is expected to alleviate the tax burden on employees who incur transportation expenses while on official duty and further promotes the use of standardized rates for mileage reimbursement across organizations.
- This is welcome by taxpayers as employers who reimburse mileage at the standard rate are not required to assess taxable benefit on the recipient employee.
- Introduction of the post-retirement medical fund relief
- The introduction of a Post-retirement medical fund relief in the Finance Acts aims to incentivize resident individuals to contribute to such funds by providing them with a tax benefit. The relief, which is calculated as the lower of 15% of the contribution paid or Kshs 60,000 per annum, offers a tangible incentive for individuals to plan and save for their healthcare needs during retirement.
- In this regard, the employer is expected to contribute towards the employer’s medical cover for the post-retirement medical fund relief.
- Definition of market value for purposes of employee share ownership plan (ESOP) taxation
- The Act determines the market value of listed and unlisted shares as mid-market value and open market value, respectively, on the day the option is exercised by the employee brings consistency and clarity to the valuation process.
- This amendment aligns with the revision made in the Finance Act 2022 regarding the taxation of Employee Share Ownership Plans (ESOPs), where the taxable benefit is now recognized on the date of exercise. By providing a standardized approach to determining market value, the proposed amendment ensures fairness and accuracy in assessing the tax implications of ESOPs for employees.
By Mwanga Modesta
mwanga@alakonyalaw.co.ke
