Finance Act 2021 Changes And Their Implications In 2022

The finance bill 2021 was tabled in National Assembly on 11^th May and passed on 29^th June 2021. The bill proposed the following amendments to the following statutes that took effect in 1^st January 2022;

Income Tax

1. Extractive Industries Taxation: The Act grants an allowance of 50% in the first year of use of machinery from previously 100% and 25% on the residual in the subsequent years. The enactment is meant to align the rate of depreciation in the second schedule with the rate in the 9^th schedule of the Income Tax Act.
2. Expansion of Tax Rebate Scheme for Apprenticeship Program: The Finance Act,2021 expanded the tax rebate scheme to include technical and vocational education
   and training (TVET). Previously, the rebate only applied to employers who engage 10
   university graduates for 6-12 months. This however as changed with the inclusion of university and TVET graduates. The employer shall therefore enjoy tax rebate subsequent to the year of such engagement.
3. NHIF Tax Relief: The Finance Act has provided 15% insurance relief on contributions made to NHIF to benefit employees and increase their net pay. This is meant to encourage uptake of NHIF and expansion base for population tax bracket.
4. Multinational Enterprises: The Act has introduced a requirement for the ultimate parent entity of a multinational enterprises group (MNE) to file and submit a return to the Commissioner detailing the group’s financial activities in Kenya as well as in other jurisdictions.
5. Change in Thin Capitalization: By definition, thin capitalization according to OECD (Organization of Economic Cooperation and Development) refers to the situation in which a company is financed through a relatively high level of debt compared to equity. The Act has introduced new provisions governing interest payments that are not deductible for corporation tax purposes. The Act, provides for non-deductibility of interest expenses exceeding 30% of earnings before interest, taxes, depreciation and amortization (EBITDA) to related and non-related parties. This restriction only applies to;
   1. Interest on all loans
   2. Expenses incurred in connection with raising finance

• Payments that are economically equivalent to interest

And doesn’t apply to;

• Banks or financial institution licensed under the Banking Act
• Micro and Small enterprises registered under the Micro and Small Enterprise
  1. Treatment of Prior Year Losses: The Act has deleted the previous 10-year limit for carrying losses to indefinite. The implication is that even though the taxpayers will be able to carry forward losses indefinitely, they will still be required to account for minimum tax (currently suspended by the high court) on gross revenue earned
  2. Digital Service Tax Changes: The Act defines the digital market as “an online platform which enables users to sell or provide services, goods or other property to other users”. Section 3 (2) of the Act defines proceeds from such a platform as “Income accruing from a business carried out over the internet or an electronic network including through a digital marketplace” and shall attract a digital service tax. However, the digital service tax only accrues to non-resident persons from the provision of services through a digital market place. The tax is not applicable to persons transmitting messages (Sec9 (2)) or to any foreign income subjected to withholding taxes (Sec 35.). The implication is that definition of a digital market place is modified to eliminate any contradiction and tax avoidance arising from misinterpretation, and that the income accruing to a resident person conducting a business via the internet or electronic platform is excluded since tax is charged on individual or corporate tax rates.
  3. Private Electricity Companies Supply to the national grid: The Act removes the requirement that electricity must be supplied to the National Grid for the generation of the same to fall under the definition of “manufacture”, which is a prerequisite to qualify for investment deduction on equipment, machinery and buildings used in manufacture.
  4. Farm Works Definition: The Act has defined “Farm works” under the Second Schedule to mean: farmhouses, labour quarters, any other immovable building necessary for the proper operation of the farm, fences, dips, drains, water and electricity supply works and other works necessary for the proper operation of the farm

Value Added Tax (VAT)

The VAT Act (2013) provides that VAT should be charged on any supply made over a digital market place. The Finance Act, 2021 amended Section 5 of the VAT Act to charge supplies made over the internet or an electronic network or through a digital marketplace in order to clear the ambiguity posed by digital transactions. Thus, any suppliers who sell goods/ services via websites, social media platforms or any other electronic device/ platform will be required to account for VAT.

Section 17 of the VAT Act provides for deduction of input VAT on taxable supplies. The enacted provision detests the reference that VAT restriction is only limited to provisions of Section 17 to include the provisions of the entire VAT Act and Regulations. This clarification implies that prior to the deduction of VAT, businesses should ensure that the purchase was done to make a taxable supply.

The Finance Act, 2021 also provides for additional restriction on claiming input VAT by extending the restriction to;

• the leasing or hiring of passenger cars or mini buses
• entertainments,
• restaurant and
• accommodation services.

Previously, VAT Act only referred to acquisition of these supplies. The implication is that the input VAT incurred in relation to the procuring of passenger cars or mini buses and entertainment, restaurant and accommodation services in any form including leasing, hiring and purchasing is not deductible. The amendment therefore provides a clarity on the deductibility of VAT relating to leasing or hiring of these supplies.

Author: Eddie Opiyo