FINANCE
Key Highlights Of The 2021 Finance Act
By CPA Peter Kinuthia
A
Finance Act promulgates measures that the National Treasury has put in place to mobilize funds through several avenues including collecting taxes to finance the Government expenditures for the following year of income , in this instance , 2021 / 22 fiscal year . The Finance Act 2021 ( the Act ), was assented into law by the President on 29 June 2021 . The Act amends various tax laws including : the Income Tax Act , The VAT Act , 2013 , Excise Duty Act , Tax Procedures Act , 2015 , and the Miscellaneous Fees and Levies Act . It also makes various amendments to other miscellaneous amendments to the Insurance Act , Capital Markets Authority Act and Retirement Benefits Act . Hereunder is a highlight of key amendments of the Finance Act , 2021 !
Business Income Tax
Tax Losses to be carried forward indefinitely - Effective 1st July 2021 The Income Tax Act is amended to allow business tax losses to be carried forward indefinitely . This is a welcome move because under the previous provisions , tax losses could only be carried forward for a period of ten years . Thereafter the same were abandoned or forfeited if the business did not generate enough profits to absorb them .
This is a welcome move as it affords an important tax shield because the tax losses will be offset against any future taxable profits until fully exhausted .
However , the relevance and usefulness of this proposal will only be confirmed once the case challenging the constitutionality of the minimum tax provision is heard and determined . This is because under the minimum tax regime , a business is required to pay taxes whether or not it reports a profit .
Interest restriction on thinly capitalized entities - Effective 1st January 2022
Under the previous provisions of the Income Tax Act , an entity was thinly capitalized where debt to equity ratio was greater than 3:1 . Interest as a tax deductible expense was restricted to that ratio .
The current Finance Act has tightened the thin capitalization interest restriction from the 3:1 ratio , to 30 % of Earnings Before Interest , Depreciation and Amortization ( EBITDA ).
Interest paid or payable to related persons and third parties will be restricted to 30 % of EBITDA . For this purposes , interest
The Income Tax Act is amended to require multinational enterprise groups ( MEGs ), whose ultimate parent is based in Kenya , to submit returns giving information on their activities in other jurisdictions . The annual return should be filed within 12 months after the last day of the financial reporting year . includes Interest on all loans , payments that are economically equivalent to interest and expenses incurred in connection with raising the finance .
The taxman is seeking to protect the erosion of taxable profits by disallowing interest expense thus having a higher tax yield .
It is worth noting that this restriction does not apply to banks or financial institutions licensed under the Banking Act and micro and small enterprises registered under the Micro and Small Enterprises Act , 2012 .
Legislation of Country by Country Reporting ( CbCR ) - Effective 1st July 2022
Multinational enterprise groups ( MEGs ), whose ultimate parent is based in Kenya , are now required to submit returns giving information on their activities in other jurisdictions . The annual return should be filed within 12 months after the last day of the financial reporting year . This is only applicable where the groups ’ gross turnover exceeds a prescribed threshold . The threshold has not yet been defined .
A MEG is defined as a group that includes two or more enterprises which are resident in different jurisdictions including an enterprise that carries on business through a permanent establishment or through any other entity in another jurisdiction .
The following information will have to be disclosed in the said return with respect to each jurisdiction in which the group operates : Total revenue ; Profit or loss ; Corporate income tax paid ; Accrued income tax ; Stated Capital ; Accumulated earnings ; Number of employees ; and Tangible assets other than cash and cash equivalents .
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