MAL48:22 | Page 75

Income Tax

Increase of Capital Gains Tax ( CGT ) rate - w . e . f 1 January 2023

The CGT is applicable on the gains which accrue to a Company or an individual on or after 1 January 2015 on property situated in Kenya , whether or not the property was acquired before 1 January 2015 . It is proposed to increase the CGT rate from 1.5 % to 3 %. The increase will lead to significant tax payments on the sale of capital assets as no indexation provisions have been provided to cater for inflationary gains .

Investment Deduction - 100 % - w . e . f 1 July 2022

Investment deduction of 100 % is allowed for investments made outside Nairobi and Mombasa Counties . The Bill has proposed to restrict the 100 % investment deductions to only apply to Hotel building , building used for manufacturing and machinery used for manufacturing . It has also proposed that the investment deduction shall not apply to investments which due to the nature of their business have to be located in places which are outside Nairobi and Mombasa Counties .

The Bill has proposed to amend and allow entities to claim deductions in respect of any donations to any charitable organization whose income is exempt from tax under paragraph 10 of the First Schedule of the Income Tax Act . This is a welcome move as Charitable Organisations registered under other Acts like , Trust Act , Companies Limited by Guarantee can also enjoy the benefit . The condition of tax-exemption issued by the Commissioner remain unchanged .

Definition of the term “ Fair market value ” - w . e . f 1 July 2022

Despite its numerous use , the term fair market value is not defined in the Income Tax Act . The Bill proposes to define fair market to mean the comparable market price available in an open and unrestricted market between independent parties acting at an arm ’ s length and under no compulsion to transact , which is expressed in terms of money or money ’ s worth .

This a welcome proposal as it will reduce future disputes on perceived controlled transactions or non cash benefits carried out by taxpayers .

Deferral of realized foreign exchange losses - w . e . f 1 July 2022

The Bill proposes that realized foreign exchange loss be deferred for a thinly capitalized company until the thin cap position reverses . A thinly capitalized company is defined as the one whose gross interest paid or payable exceeds 30 % of Earnings Before Interest Depreciation and Armortization ( EBITDA ).

Digital Service Tax ( DST ) - w . e . f 1 July 2022

The Bill proposes to clarify that the DST shall not apply to non-resident person with a permanent establishment in Kenya . It further proposes to increase the tax rate from the current 1.5 % to 3 % of the gross online transactions .

Business with preferential tax regime - w . e . f 1 January 2023

In order to ensure that there is no tax leakage , the Income Tax Act under Section 18A requires that transactions between related entities , where one is based in a preferential tax regime and the other is not , be carried out on an arm ’ s length basis .

The Bill has proposed to widen the scope of preferential tax regime in addition to the current Economic Processing Zones ( EPZ ) and Special Economic Zones ( SEZ ) to also include foreign jurisdiction which : Do not tax income or taxes income at a rate that is less than 20 %; Do not have framework for exchange of information ; Do not allow access to banking information ; Lack transparency on corporate structure , ownership of legal entities , beneficial ownership or regulatory supervision .

Employee Share Ownership Plan ( ESOP ) - w . e . f 1 July 2022

It is proposed to change the point at which the benefit accrues to an employee who has been given share options , from the date the option is granted by the employer to the date when the employee exercises the option . Under the current provision , the value of benefit is the difference between market value per share , and the offer price per share , at the date the option is granted by the employer .

Taxation of Family Trust Income - w . e . f 1 July 2022

The Bill proposes to remove exemption from taxation granted through Finance Act 2021 . The implication is that income of a Registered Family Trust will now be taxable either in the hands of beneficiaries or Trustees . This is with the exception of any capital gains from the transfer of title of immovable property which remain tax exempt .

Value Added Tax ( VAT )

Claiming input VAT - w . e . f 1 July 2022

The proposal is to amend section 17 of the VAT Act and make it mandatory that input VAT can only be claimed when a taxpayer has filed a VAT return . Previously there was a lacuna and it was not clear in law .

Further , it is proposed to empower the Commissioner to ask for additional documents to validate input tax . This is over and above the current requirement that a purchaser must be in possession of a proper tax invoice and the tax thereon must have been declared by the seller .

Digital marketplace - w . e . f 1 July 2022

The Bill proposes to redefine the Digital marketplace to mean online platform which enables users to sell goods or provide e-services to other users .

Further , it proposes to remove reverse charge VAT on imported services procured over the internet or an electronic network or through a digital marketplace .

It also proposes to remove registration requirement for suppliers who are involved in supplying imported digital services over the internet or an electronic network or through a digital marketplace .

I trust the above draft has given you some snippets of some of the measures as proposed in the Finance Bill , 2022 . For a full and detailed highlight , please visit our website , www . resoluteadvisory . co . ke .