How the Kenya Finance Act 2021 affected financial institutions.
Highlights of the finance act 2021 changes affecting financial institutions.
The Finance Act, 2021 that was recently passed has several implications to Financial Institutions. Financial Institutions means a person licensed under;
- The Banking Act (Cap. 488);
- The Insurance Act (Cap. 487);
- The Central Bank of Kenya Act (Cap. 491) or;
- The Microfinance Act, 2006 (Cap. 493D).
- A co-operative society registered under the Co-operative Societies Act (Cap. 490);
- the Kenya Post Office Savings Bank established the Kenya Post Office Savings Bank Act;
- The Kenya Reinsurance Corporation established by the Reinsurance Corporation Act.
- A building society registered under the Building Societies Act (Cap. 489).
- The National Housing Corporation established under the Housing Act (Cap. 117).
- The Agricultural Finance Corporation established by the Agricultural Finance Corporation Act (Cap. 323).
- A person licensed under Part VII of the Hire-purchase Act (Cap. 507).
The following are some of the implications that Financial Institutions licensed by the above Acts need to take note of;
The Finance Act 2021, has introduced a provision concerning common reporting standards for the financial institutions. The standards require that financial institutions conduct due diligence and report the accounts of the institutions in line with Common Reporting Standards to the Commisioner. However, this provision will be effected once the Cabinet Secretary and the National Treasury publishes the regulations. This provision will be applicable to all the financial institutions in Kenya including branches established in Kenya. Further, there will be penalties on non-compliance to this provision; Kshs.100,000 for every omission or untrue statement, or an imprisonment of a term not exceeding 3 years or both. For those financial institutions that will fail to file the reports the penalty will be Kshs.1,000,000 per year.
The Finance Act amended the definition of “other fees” by expunging the words ‘fees or commissions earned in respect of a loan,” effective 1st July 2021. Initially, other fees were defined to be any fees, commissions or charges charged by financial institutions, but the definition left out excise duty, commissions earned in regards to a loan, interest on loan or return on loan or fees. This implied that fees and commission received on loans were not within the ambit of excise duty.
The Act amended the definition of other fees which excluded loan related fees and charges this mean that financial institutions should charge 20% excise duty on fees or commissions earned from loan. This is a reactive move since in the recent past there has been various litigations concerning the phrase “other fees” that was introduced by Finance Act 2012 and the Tax Appeal Tribunal has constantly reiterated that loan related fees such as loan administration fees are not subject to excise duty a case in point is Cooperative Bank of Kenya Limited vs Commissioner of Domestic Taxes, Tax Appeal No.45 of 2017.
The Act has introduced a condition for the ultimate parent entity (UPE) of a Multinational enterprises group (MNE) to submit a report on financial activities to the Commissioner concerning their operations in Kenya and other countries where the enterprise has a taxable presence. This implies that parent financial institutions in Kenya will submit the reports of its branches or subsidiary located outside Kenya to the Commissioner annually. Some of the information the parent entity will submit include the amount of revenue; profit or loss before tax; income tax paid; income tax accrued; stated capital; accumulated earnings; number of employees and tangible assets other than cash or cash equivalents from every country the group has a presence and operates.
The Finance Act, 2021 has exempted financial institutions from being deemed to be in control if they advance a loan facility constituting at least 70% of the total book value of the assets of another company or guarantees 70% of the total debt of the debtor.
The Act prohibits payment of gross interest to related parties and third parties exceeding 30% of earnings before interest, taxes, depreciation and amortization (EBITDA) of the borrower in any financial year. However, financial institutions have been exempted from this provision.
Finally, for those institutions registered under Insurance Act, the Finance Act 2021 has exempted such institutions from the controversial minimum tax.
Related: Selecting Financial Advisory Companies in Kenya – What to Look for?