introduction.
Happy New Year from all of us here at Ronalds LLP!
We wish to bring to attention several key tax matters that will affect all taxpayers in the year 2021.
These include the tax changes that were introduced last year by the Finance Act of 2020 and the Tax Laws (Amendment) No. 2 Act of 2020, intended to take effect from 1st January 2021.
Please note however that this tax alert is meant to provide guidelines and does not constitute tax advice
TAX CHANGES WITH EFFECT 1ST JANUARY 2021
INCOME TAX
REINSTATEMENT OF THE TAX RATE
The corporate tax rate has been reinstated from 25% to 30% effective 1st January, 2021.
MINIMUM TAX
A new tax known as minimum tax was introduced at the rate of 1% on gross turnover for entities. This was effective 1st January 2021.
Minimum tax is a base tax which is payable on instalments and shall be due on 20th day of the 4th, 6th, 9th and 12th month of the year of income, just as the case for instalment taxes.
Instalment tax and minimum tax shall be applicable concurrently. Where installment tax is higher than the minimum tax, then installment tax shall be payable in that particular installment, whereas, where the minimum tax is higher than the installment tax, then minimum tax shall be payable in that particular period.
Notes;
The corporate tax rate increases to 30%.
1% Minimum tax is payable on the gross turnover.
Minimum tax is due on 20th of the 4th, 6th, 9th and 12th month of the financial year.
Whichever is higher between the instalment tax and the minimum tax, shall be payable when making an installment payment.
Residential rental income lower threshold is changed from Kshs. 144,000 to Kshs 288,000 per annum.
Residential rental income upper threshold has increased from Kshs. 10 Million to Kshs. 15 Million per annum.
The following category of income shall be exempted from Minimum Tax deductions;
Employment Income.
Income subject to Turnover Tax
Income exempted by the Income Tax Act
Income subject to Residential Rental Income tax
Income of extractive sector
Income subject to Capital Gains Tax
Persons engaged in insurance business
Businesses whose retail pricing is controlled by the government
RESIDENTIAL RENTAL INCOME THRESHOLD
Landlords, take note: Effective 1st January, 2021, the upper threshold of residential rental income is Kshs. 15 Million per annum, up from Kshs. 10 Million. On the other hand, the lower threshold has been increased to Kshs. 288,000 per annum.
DIGITAL SERVICE TAX
Effective 1st January, 2021, Digital Service Tax is now applicable on income from services that are derived or accrued from Kenya through a digital marketplace.
The tax rate applicable is 1.5% of the gross transaction value. Take note that Digital Service Tax is due at the time of the transfer of the payment for the services to a service provider.
Businesses that have changed their operational models and transformed to digital platforms need to take note of this tax amendment.
Notes;
Digital Service Tax is applicable on the gross transactional value.
Digital Service Tax is charged at the rate of 1.5%.
The Commissioner is empowered to appoint agents for purposes of collecting Digital Service Tax
Notes;
Digital Service Tax is applicable on the gross transactional value.
Digital Service Tax is charged at the rate of 1.5%.
The Commissioner is empowered to appoint agents for purposes of collecting Digital Service Tax
Subscriptions to trade associations and club subscriptions will no longer be tax deductible.
Exemption under HOSP has been revoked.
Businesses may opt for alternatives such as the affordable housing scheme.
DISALLOWED EXPENDITURES
The following expenses are no longer tax deductible;
Annual Subscriptions and entrance fees to trade associations.
Club subscriptions paid by employers on behalf of employees.
Capital expenditure on legal costs and incidental expenses relating to issuance and authorization of shares or similar securities offered for purchase by the general public.
Exemptions under the home ownership savings plan are no longer available.
TAXABLE INCOME
No more exemption. Tax is applicable on the following incomes;
Income from Home Ownership Savings Plan (HOSP)
VALUE ADDED TAX
REINSTATEMENT OF THE TAX RATE
The rate of VAT has changed from 14% to 16%, effective 1st January, 2021.
Taxpayers are advised to make the necessary adjustments in their accounting systems to reflect the current rate.
In addition, it is necessary for companies to reset their fiscal machines i.e., the ETR’s in order to reflect the current VAT rate of 16%.
Notes;
The rate applicable for Vat has reverted back to 16%, as it was during the pre-covid period.
Notes;
Businesses need to reset their fiscal ETR machines to the current rate of 16%.
COMPANY OPPORTUNITIES
Companies are encouraged to apply for the Voluntary Disclosure Program to enjoy up-to 100% remission on penalties and interest charges.
Taxpayers who are under tax audits or have been notified by the Commissioner of a pending audit will not be eligible for the Voluntary Disclosure Program.
TAX PROCEDURES ACT
VOLUNTARY DISCLOSURE PROGRAM (VDP)
The Voluntary Disclosure Platform became effective 1st January 2021, giving taxpayers an avenue to disclose tax liabilities that were previously undisclosed to the Commissioner without imposition of the punitive penalties and interests.
This program shall be open for a period of three years starting 1st January, 2021.
This window is open for the tax periods of up to 5 years prior to 1st July, 2020.
There is 100% remission of penalties and interest where the disclosure is made and the tax liability is paid within the first year of the program i.e., in 2021.
There is 50% remission of penalties and interest where the disclosure is made and the tax liability is paid within the second year of the program i.e., 2022.
There is 25% remission of penalties and interest where the disclosure is made and the tax liability is paid within the final year of the program i.e., 2023.
INDIVIDUAL TAXATION
TAX RATES FOR PAY AS YOU EARN(PAYE)
Through the Tax laws (Amendment) No. 2 Act of 2020, the new tax rates applicable on individual incomes, starting 1st January 2021, are as follows;
Monthly Taxable Pay | Annual Taxable Pay | Rate of Tax |
On the first Kshs 24,000 | On the first Kshs 288,000 | 10% |
On the next Kshs 8,333 (24,001 – 32,333) | On the next Kshs 100,000 (288,001 – 388,000) | 25% |
Above Kshs 32,333 | Above 388,000 | 30% |
UNIFIED PAYROLL RETURN (UPR)
The Kenya Revenue Authority and National Industrial Training Authority have rolled out a unified payroll return system that allows for joint declaration and payment of Pay As You Earn (PAYE) and Industrial Training Levy deductions. This will raise compliance levels by employers.
