Many people have been asking about Tax Incentives in Special Economic Zones. During the reading of the National budget for 2017/18 in March 2017, the Cabinet Secretary (CS) for the National Treasury proposed several changes which were incorporated in the Finance Bill, 2017.
(Post continues after post.)
Some of the tax proposals were specific to Special Economic Zones (SEZs).
However, some of the proposals, though they were not specifically for SEZs, they have a bearing on the operations of the SEZs. The following are some of the proposals that will affect SEZs in Kenya.
Amendments to the Tax Procedures Act (2015)
Several proposals were made on the Tax Procedures Act that may affect SEZs. The following are some of the proposals:
Tax officers initiate prosecution
There was a proposal to Section 7 of the Act to allow KRA officers to initiate prosecution of taxpayers and produce evidence of the crimes in a court of law or the tax tribunal.
Tax penalty as liability
There was a proposal to amend Sections 18(3), 17(6) and 16(9) to include tax penalty as a liability.
Tax amnesty for Income earned outside Kenya
- Section 37B was amended to
- extend the filing of tax returns to 30th June 2018
- Make tax payments
- Provide for transfer of the declared funds to be reinvested in Kenya.
Time frame Withholding VAT
Section 42A is amended to provide the dues date as 14 days after withholding. Failure to withhold and or/and remit is a tax offence.
Revoking of Withholding or VAT
Section 42A is amended and allows the Commissioner to exempts suppliers who are in perpetual VAT credit position for not less than 24 months, occasioned by the withholding VAT provisions.
The effective date for theses changes is 3rd April 2017
Amendments to the Income Tax Act Cap 470
Several proposals were made for personal income tax (PAYE) and corporate income tax.
Employment income
For personal taxes, there were proposals for employment income and pension withdrawals. SEZs are expected to deduct PAYE for all their employees and remit it to the KRA. Hence, changes in the tax bands and personal relief will affect SEZs. The following are the new tax bands.
Amount Tax rates
The first kshs 147,580 10 %
The next kshs 130,043 15 %
The next kshs 130,043 20 %
The next kshs 130,043 15 %
Income above kshs 564,709 30 %
Personal relief was increased to ksh 16,896 per year. The PAYE bands and personal relief changes are effective from 1st January 2017.
Pension Withdrawals
There are SEZs employees who will withdraw their pension. The tax bands for pension withdrawals have been harmonized with PAYE tax bands as follows:
Amount Tax rates
The first kshs 147,580 10 %
The next kshs 130,043 15 %
The next kshs 130,043 20 %
The next kshs 130,043 15 %
Income above kshs 564,709 30 %
Application of the new tax bands is effective on 1st January 2017.
Corporate tax
Various income tax proposals were made. The following is a list of some of the income tax proposals.
a. Investment deductions for businesses in Special Economic Zones
- Business enterprises operating in the Special Economic Zones (SEZ) have been allowed to deduct 100 % investments cost on building’s construction, machinery purchase and machinery installations.
- The investment deduction will be in the first year of utilization.
- The investment deduction is effective on 1st January 2017.
b. Withholding tax on dividends from Special Economic Zones Businesses to non-residents
- Dividends from business enterprises operating from Special Economic Zones (SEZ) to non-residents are now exempted from withholding tax.
- This is effective 1st January 2017.
c. Withholding tax rates for Special Economic Zones Businesses
There were proposals to reduce the withholding tax rates for businesses in SEZs as follows:
- Management and professional fees – from 20 % to 5 %.
- Interests from 15 % to 5 %.
- Royalty – from 20 % to 5 %.
The effective date is 1st January 2017.
d. Donations as allowable deductions
Though SEZs are not paying corporate tax currently, they will be paying after some time. They may give donations. The donations will be tax-deductible if :
- The donations expenditures are incurred for the alleviation of distress during natural disasters declared by the President.
- However, the donations must be channelled through the Kenya Red Cross, County governments or any other organization responsible for natural disaster management in Kenya.
- The effective date is 1st January 2017.
Amendments to the Value-Added Tax Act
There were proposals on Value-Added Tax (VAT). The following five VAT proposals that were made in the 2017/18 budget and may affect SEZs.
Exemption of supplies for the disabled
- Supplies of educational, scientific or cultural advancement to organizations exempted by national government.
- The effective date for the VAT changes is 3rd April 2017.
In case the SEZs enterprises make supplies for the disabled, then the supplies are VAT exempt.
Exemption of supply of Liquefied Petroleum Gas
- Supply of liquefied petroleum gas (LPG) is exempted from VAT.
- The effective date of the VAT changes is 3rd April 2017.
Exemption of inputs for manufacture of pesticides
- All inputs used for local manufacture of pesticides will be VAT exempt.
- However, this is subject to recommendations by the Minister for Agriculture.
- The effective date for the VAT changes is 3rd April 2017.
Exemption of purchase and assembling of tourist motor vehicles
- Local assembling and purchase of motor vehicles for conversion as tourists vehicles will be VAT exempt.
- The effective date for the VAT changes is 3rd April 2017.
Exemption of medical equipment’s and apparatus in Specialized hospitals
- Medical equipment’s and apparatus used in specialized hospitals will be VAT exempt. This is a follow up of earlier exemption of material subject to VAT for construction of the hospitals.
- The effective date is 3rd April 2017.
Exemption of civil aviation spare parts
Under Section 29(1)(b), the Commissioner is now allowed to refund excise duty paid on illuminating kerosene that has been used by registered manufacturers of paint and resin.
Excise Duty on Spirits
The rate of excise duty on spirits has been changed from kshs 175 per litre to kshs 200 per litre.
Excise Duty on Spirits
The rate of excise duty on cigarettes has been changed to:
- Cigarettes with filter (Soft cap and Hinge lid) – kshs 2,500 per mille.
- Cigarettes without filter (plain cigarettes) – kshs 1,800 per mille.
Excise Duty – Definition of powdered beer
Powdered beer means any powder, crystals or any other dry substances which, after being mixed with water or any other non-alcoholic beverages, ferments to or otherwise become an alcoholic beverage.
Part A of Second Schedule – exemption for supplies for sanitary towels.
Part amended to exempt locally manufactured products for the manufacture of sanitary towels.
Part A of Second Schedule – Supplies to St. John Ambulance
Part amended to exempt on excisable goods supplied to St. John Ambulance for their official use for relief sullies in Kenya.
Part A of Second Schedule – Value of right-hand vehicle for returning residents
Paragraph 6 of part A allows returning residents to purchase a vehicle equivalent in retail selling price to the previously owned left-hand drive vehicle.
Cost of Excisable Stamps
- Under the Excisable Goods Management System (EGMS), the cost of stamps to be affixed on the goods will range from kshs 0.5 to kshs 2.5.
- return or transfer of excise stamps due to various reasons, e.g shifting of manufacturing plant, cessation of manufacturing activities or defective stamps, etc.
- Marking of excisable supplies to the Kenya police.
- The requirement for a retailer, manufacturer, distributor, importer or any other person involved in the supply chain of excisable goods to verify and authenticate the stamps and excisable good before admitting them in their premises.
- The effective date is 3rd April 2017.
Amendment of Tax Appeals Tribunal Act
The time limit set for resolving tax cases before the tribunal is 90 days from the date the case is lodged
Miscellaneous Fees and Levies Act
The Miscellaneous Fees and Levies Act will be amended to exempt from export duty and import duty declared for goods exported to and imported by business enterprises operating at the Special Economic Zones under the SEZ Act.
Feel free to send us questions or topics on tax and investments in Kenya that you would wish to be covered in this website.
taxkenya@gmail.com
