2011 KENYA TAX BUDGET HIGHLIGHTS

June 2011

Contents
Overview of GOK Revenues Income Tax Changes Withholding Tax Value Added Tax Act Excise Duties Customs Import Duties Financial Sector Governance

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific formation professional advice. Please contact BDO East Africa to discuss these matters in the context of your particular circumstances. BDO East Africa, its partners, employees and agents do not , accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it. BDO East Africa is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

OVERVIEW OF GOK REVENUES

Revenue Targets Increase

The fiscal year 2010/2011 encountered difficulties in achieving revenue targets due to VAT withholding challenges, competition in the mobile telephony sector, oil supply constraints and changes in the taxation of cigarettes. The ongoing implementation activities of the new constitution, interventions to address drought and security along our borders put a huge demand for additional funding. The following table and charts summarises the 3 year revenue collections for the previous 2 years and the target for the coming year: Sources of revenue Ordinary revenue Grants Domestic Borrowing Total revenues (Kshs Billions) 2009/2010 548.16 20.71 133.51 702.38 2010/2011 685.19 43.73 125.00 853.92 2011/2012 791.48 41.11 119.50 952.10

Source: Estimates of Revenue 2011/2012

Total revenue
1,000.00 950.00 900.00 850.00 800.00 750.00 700.00 650.00 600.00 550.00 500.00 450.00 400.00 350.00 300.00 250.00 200.00 150.00 100.00 50.00 2009/2010 2010/2011 2011/2012

Kshs (Billions)

Total revenue Ordinary revenue Domestic Borrowing Grants

INCOME TAX HIGHLIGHTS

Personal reliefs
PAYE rules have been amended to require that employees receiving emoluments from more than one employer will only qualify for one personal relief. (W.e.f. 9th June 2011)

Income tax exemption for REITS

Real estate investment trusts (REITS) are now exempt from corporation tax. Dividends from such trusts are exempt from income tax. (W.e.f. 9th June 2011)

Tax evasion and safeguarding of revenue

The Finance Minister has proposed to amend the law to allow the government to enter into Tax Information Exchange Agreements with other tax jurisdictions to curb tax evasion and safeguard revenue particularly with regard to transfer pricing. (W.e.f. 1st January 2012)

Individual self-assessment tax returns

In order to reduce unnecessary paperwork and filing of tax returns, all employees who have no other income apart from salaries and whose income tax has been correctly paid through PAYE by their employers are no longer required to file individual tax returns. (W.e.f. 9th June 2011)

Registration of tax payers

In the endeavour to recruit more tax payers, the commissioner has now been empowered to compulsorily register defaulting would-be tax payers. (W.e.f. 9th June 2011)

Medical benefits
The cost of medical benefits paid on behalf of full-time employees beneficiaries has now been clarified to be tax exempt. (W.e.f. 9th June 2011)

Deemed interest
The commissioner has been empowered to prescribe the form, manner and period for which deemed interest will be applicable. (W.e.f. 9th June 2011)

Official languages and currency

Any returns, records or other documents required to kept or produced shall be maintained in either English or Kiswahili and shall only be maintained in Kenya shillings. (W.e.f. 9th June 2011)

Penalty on underpayment of instalment tax

The Commissioner is now empowered to remit up to Kshs one million and five hundred thousand without seeking the ministers approval (previously Kshs five hundred thousand). (W.e.f. 9th June 2011)

WITHHOLDING TAX CHANGES

1.

Withholding taxes on professional, management and training fees paid locally has been increased to 10% up from 5% previously. The rate for non-residents remain the same at 20% (w.e.f. 9th June 2011). Leasing of locomotives and rolling stock is now exempted from withholding tax (w.e.f 9th June 2011). Rolling stock comprises all the vehicles that move on a railway. It usually includes both powered and unpowered vehicles including locomotive, railroad cars, coaches and wagons. Deemed interest will now attract withholding tax at the rate of 15% like other interest. Deemed interest means an amount of interest equal to the average ninety-one day Treasury Bill rate, deemed to be payable by a resident person in respect of any outstanding loan provided or secured by a non-resident, where such loans have been provided free of interest. w.e.f. 9th June 2011. Gains from bettings and gaming will suffer withholding tax at the rate of 20% (w.e.f. 9th June 2011).

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VALUE ADDED TAX (VAT)

There were no VAT changes proposed in the Finance Bill 2011. However a taskforce constituted to review the entire VAT act has finalised and the draft VAT legislation bill to be shortly uploaded onto the Treasurys website. The public will be invited to submit their comments and a stakeholders workshop is scheduled for August 2011. Thereafter, the bill will be presented to parliament.

EXCISE DUTY REVISIONS

Goods description Beer Stout and porter Other beer made from malt Cider Opaque beer Other fermented beverages Pre-mixed alcoholic beverages (e.g ready to drink of strength not exceeding 10%by volume of alcohol) Sparkling wine of fresh grapes including fortified wines, grape must Other wine in containers holding 2 litres or less Other wine in containers holding more than 2 litres Other grape must Vermouth and other wine of fresh grapes flavoured with plants or aromatic substances in containers of 2 litres or less Cigarettes Diesel Kerosene

Revised excise duty rates Ksh 70 per litre or 40% of the RSP whichever is higher Ksh 70 per litre or 40% of RSP Ksh 70 per litre or 40% of RSP Ksh 70 per litre or 40% of RSP Ksh 70 per litre or 40% of RSP Ksh 70 per litre or 40% of RSP Ksh 70 per litre or 40% of RSP Ksh 80 per litre or 40% of RSP Ksh 80 per litre or 40% of RSP Ksh 80 per litre or 40% of RSP Ksh 80 per litre or 40% of RSP Ksh 80 per litre or 40% of RSP

Ksh 1,200 per mille or 35% of the RSP whichever is higher Retained at 20% Duty free

(RSP: Retail selling price, I mille equals 1000 sticks) These changes are effective 9th June 2011. Excise duty is now payable within ten days after petroleum oils are transferred to the owners by the Kenya Petroleum Oil Refineries Limited.

CUSTOMS IMPORT DUTIES

Customs Duty Rate Revisions

The following import duties are proposed: Goods Description Aseptic plastic bags used to store fruits by fruit farmers Premixes used for manufacture of animal and poultry feeds Imported raw materials for manufacture of solar panels Battery operated vehicles Apron buses used at the airside Vehicles and equipment imported by the Kenya police Motorcycle ambulances Security equipment e.g. hand held metal detectors, CCTV cameras, bomb detectors, under carriage walk through metal detectors and under carriage mirrors Rate of Import duty Lowered from 25% to 10% Lowered from 10% to 0% Duty remission now granted Duty exempt now Duty exempt now Duty exempt now Duty exempt now Duty exempt now

EAC harmonised customs on foodstuff

a. The Common External Tariff application now allows the importation of all types of rice at the rate of 35% instead of 75% for a period of one year. b. Maize grains imported by gazetted maize millers are granted remission of duty for a period of six months at a duty rate of 0% instead of 50% as per the EAC Common External Tariff. c. To enable millers import wheat grain to supplement local production, there is duty remission of imported wheat by gazetted millers at the rate of 0%, instead of 10% granted last year, for a period of one year.

FINANCIAL SECTOR CORPORATE GOVERNANCE ISSUES

Banking Services The Micro Finance Institutions (MFIs) Act is set to be amended so as to prohibit unlicensed entities from taking deposits. Unlicensed deposit taking MFIs to be prohibited from using the term deposit taking finance. Commercial Banks lending rates have remained high and the problem to be addressed through inter-bank lending rate disclosures and Government Bonds. Reforms will also be targeted on financial legal regulatory framework with an aim of addressing issues relating to movable and immovable collateral. Further proposals to amend the Banking Act have been made so as to provide for interbank trading between local banks and foreign banks as well as allow credit information sharing between the banks and MFIs. In order to enforce corporate governance Forex Bureaus will be governed under new guidelines published on 1 April 2011 and the guidelines to be harmonized with other existing laws.

Pension Schemes The requirement to have fund managers for pension schemes is to be removed where the pension fund has invested in guaranteed funds and the scheme submits half year investment reports to the Retirement Benefit Authority (RBA). Previously all pension schemes were required to have a fund manager and the administrative costs associated with this can now be avoided. An amendment to the NSSF Act will now enable a person undergoing imprisonment to appoint a representative to receive payment of benefits during the term of such imprisonment.

Capital Markets Authority Capital Markets Authority (CMA) Act to be amended in order to provide for commodity futures trading and over the counter bonds trading. Further amendments will seek to recognize trading of Real Estate Investment Trusts.

Insurance Companies A proposal to amend Insurance Act will be tabled in due course with an aim of strengthening the Insurance Regulatory Authority (IRA) in its dispensation of regulating the insurance sector. This is being driven by the need to have the IRA involved in the management of insolvent/troubled insurance companies so as to safeguard the stakeholders/policy holders from losing their claims as seen before when insurance companies dispose assets without compensating policy holders.

Mobile Phone Services In order to enhance mobile phone usage security, it has been proposed to amend the Kenya Information & Communications Act so that subscribers will be required to register for telecommunication services. Previously for example a SIM Card buyer was not required to show any form of identification.

Contacts: BDO East Africa

Certified Public Accountants 12th floor, Pension Towers, Loita Street P O Box 10032 Nairobi 00100 Telephone (254) 020 224 8381/224 8384

Audit partners & directors

Clifford Ah Chip - clifford.ahchip@bdo-ea.com Sayyida Nusrath - sayyida.nusrath@bdo-ea.com

Corporate finance - director

Sunil Lakhani - sunil.lakhani@bdo-ea.com

Advisory & I.T.- directors

Sandeep Khapre - sandeep.khapre@bdo-ea Peter Githongo - peter.githongo@bdo-ea.com Feizal Jownally - feizal.jownally@dcdm.intnet.mu

Tax & company secretarial - team

Charles Muchuha - charles.muchuha@bdo-ea.com Henry Sang - henry.sang@bdo-ea.com Nishat Jaweed nishat.jaweed@bdo-ea.com Beatrice Njambi beatrice.njambi@bdo-ea.com Betty Mwiu betty.mwiu@bdo-ea.com Esther Kariuki esther.kariuki@bdo-ea.com Rahab Wahito rahab.wahito@bdo-ea.com Robert Ndungu robert.ndungu@bdo-ea.com Augustine Kinuthia augustine.kinuthia@bdo-ea.com