Economic overview and salient features from

Kenya Budget 2016

© 2016 Five Elements Advisory, all rights reserved

Is global growth loosing steam ?

 World GDP decelerated to 3.1 %. Global recession has set in every 8th year in last two decades and
2016 remains to be a year of economic and inflationary corrections
 Kenya’s GDP is approximately USD 62 billion and is the largest among all East African Nations
 Kenya’s GDP is seemingly growing due to consumption (government expenditure and private
consumption) and not by increase in net exports (export cover ratio is a deficit)
 Kenya GDP growth has not touched 6% in last 5 years and hence there are major policy moves by the
Kenyan government to boost exports
 Sub Saharan Africa GDP growth decelerated sharply to 3.8% on account of decline in commodity
prices, higher inflation due to weakening of region’s major currencies and weaker global trade 2
Kenya not on top slot in FDI Destinations (last five years)

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Macros

4
How the key Sector Performance tie to GDP growth

 Agriculture, Transport
and Storage, Real Estate
and Electricity Supply –
sectors have expanded
in last two years and are
the key winners

 Wholesale and retail

trade & Information and
Communication sector
contribution to GDP has
shown a decline over a
GDP Growth Rates YOY
period of last two years
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%

Growth Rate YOY 2015 Growth Rate YOY 2014 5

Agriculture now accounts for 30% of GDP

Marketed Production (in 000s Tonnes)

500

400

300

200

100

-
2013 2014 2015

Tea Marketed Production Horticulture Marketed Production

Maize Marketed Production

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Measure of growth in manufacturing sector

 Shift of focus on higher value

added goods in order to grow
exports
 Product focus on textile, apparel,
leather, food processing, fish
processing, agro-processing
 Special Economic Zone to boost
exports along with EPZs
 New ISM Stamps to fight
counterfeit products in the market

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Trend indicators

23%

8
What is Kenya Exporting and which are the hot destinations

9
What is Kenya importing and which are the top importation
partners

10
Horticulture (Cut Flowers)

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Tourism

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Tourism

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BUDGET 2016 - TAX HIGHLIGHTS – Summary of direction

Re-Alignment  Policy moves to strengthen exports and country’s

Unpredictable flagship industry’s earnings
to Industry  Elements of unpredictability continues on tax and
tax regime
focus levies legislation, though the process of public
consultation has improved
Drive to  Tax amnesties introduced to bring the untaxed
Low tax payer income under government net and by
expand the
base encouraging Kenyans to bring home their foreign
taxpayer base earned income
Weak  I-Tax has had post implementation technical
Leveraging issues but elimination of manual intervention in
legislation and technology and return submission and tax payment process has
inefficient tax strenghthened reduced business time on routine tax compliance
administration legislation  The New unified tax law for tax administration,
compliance, collection & recovery for all tax laws
in Kenya will boost the doing business
convenience in Kenya

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5E 2015 report card on Kenya
Where Kenya did well
- Enactment of the New Companies Act to boost
Doing business convenience in Kenya
- Enactment of new SEZ (Special Economic Zone)
law to bring export driven focus of Kenya to
frontline
- Kenya joining the TFTA
- Signatory to AEOI with OECD countries to curb
Tax evasions
- Pre-shipment clearance of all imported goods for
time and cost efficiencies
- Issue of New ISM Mark to curb counterfeit
products in Kenya - Three collapsed banks reflecting need to strengthen
- Mandatory move to I-TAX (electronic tax -
compliance platform)
- CBK issuing an Average Lending rate comparison
for all commercial banks to boost transparency -
- Concretization of plans for development of
industrial parks along the Standard Gauge
Railway line at Dongo Kundu in Mombasa, Voi,
Mtito Andei, Nairobi and Naivasha
Where Kenya performance lacked
- Corporate earnings have be down in 2015 with many
listed companies issuing profit warning. This has
resulted in significant lower tax collections.
- In 2015, when domestic airlines in most countries
booked profits and stock prices went bullish, Kenya is
bailing out KQ
- Due to decline in commodity prices, global inflation
went to multi decade low at 3.3%. Ironically, Kenya’s
inflation was touching the CBK headroom rate of 8%
during 2015
- Kenya’s banking system needs a major fix. The Interest
rate spreads are unrealistic and SMEs are struggling to
access credit
regulator’s supervision system (CBK, CMA and ICPAK)
Accounting scandals have hit some major Kenyan
organisations
- Value in the stock market has eroded by >25%. No IPOs
and only technical listings in last one year
WHT VAT regime was introduced has resulted in cash
profit margin not being realized in retail/trading
business. Companies are either forced to borrow locally
at an exorbitant ROI in Kenya or curtail business or look
for off shore funding
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Tax collection dependency to fund growth

Kenya is Taxing
Labour higher than
capital

2.2 Million Active Taxpayers Kenya’s population is

on I Tax as at 31 March 2016 44.2 million

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Direct Taxes

New Income Tax Act – light at the end of tunnel – overhaul still in progress
Salient Corporate Tax Amendments
 Tax incentive for graduate apprenticeship: Employers will now get an additional tax
deduction of 50% of the cost of the apprenticeship emoluments. This results in a
additional tax shelter to the employers of 15% of the cost of emoluments of the
apprentices. In order to enjoy the incentive, employers must engage at least 10 graduates.
Regulations to operationalize the incentive is expected to be gazetted soon.

 Low Corporate Tax Rate Regime introduced for Residential Estate Developers: The current
annual housing supply gap in Kenya is estimated at 150,000 units per year in the low cost
housing market. The finance bill proposes to reduce the corporate tax rate from 30% to
20% for housing developers who construct at least 1,000 units per year.

However, with the high interest cost and high inventory overhang period in Kenya, uptake of
this incentive by developers could be a challenge. The effective date proposed for this new law
is 1st January 2017

 Appointment of Tax Representative by Non-resident Person: Where a Non-resident person

with no fixed place of business in Kenya is required to register under a tax law, such
representative shall appoint a tax representative in Kenya in writing. The effective date
proposed for this new law is 1st July 2016 17
Direct Taxes

 Simplified taxation of Rental Income: Finance Bill 2016 builds on the new regime of rental
taxation brought through by Finance Act 2015. The bill proposes that residential rental
income which exceeds more than Kshs 144,000 (Kshs 12,000 p.m) but does not exceed
Kshs 10 million (Kshs 833,333 p.m) will be subject to witholding tax of 10% on gross rental
income. This translates into the fact that residential rental income of less than Kshs 12,000
p.m would not be governed by the Witholding Tax provisions. Finance Bill also provides for
Power to Commissioner to appoint witholding tax agents for collection of tax on rental
income and only such person appointed shall deduct the tax.
The effective date proposed for this new law is 9 June 2016

 Duty to submit third party returns: Finance Bill 2016 has inserted a new section in Tax
Procedure Act 2015 which requires any person, as required by the Commissioner, to furnish
information and returns in the manner and form prescribed by Commissioner.
This is a masterstroke from Kenya Revenue Authority which has been long waiting to require
Banks and Mobile Money Service Providers to furnish information about persons who have
undisclosed income and bring such income to tax net. Even though this provision has been
included in Finance Bill 2016, sharing of such information will require amendments to
legislations relating to customer privacy and protection of confidentiality and hence KRA is
expected to face stiff resistance from all counters against enactment of this provision. The
effective date proposed for this new law is 1 July 2016
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Direct Taxes

 New tax Amnesty: In respect of the undisclosed income earned outside Kenya, Finance Bill
2016 proposed to provide full amnesty from tax, penalty and interest for year of income
upto 31 December 2016, if the returns and accounts for the year 2016 are submitted on or
before 31 December 2017. The provisions also refrains the Commissioner from following
up on the source of income. This amnesty shall not be available if a person has already
been assessed for taxes or any matters relating to it or is already undergoing audit or
investigation for undisclosed income or any matters relating to it.
The effective date proposed for this new law is 1 Jan 2017

 Extension of time to pay tax: Finance Bill 2016 has amended Tax Procedure Act 2015 to
provide that where a taxpayer has applied for extension of time to pay a tax due under a
tax law, the Commissioner shall notify the tax payer of its decision regarding extension of
time within 30 days of receiving the application. This brings clarity and certainty in
legislation for response from Commissioner.
The effective date proposed for this new law is 1 Jan 2017

 Tax Refund application: Finance Bill 2016 has amended Tax Procedure Act 2015 to provide
that refund application for overpaid taxes (except VAT which will follow rules under VAT Act
2013) shall be made within 5 years from date of payment of tax. Commissioner shall notify
the tax payer of its decision regarding application within 90 days of receiving the
application. The effective date proposed for this new law is 1 Jan 2017
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Direct Taxes

Salient Personal Tax Amendments

 Increase in Personal Tax relief: Finance Bill 2016 proposed to increase the personal relief
from the current Kshs 13,944 per annum (KES 1,162 per month) to Kshs 15,338 per annum
(KES 1,278 per month). The net impact of savings per month from relief is negligible. The
effective date proposed for this new law is 1 Jan 2017

 Expansion of tax bands: Finance Bill 2016 proposed to expand the tax band by 10% as
below:

Considering that salary tax band proposed to be amended was structured more than 10 years
ago and the fact that Kenya has experienced inflationary economic conditions (as evidenced in
CPI) on Year on Year basis, a flat 10% rate used for expansion of tax brackets does not seem
rational to adequately index the inflation in tax slabs and provide offsetting effect on earnings
of Kenyans. Although, this is a welcome move and in the right direction.

The effective date proposed for this new law is 1 Jan 2017
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Direct Taxes

 Exemption of tax on bonus, overtime allowance and retirement benefits for low income
employees: Finance Bill 2016 proposes a welcome move to help low income earners to
fight high cost of living in Kenya. This benefit will be available to employees whose taxable
employment income before bonus and overtime allowance does not exceed the lowest tax
band.
The effective date proposed for this new law is 1 July 2016

 Transfers not considered for Capital Gains: Finance Bill 2016 proposes amendments to
exempts transfers between following from being considered as a “Transfer of asset” for
Capital Gains tax. Transfer of assets
- Between Spouses
- Between former spouses as part of divorce settlement or a Bona fide separation
agreement
- to immediate family
- to immediate family as part of a divorce or Bona fide separation agreement
- to a company where spouse or a spouse and immediate family hold 100% shareholding

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Indirect Taxes

Salient Excise Duty Amendments

 Excise duty imposed on illuminating Kerosene at Kshs 7,205 per 1,000 litre.
The effective date proposed for this new law is 9 June 2016

 Excise duty imposed on cosmetic and beauty products at 10%

The effective date proposed for this new law is 9 June 2016

 Excise duty on motor vehicles amended to 20%. The provisions relating to fixed rate of
duty based on age of vehicles has been removed
The effective date proposed for this new law is 9 June 2016

 Excise duty on plastic sacks and bags of following tariff number except vacuum bags for
food juices, tea and coffee (the words “Plastic shopping bags” has been deleted from The
Excise Duty Act 2015 – First Schedule – Part I)

- Tariff Number 3923.21.00 - Articles for the conveyance or packing of goods, of plastics;
stoppers, lids, caps and other closures, of plastics of polymers of ethylene
- Tariff Number 3923.29.00 - Articles for the conveyance or packing of goods, of plastics;
stoppers, lids, caps and other closures, of others plastics
The effective date proposed for this new law is 9 June 2016 22
Indirect Taxes

Salient VAT Amendments

 Definition of “Hotel” included in VAT Act: Definition of Hotel will include service flats,
service apartments, beach cottages, holiday cottages, games lodges, safari camps, bandas,
holiday villas. The inclusion of definition clarifies the legal stand point on application of VAT
for all premises which will be considered within the definition of “Hotel”.
The effective date proposed for this new law is 1 July 2016

 Provisions of Witholding VAT has been codified by insertion of proposal of new Section in
the Tax Procedure Act 2015. The person appointed as Witholding VAT agent would be
required to withhold 6% of taxable value on purchasing taxable supplies at the time of
payment of supplies and remit the same to Commissioner
The effective date proposed for this new law is 19 Jan 2016

 Service charges paid in lieu of tips shall not be considered as “supply” of accommodation
or restaurant services
- if the same is distributed directly to employees of the hotel or restaurant in accordance
with a written agreement between employer and employee and
- service charges does not exceed 10% of price of service, excluding such service charge
The effective date proposed for this new law is 1 Jan 2017

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Indirect Taxes

 VAT exempt on LPG

 VAT exempt on entry fees in National Parks

 VAT exempt on commission of Tour operators

 VAT exempt on direction finding compasses, instruments and appliances for aircraft

 VAT exempt on supply of garments and leather footwear manufactured in an EPZ. This is a
significant move to boost business and employment in Export Processing Zones. This will
also allow Kenyans to buy new clothes and shoes at affordable prices. However, the impact
of this provision on the un-organized and popular “Mitumba” market needs to be assessed.

The effective date proposed for above exemptions is 9 June 2016

 Supply of goods or taxable services to Special Economic Zone have been Zero-rated

The effective date proposed for above exemptions is 9 June 2016

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Indirect Taxes

Salient Import Duty Amendments

 Protecting the local iron and steel industry: Introduce a specific import duty rate of USD
200/MT on a wide range of iron and steel products. This is in a bid to cushion local
manufacturers from unfair competition and create more jobs in the iron and steel sector.
 Local production of aluminum cans: To encourage and protect the local production of
aluminium cans, the Government has proposed to:
- Remit, under the EAC duty remission scheme, import duty on aluminium plates and
sheets used in the manufacture of aluminium cans, and
- Increase import duty on importation of aluminium cans from 10% to 25% making the
import of these products into Kenya more expensive.
 Exempt HVAC Air Conditioners from payment of duty in order to make them affordable to
the manufacturers of pharmaceutical products
 Purchases from EPZ: To encouraging growth of industries in the Export Processing Zones
(EPZ) and enhance employment creation, the Government has proposed to stay application
of import duty (at the rate of 0%) on the purchases of made up garments and leather
footwear from the zones
 Energy efficient stoves: Reduction in import duty of stoves that use cleaner sources of
energy (electricity, gas and other fuels) from 25% to 10%

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Miscellaneous Taxes

 Removal of ad valorem levy on tea: Since 2012, tea farmers in the Kenya have been
required to pay a 1% percent ad valorem levy on the sale price of each kilo of tea sold at
auction. In the long run, the move may result in the improved competitiveness of Kenyan
tea in the international markets if the savings are reinvested towards improving yields and
quality
 Removal of Sugar Development Levy: 4 percent sugar development levy paid on the net
price of sugar has been abolished. This is a welcome move and we need to await and see if
the benefit of this will be passed on to farmers and end customers

 All fees of National Environmental Management Authority and the National Construction
Authority has been abolished: This move will be a big boost for Kenya on Doing Business
Convenience Index as it takes away the administrative hurdles and cost. Implementation
needs to be watched out for.

 Increase in Road Maintenance Levy from Kshs 12 to Kshs 18 which is now bound to
increase the cost of petroleum products and an overall impact on the inflationary effects
on the economy

 Special Tourism Promotion Fund to be financed by Air Passenger Service Charges:

Increase by 25% for International Travel and 20% for Domestic travel
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 Insurance and Bank

 Goods Imported into Kenya to be insured by Kenyan Insurance Companies: Section 20 of

the Insurance Act expressly prohibits placement of “Kenyan Business” with non-Kenyan or
foreign insurance markets except under certain circumstances. The exceptions are primarily
in respect of placement of reinsurance business outside Kenya with the laid out conditions.
Despite the existence of the law, imports into Kenya continue to be on a Cost, Insurance
and Freight (CIF) basis instead of Cost and Freight basis. This business practice has denied
insurance companies registered in Kenya significant business that could substantially
benefit the industry and the economy. Cabinet Secretary for National Treasury has directed
Kenya Revenue Authority to work with the relevant stakeholders to ensure that this part of
the law is implemented. It is expected that this move will also be beneficial to Kenyan
importers who will be able to exercise greater control and participation before the imports
arrive into Kenya.

 Minimum core capital for Banks: The Banking Act (CAP 488) has been amended to provide
for banks and mortgage finance companies to increase their core capital to minimum Kshs
5 billion by 31 December 2019. The amendment provides for a phased increase over the
final deadline of 31 December 2019 as below:
31 December 2017 – Kshs 2 Billion
31 December 2018 – Kshs 3.5 Billion
31 December 2019 – Kshs 5 Billion
Significant Merger & Acquisition activity along with capital raising expected in run to
deadlines 27
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Disclaimer

Information provided here is of general nature and is not intended to address the circumstances
of any particular individual or entity. The Information compiled in this document has been drawn
and interpreted from the Budget Statement by Cabinet Secretary for National Treasury on 8 June
2016, Finance Bill 2016, Economic Survey 2016 issued by Kenya National Bureau of Statistics,
Central Bank of Kenya website, UCTAD Knowledge resource website, East Africa Community
Customs Resources. A misstatement or omission of any fact or a change or amendment in any of
the facts and assumptions we have relied upon may require a modification of all or a part of this
document. Although we endeavor to provide accurate and timely information, there can be no
guarantee that such information is accurate as of the date of it is received or that it will
continue to be accurate in future. No one should action such information without appropriate
professional advice and after a thorough examination of the particular situation

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