The Kenyan Finance Bill 2024 and its implications in the infrastructure industry Paula Ochango

THE KENYAN FINANCE BILL 2024

AND
ITS IMPLICATIONS IN THE INFRASTRUCTURE INDUSTRY

The Finance Bill 2024, presented to the Kenyan National Assembly on 9 May 2024 outlines
critical fiscal measures to fund the budget for the 2024/25 fiscal year. However, its fate rests on
public participation, a crucial step in Kenya's legislative process. Should the bill garner approval
from the National Assembly following this public engagement, the proposed tax reforms and
amendments are slated to come into effect on 1 July 2024, shaping the country's economic
landscape in the months ahead.
Let's dive deeper into the implications of some of the proposed changes for investors and foreign
contractors specifically in the infrastructure sector:
1. EXPANDING THE DEFINITION For investors and foreign contractors involved in
OF ROYALTIES infrastructure projects, the expanded definition of
royalty to include software-related fees could impact
project costs. Many infrastructure projects rely
heavily on software for design, project management,
and monitoring systems. If these software expenses
become subject to taxation as royalties, it could
somewhat have an impact on project budgets. It
should be noted that this amendment is a
divergence from international norms.

2. FOREIGN EXCHANGE LOSS Infrastructure projects often involve significant

LIMITS foreign currency transactions, exposing investors
and contractors to exchange rate fluctuations.
Shortening the period for deferring foreign exchange
losses from five years to three years adds another
layer of financial risk. Large-scale infrastructure
projects often span several years, and abrupt
currency fluctuations could erode profit margins if
losses cannot be fully accounted for within the
shorter three-year window. This may prompt
investors and contractors to adopt more
conservative financial strategies.

3. WITHHOLDING TAX ON Infrastructure projects frequently involve contracts

PUBLIC ENTITY PAYMENTS with public entities for construction, maintenance, or
supply of goods and services. The imposition of
withholding tax on payments to suppliers may affect
project cash flows and profitability. Non-resident
contractors in particular, may face challenges in
recovering withheld taxes, leading to higher project
costs.

4. ENHANCING NON-TAXABLE The proposed increase in non-taxable benefits for

BENEFITS: employees, such as allowances and meal
provisions, could indirectly benefit investors and
contractors involved in infrastructure projects. By

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The Kenyan Finance Bill 2024 and its implications in the infrastructure industry Paula Ochango

improving the attractiveness of employment

packages, contractors may find it easier to attract
skilled labour, which is crucial for the successful
execution of infrastructure projects. However, this
benefit may be offset if increased labour costs lead
to higher project expenses.

5. INTRODUCTION OF MINIMUM The introduction of a minimum top-up tax aligns

TOP-UP TAX Kenya with global efforts to prevent tax base erosion
by multinational corporations, potentially enhancing
the country's reputation as a transparent and fair
business environment. However, the additional tax
burden on multinational groups operating in Kenya
could lead to higher project costs, particularly if tax
liabilities cannot be fully passed on to clients or
consumers.

6. INTRODUCTION OF MOTOR Infrastructure projects often require extensive

VEHICLE TAX transportation of materials, equipment, and
personnel. The introduction of motor vehicle tax at
the rate of two-point five percent (2.5%) of the value
of the motor vehicle, albeit exempting certain
vehicles, will increase the operating costs for
contractors.

7. DIMINUTION OF VALUE Infrastructure projects involve substantial

DEDUCTIONS investments in machinery and equipment. The
proposed deduction for the diminution of value of
implements not covered by existing schedules could
provide some relief for project developers. However,
the impact may vary depending on the scale and
nature of the infrastructure project. Investors with
significant investments in specialized equipment not
covered by existing deductions could benefit the
most.

8. INTRODUCTION OF ADVANCE Multinational infrastructure projects often involve

PRICING AGREEMENTS (APAS) complex intercompany transactions. The
introduction of APAs could provide certainty for
investors regarding transfer pricing arrangements,
reducing the risk of tax disputes with the Kenya
Revenue Authority (KRA). This could enhance
investor confidence and facilitate smoother project
execution. However, concerns about the KRA's
unilateral power should be checked as it could
potentially nullify APAs and further introduce
uncertainty, potentially deterring some investors.
9. REMOVAL OF INVESTMENT The removal of enhanced investment deductions for
DEDUCTIONS FOR STANDARD SGR-related bulk storage facilities could impact
GAUGE RAILWAY (SGR) ongoing and future infrastructure projects linked to
RELATED INVESTMENTS the SGR. Investors who previously benefited from
these deductions may need to reassess their
investment strategies and financial projections.

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The Kenyan Finance Bill 2024 and its implications in the infrastructure industry Paula Ochango

10. TAXATION OF NON-AID Foreign contractors, subcontractors, consultants,

PROJECT INCOME FOR NON- and employees engaged in infrastructure projects
RESIDENTS financed by grants will now be subject to taxation on
their income. This change could potentially increase
the tax burden for non-resident stakeholders
involved in infrastructure development.

11. TAXATION OF GAINS FROM The clarification that gains arising from property
SPECIAL ECONOMIC ZONES transfers within SEZs will be exempt from income
(SEZS) tax offers a favourable incentive for investors in
SEZ-related infrastructure projects. This could
encourage more investment in SEZ development
and related infrastructure, stimulating economic
growth and attracting foreign investment.

12. REMOVAL OF LOWER TAX The Bill proposes to do away with the lower income
RATE FOR RESIDENTIAL tax rate of fifteen percent (15%) that applies to a
CONSTRUCTION COMPANIES company that constructs one hundred residential
units annually. Accordingly, the income earned by
the companies will be subject to corporate tax at the
rate of thirty percent (30%).

13. TAXATION OF SHIP OWNERS' The proposal aims to subject ship owners' income
INCOME from the carriage of passengers and cargo in Kenya
to a higher tax rate of three percent (3%) of the gross
amount received, compared to the previous rate of
two and a half percent (2.5%). This adjustment could
impact maritime infrastructure projects and shipping
operations, potentially increasing operating costs for
shipping companies and affecting freight rates.

14. EXPANSION OF WITHHOLDING The proposal to subject all payments for

TAX REQUIREMENT management, professional, or contractual fees to
withholding tax, regardless of the amount, implies
that these payments will now be subject to taxation.
This change may increase the compliance burden
for taxpayers, especially those receiving numerous
small payments below the previous threshold of
Kenya Shillings twenty-four thousand (KES 24,000)
per month.

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The Kenyan Finance Bill 2024 and its implications in the infrastructure industry Paula Ochango

15. DEFINITION OF TAX INVOICE
TO INCLUDE ELECTRONIC TAX
INVOICE
The amendment to include electronic tax invoices
aligns the VAT Act with the Income Tax Act and the
Tax Procedures Act, which require the issuance of
electronic tax invoices for transactions. For investors
and foreign contractors, this streamlines invoicing
processes, potentially reducing administrative
burdens associated with traditional paper-based
invoicing.

16. TIME OF SUPPLY FOR The proposed change in determining the time of
EXPORTED GOODS supply for exported goods introduces uncertainty, as
it deviates from the current criteria based on
delivery, invoicing, or payment receipt. The
requirement to possess export confirmation
documents may introduce logistical challenges and
delays, potentially affecting cash flow for exporters,
including those involved in infrastructure projects.
Foreign contractors and investors exporting goods
from Kenya may need to adapt their supply chain
management processes to comply with the new
requirements and mitigate potential disruptions.

17. REMOVAL OF VAT The removal of VAT exemptions for certain capital
EXEMPTIONS FOR goods, plant, machinery, equipment used in specific
MANUFACTURING AND sectors such as manufacturing, plastics recycling,
CONSTRUCTION SECTORS and construction of specialized hospitals may
impact investment decisions in these industries.

18. DELETION OF SIXTY-DAY The deletion of the sixty-day timeline for returning
TIMELINE FOR RETURN OF tax on bad debt and the associated interest rate
TAX ON BAD DEBT provision may simplify compliance procedures for
taxpayers. This change could provide clarity and
alignment with existing timelines provided in the VAT
Act, potentially reducing administrative burdens for
businesses involved in infrastructure projects.

19. INCREASE OF VAT The proposed increase in the threshold for

REGISTRATION THRESHOLD mandatory VAT registration from Kenya Shillings five
million (KES 5,000,000) to Kenya Shillings eight
million (KES 8,000,000) is expected to reduce the
compliance burden for small businesses. This
adjustment may positively impact investors and
contractors operating in Kenya by reducing
administrative costs associated with VAT registration
and compliance.