How the 2024 amendments aim to reshape investment and compliance

By Alex Kanyi and Lena Onyango

Economic pressure on Kenya’s National Treasury has seen the rise of two significant legislative proposals: the Tax Laws (Amendment) Bill, 2024, and the Tax Procedures (Amendment) (No.2) Bill, 2024.

In simple terms, these bills seek to address Kenya’s fiscal deficit by broadening the tax base, improving compliance, and aligning with international tax standards. While these proposals reflect the evolving economic and governance landscape, they also raise questions about their potential to create sustainable revenue streams.

The legacy of the infamous Finance Bill of 2024, which sparked widespread protests across the country, casts a long shadow over these new amendments. The government’s challenge lies in balancing its urgent need for revenue with measures that do not alienate or aggravate taxpayers.

This delicate balancing act is evident in the proposed changes to the Income Tax Act (ITA), Value Added Tax (VAT) Act, Excise Duty Act, and the Tax Procedures Act (TPA). The amendments range from expanding tax definitions and introducing new levies to offering certain reliefs aimed at boosting compliance and aligning Kenya with global tax practices.

One of the more contentious aspects is the expanded definition of royalties to include payments for software distribution. This could subject software distribution to withholding tax. This signals a departure from international best practices and diverges from neighbouring economies like Uganda and Tanzania. For many software importers, this could mean higher costs, even though the Kenya Revenue Authority is aiming to capture a previously untaxed revenue stream.

While some proposals may raise concerns, others offer relief, particularly in areas impacting employees and employers. For example, the proposal to increase tax-free limits for meals, non-cash benefits, and pension contributions reflects an effort to provide relief. By enhancing these thresholds, the government seeks to boost disposable income and improve the competitiveness of benefit packages in the labour market.

Looking further, you’ll find more ‘innovations’ in the bills, including the introduction of a significant economic presence tax for non-resident digital service providers, which replaces the digital service tax. This move aligns Kenya with global trends, on taxing the digital economy. However, the 100% increase in the tax rate from 1.5% to 3% could be a disadvantage to Kenya’s plan to improve the digital economy. Similarly, taxing digital marketplace transactions for both residents and non-residents expands Kenya’s tax net but may face implementation challenges.

The bills also propose to introduce a 15% minimum tax rate for entities with global revenues exceeding EUR 750 million. In this proposal Kenya aligns itself with global efforts to combat tax avoidance and profit shifting. This measure drives government’s commitment to fair taxation of multinational profits, while offering exemptions for public entities and non-operational holding companies among others.

Broader structural changes aim to enhance tax administration and compliance. The standardisation of electronic tax invoices underscores the government’s drive for consistency and accountability in tax collection. Similarly, extending the tax amnesty period and reinstating the Commissioner’s power to abandon unrecoverable taxes provide taxpayers with an opportunity to regularise their obligations while empowering the tax authority to manage arrears pragmatically.

The VAT and Excise Duty Acts are not spared from reform. Clarifying the timing of export supply for VAT purposes and adjusting the apportionment formula for input tax signal the government’s intent to tighten tax laws while fostering a predictable business environment. However, proposed changes, such as taxing digital platforms and increasing excise duty on certain goods such as electric transformers and services such as betting, may face resistance as businesses assess their operational impact.

With such high stakes, these legislative proposals beg the question: Are Kenya’s tax policies achieving their intended goals? While frequent tax changes are a tool to raise revenue, it may be time to reassess their effectiveness. Do they align with broader economic aspirations like ease of doing business, industrialisation, job creation, and technological innovation? Are these changes adequately targeted, or do they risk hurting the goose that lays the golden egg (the taxpayer)?

Businesses navigating the evolving tax landscape will need to remain engaged if they are ever going to answer these questions. We should always advocate for measures that enhance transparency, accountability, and align with Kenya’s long-term goals.

Ultimately, these bills highlight the urgent need for collaboration between all stakeholders—small-scale businesses, multinationals, policymakers, economists, legal experts, and investors. Only through this collaboration can Kenya ensure its tax system supports sustainable, equitable growth while addressing the country’s fiscal challenges.