PKF proposes changes to Income Tax Bill 2018 to boost investment
By Catherine Muema
PKF is calling for changes to the new Income Tax Bill, 2018 to improve the country’s investment environment.
According to PKF, the proposed new Income Tax law requires changes to reflect development needs of the country and to meet and look beyond the BIG 4 agenda – Universal Healthcare, Manufacturing, Affordable Housing and Food Security.
PKF’s tax partner, Michael Mburugu said the proposed Bill though styled as transformative in respect of the BIG 4 priority areas, has failed to recognise that the BIG 4 agenda is transient in nature.
“The Bill is relatively progressive and points to the right direction in addressing shortcomings that are characteristic of the current Income Tax law of 1974. In a few incidences however, the architecture of the proposed new law requires some changes to reflect a long-term development journey to meet and look beyond the BIG 4 agenda,” said Mburugu.
Some of the key areas that PKF is proposing include a rethink of the proposals to introduce a 35% upper rate of tax for both corporates and individuals which will only serve to make Kenya a less popular destination for investment against the backdrop of reducing tax rates in other countries. This together with elimination of 150% investment deduction allowances will in the long term reduce the tax base and revenue and are therefore short sighted.
“We are of the opinion that an aggressive policy of reducing corporate tax rates gradually from the current 30% to as low as 20% together with a significant widening of the income tax brackets whilst retaining the upper rate at 30%, which is long overdue, will in the long term significantly increase tax revenue beyond the short term gains that may be seen through a tax rate increase” said Mburugu.
PKF also propose the review of the ‘Thin capitalisation’ concept that taxes foreign controlled companies, which are financed with a bigger proportion of loans as opposed to equity. The Bill proposes to change the current debt to equity ratio of 3:1 to 2:1.
The proposed change, according to PKF will reduce the headroom for foreign borrowing thus directly impeding on foreign financing by related parties. This is expected to slow economic growth and make Kenya unattractive for foreign investment.
“To encourage rapid infusion of foreign investments to aid the Big 4, the Government should consider suspending this requirement for a considerable duration of time,” said Mburugu.
The firm is also urging the government to scrap deemed interest on interest-free loans on foreign controlled companies. In 2009, the Government introduced deemed interest on interest-free loans on foreign controlled companies. The Bill has proposed to retain the deemed interest concept but it has clarified that its application will be benchmarked on market interest rates applicable in the country of origin as opposed to local rates.
“The whole concept of deemed interest just like that of thin capitalization is largely an out-dated protectionist tool in global tax systems. In fact, loans advanced to Kenyan businesses by related parties serve to provide the much-needed financing as an alternative to borrowing from local banks, thus allowing for increased credit to local companies,” said Mburugu.
PKF is also urging the government to leverage on iTAX and e-CITIZEN to profile Kenyans and impose an obligation to pay tax on their income however small. According to the Bill, the Government proposes a tax equivalent to 15% of the County Government single business permit for small informal businesses with income of up to 5 Million shillings. Currently these are allowed leeway to pay a flat turnover tax at a rate of 3% on turnover.
“In our view, with technology, turnover tax should be implemented in its current form to ensure every citizen contributes to the tax kitty just like every citizen consumes public good and services. This will reduce the burden of taxation which is currently resting on the shoulders of salaried staff and big companies,” said Mburugu.
The firm is also urging the government to extend the foreign income tax amnesty period by another three to six months to give an opportunity to those who are willing to take advantage of the amnesty to do so. The tax amnesty introduced in 2016 on foreign held income and assets did not gain significant traction until recently as it was not well publicised and much needed clarifications were only issued in late 2017. The amnesty period expires on 30 June 2018. The firm also suggested that time is right for another local tax amnesty which will serve to capture all tax payers on iTax for purposes of wider future compliance.
On indirect taxation, and particularly VAT, the firm urged a review of the VAT exemption vs. zero rating policy on a number of basic commodities. Whilst VAT exemptions are easier to administer, they serve to increase costs of production, which in turn leads to higher basic commodity prices for the average Kenyan.
On actualizing the Big 4 agenda, the firm cited corruption as a major hindrance and said there was need to examine root causes and not just address the symptoms. “Corruption is a worldwide problem and we should work with other countries to fight it. We can start by asking those countries we do business with to make a crime in their country to bribe foreign officers” said PKF’s David Kabeberi Managing Director, PKF Consulting
Commending the government on the steps that the government has so far taken, Kabeberi added that corruption evolves and there is a need to continuously strengthen legislation and the use of technology to combat it.
PKF is of the view that under the housing pillar, there was need for innovative construction and financing methods to keep the costs low to enable many ordinary Kenyans to own a home and a stake in the country. “For example, new housing schemes should be symbiotic with industrial and other productive economic activities that can better absorb the cost of supporting infrastructure”