THE FINANCE ACT, 2018 ANALYSIS
The Finance Act, 2018 (“the Act’’) was assented to by President Uhuru Kenyatta and published in the Kenya Gazette on 21st September, 2018 (Kenya Gazette Supplement No. 121 (Acts No. 10)). The Act comes into force on diverse dates between 1st July, 2018 (now past) and 1st January, 2019.
In this legal alert, we focus on the provisions that came into force on 1st July, 2018 and 1st October, 2018 (now past).
The notable amendments under the Act are as follows;
- AMENDMENTS TO THE INCOME TAX ACT
Definition of the term dividend
The Act expanded the definition of the term “dividend” under section 7 of the Income Tax Act to include:
- Cash or asset distributed or transferred by a company to or for the benefit of a shareholder or any person related to that shareholder;
- Discharge of a shareholder or related person from any obligation measurable in money which the shareholder or related company owes to the company (namely repayment of shareholders loan);
- The amount used by a company in any other manner for the benefit of the shareholder or any person related to that shareholder;
- Settlement by a company of any debt owed by the shareholder or any person related to that shareholder to any third party; and
- Additional taxable income or reduced assessed loss of a company by virtue of any transaction with the shareholder or related person to such shareholder, resulting from an adjustment e.g. transfer pricing adjustments that result in additional taxable income will be chargeable to corporation tax at 30% and withholding tax on deemed dividends at 10%
The rate of tax charged on Dividends is retained at the rate of 5% on dividends paid to residents of Kenya and 10% on non-residents, even with the expanded category.
Withholding Tax on Demurrage Charges and Insurance Premiums
The Act expanded the tax regime by imposing tax on payments made to non-resident persons on account of demurrage charges and insurance premiums effectively impacting the shipping and insurance companies in Kenya. It defines Demurrage Charges as a penalty paid for exceeding the period allowed for taking delivery of goods, or returning of any equipment used for transportation of goods.
Demurrage Charges (paid to ship operators) payable to a non-resident Corporation are now taxed at the rate of 20% of the gross amount payable whereas Insurance Premiums (excluding aircraft insurance) tax deduction is at the rate of 5% of the gross amount payable.
Capital Gains Tax on transfers by Insurance Companies
Gains arising from the transfer of property by an insurance company (other than property connected to life insurance business) are now taxed at the rate of 5% of the net gain in accordance with the provisions of the eighth schedule to the Income Tax Act.
- AMENDEMENTS TO THE VALUE ADDED TAX ACT
Tax on Petroleum Products
Petroleum products that were previously exempt from VAT are now taxable at the rate of 8% of the taxable value. These products include:
- Petroleum oils and oils obtained from bituminous minerals
- Motor spirit (gasoline) regular and premium.
- Aviation spirit
- Spirit and kerosene type jet fuel
- Special boiling point spirit and white spirit
- Other light oils and preparations
- Partly refined oil (including topped crudes)
- Illuminating kerosene (IK)
- Other medium petroleum oils and preparations
- All Gas oils
- Natural gas in gaseous state