The Finance Bill 2025 is currently under parliamentary review and the bill proposes a wide array of amendments to existing tax laws.
One of the central tenets of the Finance Bill is the expansion of the tax base by extending the scope of existing taxes and repealing certain exemptions:
1. Significant Economic Presence (SEP) Tax: The Bill proposes to broaden the scope of SEP tax to specifically include income derived from businesses operating over the internet or electronic networks. Crucially, the current Ksh. 5 million annual turnover exemption for non-resident persons is proposed to be repealed, bringing more digital businesses into the tax net.
2. VAT changes: Significant proposed amendments to the First Schedule of the VAT Act will impact consumer prices. Packaging materials for tea and coffee, raw materials for animal feeds, electric bicycles, and electric buses (tariff 87.02) are proposed to shift from zero-rated to exempt status. This means manufacturers and retailers of these goods may no longer be able to claim VAT refunds on their inputs, a cost likely to be passed on to consumers. Furthermore, the scope of VAT is set to expand to include all internet-based services provided by non-residents.
3. Royalties: The definition of royalties is proposed to be expanded to explicitly include payments for software distribution, ensuring a broader range of digital licensing activities are taxed.
4. Tax Loss Carryforward: A notable proposal is the introduction of a five-year cap on carrying forward tax losses, a significant departure from the current system which allows losses to be carried forward indefinitely. This could have substantial implications for long-term tax planning, particularly for businesses with extended investment cycles.
5. Preferential Tax Rates: Several preferential Corporate Income Tax (CIT) rates are proposed for repeal. This includes beneficial rates for companies constructing at least 100 residential units annually, local motor vehicle assemblers (for their first five years of operation), and accelerated capital allowances (100%) for hotels, manufacturing buildings, and machinery. This signals a move towards a more uniform corporate tax landscape.
6. Advance Pricing Agreements (APAs): A framework for Advance Pricing Agreements is proposed to be introduced, aiming to provide certainty and mitigate transfer pricing risks for related-party transactions by allowing taxpayers and the tax authority to agree on transfer pricing methodologies in advance.
7. Agency Notices: The Bill seeks to empower the tax Commissioner to issue agency notices even when a tax dispute is under judicial review at the High Court or other courts, potentially altering the dynamics of tax disputes.
8. VAT Refunds: The Bill proposes reducing the timeline for applying for VAT refunds from bad debts (from 3 years to 2 years) and for lodging general VAT refund claims (from 24 months to 12 months). Additionally, the Kenya Revenue Authority’s (KRA) processing period for refunds is extended from 90 days to 120 days (or 180 days if an audit is required).
9. Country-by-Country Reporting (CbCR): The exemption for Multinational Enterprise (MNE) Groups from filing CbCR is proposed to be lifted where an exchange of information agreement exists, increasing reporting requirements for certain international businesses.
10. Per Diem Benefit: The tax-free per diem benefit is proposed to be expanded significantly, from Ksh. 2,000 to KES 10,000, offering relief to employees for work-related allowances.
11. Pension and Gratuity: A proposed amendment seeks to exempt all pension and gratuity payments from taxation, regardless of the recipient’s age, providing a substantial benefit to retirees.
12. PAYE Reliefs: Employers will be mandated to apply all eligible tax reliefs, deductions, and exemptions when calculating Pay-As-You-Earn (PAYE), potentially leading to improved take-home pay for employees.
13. A key provision within the Bill seeks to repeal Section 59A (1B) of the Tax Procedures Act, a statutory safeguard that previously prohibited the Kenya Revenue Authority (KRA) Commissioner from compelling taxpayers to disclose personal data or trade secrets obtained during business operations.