1. FINANCE ACT 2015
The Finance Act, 2015 was assented into law on 11 September 2015 (“the Finance Act”). The following are the highlights of in the Finance Act 2015 that impact the insurance industry;
- Investment deduction allowance of 150% retained
- The Finance Act has retained the 150% investment deduction allowance and this will continue being an incentive for businesses to invest outside the main Kenyan cities and promote development, urbanization and industrialization in the Counties
- Tax incentive for companies listing on the Securities exchange by introduction
The Finance Act has clarified that the reduced tax will be for a period of five years following the date of such listing.
Broadening the definition of “money”
The Finance Act has expanded the definition of money to include any amount paid through an ‘electronic payment system’. This change provides further clarity on what constitutes ‘consideration’ in the determination to the taxable value for VAT purposes.
To view the Detailed changes affecting the Insurance Industry contained in the Finance Act, (No. 14), 2015, click here
2. TAX PROCEDURE ACT 2015
The Tax Procedure Act (TPA) was passed into law on December 15th 2015 and came into operation on 19th January 2016. This law is important because of the following;
- The TPA Act gives the Commissioner power to register taxpayers for various tax obligations without their express application to be registered.
- The TPA Act seeks to provide the Commissioner with additional powers to investigate pricing arrangements between related entities where the Commissioner is of the view that the arrangements are designed primarily to avoid tax.
- The TPA Act provides a punitive penalty amounting to double the tax avoided for those taxpayers who are guilty of involvement in tax avoidance schemes.
- TPA Act reduces the interest for late payment of taxes from 2% (Income Tax Act and VAT Act) to 1% per month, with the total interest capped to the principal tax amount. The various tax legislations made provisions for taxpayers to appeal to the Commissioner for waiver of penalties and interest. However, following the reduction of the late payment interest rates from 2% to 1%, the TPA Act has removed the provision for waiver of penalties and interest, Taxpayers will now be expected to settle in full the principal tax and any accrued interest, where in the past taxpayers with compelling reasons could apply for waiver of the interest.
- The Commissioner has now been tasked with a responsibility to provide taxpayers with private rulings on the interpretation of tax law within 45 days from the date the taxpayers applies for the ruling. This provision will allow taxpayers to obtain clarity on the tax implications of various transactions even before they undertake the transactions, effectively reducing the possibility of future disputes on the tax treatment since the Commissioner is bound by the ruling.
3. EXCISE DUTY ACT 2015
The Excise Duty Act was passed into law and came into operation on 1st December 2015 through Legal Notice No.245. This means that from the operation date, Insurance premium, premium based or related commissions are exempt from excise duty according to the Act.
4. DRAFT EAST AFRICAN COMMUNITY INSURANCE BILL 2014
The East African Community (EAC) was established under Article 2 of the treaty for the Establishment of the Community that entered into force in July 2000.
This is an Act of the East African Community to consolidate and integrate the law relating to insurance, to provide for the regulation and supervision of insurance business, insurance intermediaries and related institutions and other businesses and activities relating to insurance and for connected purposes.
5. EAST AFRICAN INSURANCE ASSOCIATION
The process of establishing an East African Insurance Association has started. A ceremony to sign a Memorandum of Understanding took place in November 2013 at the AKI offices. The process is ongoing. There are a number of challenges such as funding and where the Association will be domiciled. The East African Insurance Associations have come up with draft Constitution.
6. ALTERNATIVE DISPUTE RESOLUTION IN TAX
Tax payers will have access to an alternative method of resolving tax disputes. The Kenya Revenue Authority (KRA) has put in place an alternative dispute resolution (ADR) framework. The main objectives of ADR is to provide an additional or alternative to the traditional adversarial dispute resolution mechanism provided for under the respective tax statutes.
The main benefits of ADR as seen by KRA are expediency, lower costs, confidentiality and maintenance of cordial relationship between the KRA and tax payers.
Intended nature of ADR proceedings
The following are some of the main features of the proposed ADR Mechanism:
- It acts as a stay against the running of time provided for under the tax statutes for progressing tax disputes. This will need to be anchored in the current tax statutes.
- It is likely to be free of unnecessary formality and the hearing of the tax disputes must be concluded within a prescribed period which could range between 45 – 60 days from the first hearing date. Specific timelines for the various activities required under the ADR process have been provided.
- The ADR discussions are confidential and on a “without prejudice” basis. This means that the matters disclosed in an ADR proceeding cannot be relied upon by either party in later proceedings unless such right is waived. Further, future evidence cannot be compelled from any person who was party to the ADR proceedings.
- The ADR discussion can be terminated by mutual agreement of the parties or for other specified reason provided to the facilitator.
- All dispute settlement will be evidenced by a written agreement and the Commissioner is required to, within a specified period of time, amend the assessment in line with the settlement agreement.
What could this mean for tax payers?
Most tax disputes need not result in litigation and often times are founded on a misunderstanding of the facts or can be resolved through early discussions or negotiations with the revenue authority.
The ADR policy could provide a basis to have confidential discussions with the Commissioner and agree on a settlement when implemented, ADR may offer an avenue for tax payers who have open tax disputes with the Commissioner to seek recourse. Of great interest could be long outstanding tax disputes which are yet to be determined or relatively straightforward tax disputes
7. COMPANIES ACT 2015
One significant change that was introduced in this Act is that a foreign company is now required to have at least 30 per cent of its shareholding held by a Kenyan citizen by birth. The effect of this provision is that every branch that wishes to operate in Kenya will be required to effect a share transfer or share allotment to a Kenyan individual in its jurisdiction.
The Companies Act 2015 also provides that unless the articles of the companies expressly restricts the objects of the company, the objects are unrestricted.
The new Companies Act provides for written resolutions except for the following two instances: when removing a director or an auditor from the office before the end of his/her term.
8. INCREASE KENYA REINSURANCE’S MANDATORY CESSION
Through a legal notice N0.178, dated 31st December 2014, The Government increased Kenya Reinsurance’s compulsory cession from 18% to 20%. The compulsory cession was extended to 31st December 2020.
9. UNCLAIMED FINANCIAL ASSETS ACT, 2014
The Unclaimed Financial Assets (UFA) Act 2014 established the UFA Authority whose mandate is to obtain unclaimed financial assets from holders of such assets on behalf of the Government, safeguard and return the assets to their rightful owners.
An asset will be declared unclaimed where one or more of the following requirements are met:
- The records of the holder do not reflect the identity of the person entitled to the assets;
- The holder has not previously paid or delivered the assets to the apparent owner or other person entitled to the assets;
- The last known address of the apparent owner is in a country that does not provide by law for passage of property to the State where there is no owner or is not applicable to the assets and the holder is a permanent resident in Kenya. Holders of Unclaimed Assets are required to:
- Make all reasonable efforts to locate the owner and to notify the owner about the assets;
- Send a written notice to the apparent owner at his last known address informing him that the holder is in possession of the assets;
- Make a report concerning the assets to the Unclaimed Financial Assets Authority.
The insurance industry is already complying with the requirements in the UFA Act.
10. CAPITAL GAINS TAX
In Kenya, Capital Gains Tax (CGT) was introduced in 1975. It was later suspended in 1985.
The Finance Act, 2014 re-introduced the Capital Gains Tax. The CGT became applicable on gains which accrue to a company or an individual on or after the commencement date of 1st January, 2015 on property situated in Kenya. The rate of CGT on transfer of property is 5%.
Income in respect of which tax is chargeable under section 3(2) (f) is the whole gain which accrues to a company or an individual on or after 1st January 2015 on the transfer of property situated in Kenya. Whether or not the property was acquired before 1st January 2015.
The Finance Act does not however specifically provide guidelines on how the capital gains tax relating to transfer of property will be met. Capital Gains Tax will apply to cases of loss or destruction of property or extinction of property where the sum paid out by way of compensation under a policy of insurance is received in respect of loss unless that sum is to be utilized to reinstate the property back to the same state /form.