KPMG Kenya Budget Brief 2015

Kenya 2015

BudgetBriefTM

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KPMG BudgetBrief 2015

1 Regional Highlights

In 2014, Tanzania and Rwanda were the best performers in the region with growth rates of 7.2% and 6.0% compared to Kenya, Uganda and Burundi which grew at 5.3%, 5.9% and 4.7% respectively.

Across East Africa, the Finance Ministers read from the same scrip with focus on creating a conducive business environment underpinned by investments in infrastructure and social services such as health and education.

The political uncertainties rocking Burundi are likely to affect the budget process in the country putting a huddle in the country’s efforts to gain normalcy.

Insecurity has hit the tourism industry in Kenya hard resulting in the closure

of many tourist facilities at the Kenya coast. The closure has had a negative impact on employment and industries such as agriculture, transport and manufacturing which supplied goods for tourist consumption.

Whereas Tanzania has enjoyed a more stable environment compared to Kenya and Uganda, incidents in the recent past suggest deteriorating security situation.

Tanzania’s strategic plan for 2016 to 2021 focuses on growing the manufacturing sector by creating a more friendly business climate.

Uganda also unveiled the second national development plan with a focus on attaining middle income status while Kenya continues to invest

The world real Gross Domestic Product (GDP) growth rate averaged 3.3% in 2014. The East Africa Community countries were among the best performers even though their growth rates were well below the target growth rates necessary to achieve upper middle income status for Kenya and middle income status for the other four countries.

Indicator Kenya Tanzania Uganda Rwanda

GDP current prices (USD’ Million) 59,201 36,362 24,905 9,017

Real GDP growth rate (%) 5.3 7.1 5.3 6.5

Population (Million) 43 49.6 35 11.3

GDP per capita (USD) 1,376 733 712 798

Overall inflation rate (%) 6.9 5.9 5.5 2.6

Treasury bill interest rate (%) 8.58 9.09 14.13 4.9

Budget deficit % of GDP at current prices 8.0 3.8 4.5 5.0

Total public debt (USD million) 25,220 18,055 7,600 2,250

Trade deficit as % of GDP current prices 28.4 11 8.5 16.2

Tax revenues (USD million) 13,246 5,686 5,951 1,310

in vision 2030 flagship projects even though it has already attained middle income status following the rebasing of the economy in 2014.

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2 Kenya Budget Environment

Slicing and dicing the budget is a delicate exercise. The 2015/2016 budget identified six critical development areas that the government plans to prioritise - infrastructure, agriculture, security, health, education, social protection and youth empowerment. By focussing on these areas, the Government hopes to boost growth, create jobs and enhance social equity.

Kenya’s economic performance has been dogged by insecurity, drought and falling tourism numbers over the past year. Externally, unfavourable agricultural prices, particularly tea, a weak global economy and delays in signing of the Economic Partnership Agreement between the European Union (EU) and the Kenya Government compounded the problems.

The agricultural, transport and storage, information and communication,

construction and financial and insurance services contribution to GDP grew marginally while the contribution from tourism declined for the second year in a row.

The positive growth is attributed to activities such as construction of the Standard Gauge Railway; increased production in agriculture following implementation of strategic interventions to revamp the sector; continued investment in infrastructure

Sources of GDP growth Contributions to GDP (%)

2014 2013

Agriculture 27.3 26.4

Manufacture 10.0 10.7

Transport and storage 8.3 7.8

Real Estate 7.8 7.9

Financial services 6.7 6.6

Construction 4.8 4.5

Mining and quarrying 0.8 0.8

projects; expansion of activities in sectors such as building and construction, manufacturing, retail and wholesale, financial intermediation, and the ongoing initiatives to deepen regional integration.

Kenya projects that in 2015 the country will grow between 6.5% and 7.0% on account of improved business environment, lower global oil prices, high public and private investment, increased consumer confidence and high agricultural productivity.

In the social scene, the economy created 799,700 jobs with the informal sector contributing 82.7% of the total employment. Public administration, compulsory wage bill and education sectors were the largest employers in the public sector.

Macroeconomic indicators remained relatively stable. Inflation rate remained at single digits, increasing from 5.7% to 6.9% in 2014. The Central Bank of Kenya (CBK) retained the Central Bank Rate (CBR) at 8.50% through the 11 months of the year but increased the rate to 10% in an attempt to stop the depreciation of the shilling.

At the Nairobi Securities Exchange (NSE), the NSE 20-share index rose by 3.8% to 5,113 points. This was largely due to the increase in the number of shares traded, increase in the number of deals in the equity market and total Bond turnover increased from KShs 452 billion in 2013 to KShs 506 billion in 2014. Trade likely suffered from the introduction of capital gains tax which lead to a tussle between stockbrokers and the KRA on the responsibility for accounting for the tax.

The Balance of Payments position

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improved to a surplus mainly on account of proceeds from the sale of the Eurobond. However, the current account deficit worsened due to deterioration in the trade deficit on the back of high imports for investments and reduced inflows from exports and tourism. During the year, the country implemented various measures to improve revenue administration. These include; enactment of income tax regime for the extractive industry, re-introduction of capital gains tax; introduction of VAT withholding with a retention of 6 percent and rolling out of iTax.

Globally, most developed and developing countries are projected to experience improved growth in 2015. World trade is expected to grow and oil prices will remain largely subdued. The global prospects for 2015 are therefore bright with world real GDP projected to grow at 3.5% subject to continued recovery from the global financial crisis. This will impact Kenya’s economic growth positively.

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Personal TaxLimited amnesty….Previous attempts to collect tax on rental income appear to have run into strong headwinds. The taxman in another attempt to kick-start the process has proposed a tax amnesty to coax more landlords into the tax bracket.

In a further incentive to landlords, the taxman has proposed a lower income tax rate of 12% on gross rental in-comes not exceeding KShs 10 million per year. Hopefully this will make it easier for a majority of landlords to comply with their tax obligations.

Return flight…Many countries have turned their fo-cus to assets that their citizens keep in offshore accounts to counter tax evasion. Kenya has jumped on this bandwagon, not for tax reasons but to encourage Kenyans who maintain assets offshore to return and invest the funds locally to spur growth. Watch out for the modalities!

3 Budget Highlights

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Corporation Tax

Tarmacking? Not anymore!Your business may be eligible for a tax rebate for hiring and training an intern or apprentice, as the Government moves to build a skilled manpower resource base.

As an incentive to facilitate this, the Cabinet Secretary has proposed tax rebates to corporate entities that engage fresh graduates to enable them acquire the relevant skills and experience.

To qualify, employers need to provide the internship or apprenticeship to a minimum of 10 interns for a period of 6 to 12 months.

Uwezo Fund for training – Perhaps?In a bid to enhance skills development, the Government intends to channel the training levy currently charged at KShs 50 per employee to a National Job Fund.

This is in line with the Government’s goal of facilitating private sector growth to accelerate industrialization and create jobs.

It is about timeContinuing the momentum on tax reforms to encourage compliance, the Cabinet Secretary has proposed to table before parliament a revised Income Tax Bill based on international best practice.

The Bill, which is under review by the various stakeholders in line with the Constitutional requirement for public participation, is expected to be tabled in Parliament by September 2015.

Withholding TaxA bright future for RiverwoodIn a bid to revamp the film industry by attracting talent among the youth and creating employment, the Cabinet Secretary has exempted payments made by foreign film producers to actors and crew members from withholding tax.

Previously, withholding tax on payments to actors and crew members was applicable at 20%.

In addition, the Cabinet Secretary has proposed to set up a fund for rebate of expenses by producers in the film industry.

This is a step in the right direction that will see an increase in investment in

the film industry.

Tax on rent – Change of tactThe Cabinet Secretary intends to introduce a new tax rate of 12% for residential rental income where gross rental income is KShs 10m or less in a year.

This is intended to reduce the hassles of computing tax on rental income. Simplifying the tax computation is expected to increase compliance and reduce the administration costs.

Additionally, this initiative is expected to bring the elusive landlords under the tax net.

Caesar’s olive branch!The Government’s efforts to rein in errant residential properties landlords have proven futile over the years.

In a bold move to encourage compliance by the residential property landlord and widen the tax base, However, the period and terms of the amnesty are not yet clear. What remains to be seen is whether the “errant” landlords will enthusiastically embrace the amnesty.

Kenyan ship…welcome to dockAs an incentive to boost the shipping sector, the Cabinet Secretary has increased the shipping investment deduction from 40% to 100% on purchase of a ship of 125 tons and above from the current 425 tons limit.

The Government incentive will encourage private entities to invest in the lucrative shipping business thus creating more employment while at the same time flying the Kenyan flag high!

CGT on shares – No relenting! In order to reduce the complexities and challenges of collecting capital gains

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on the sale of shares, the Cabinet Secretary has scrapped the capital gains tax rate of 5% on shares and introduced a 0.3% withholding tax on the transactional value of the shares.

The Government has bowed to pressure from the stock brokers by instituting a more clear tax regime. However, the treatment of sales disposals at a loss is still not clear.

Harmony in the extractive industryTo address the inconsistency in the mining and petroleum industry on withholding tax on training and contractual fees, the Cabinet Secretary has reaffirmed that withholding tax on training fees will be 12.5%.

Further, withholding tax on the contractual fee payments has been reduced to 5.6% from 12.5%.

Bingo!In a move to encourage the growth of the gaming industry while encouraging tax compliance, the Cabinet Secretary proposes to re-introduce a simplified “Gaming Tax”. Charged directly on the gross gaming revenue, the tax shall be 5% of revenue on public lotteries, 7.5% of the bookmakers and 15% on premium entry competitions.

The Government expects to leverage on the potential of the industry to generate revenues while encouraging it to grow.

Tax losses – Reprieve at last! Effective 1 January 2010, a company could only utilize losses against future income for a maximum of five years. However, such a taxpayer could apply to the Cabinet Secretary of National Treasury for an extension of this period.

The Cabinet Secretary proposes to allow companies to carry forward tax losses for a period of up to 10 years.

The extension is expected to create an inviting environment for investors involved in capital intensive sectors such as energy, mining, manufacturers and hotel operators amongst other.

“I propose to extend this period to ten years considering that there is heavy investment whose losses cannot be recovered in 3ys.”

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The making of Kenyan movie starsSeeking to nurture the youth’s vast talent and reduce unemployment, the Government has proposed to exempt from VAT, goods and services purchased for the use in the film industry. The upshot of this is to open up the film industry by encouraging investment and promoting the participation of the youth.

Let’s go greenIn a quest to achieve the goal of a green economy, the 2015/2016 budget has exempted from VAT, plastic bag biogas digesters.

Harmonization across the region…The services provided to goods in transit were previously exempted under the Finance Act 2014. In order

to harmonize the treatment of these services across the region, the 2015/2016 budget has zero rated the services offered, in respect of goods in transit. This move is will create a level playing field for transporters within the region.

Tying up loose ends!The VAT Act 2013 was not clear regarding the period within which a taxpayer could lodge a VAT refund claim with the KRA. This has now been addressed through the 2015/2016 budget, which requires taxpayers to file refund claims within 12 months from the date the tax became due and payable.

Investment destination of choiceKenya strives to boost both local and

VAT

Particulars New Rate (%) Old Rate (%)

Film making goods/services Exempt 16

Plastic bag biogas digesters Exempt 16

Transport services for goods in transit

0 Exempt

Inputs for industrial/ recreational parks

Exempt 16

Summary of changes in VAT rates

foreign investments in the country. In this regard, the Government has proposed to exempt from VAT, taxable goods and services for the use in construction of infrastructure works in industrial and recreational parks of 100 acres or more. This is bound to create more jobs, combat unemployment, and contribute towards the growth of the economy.

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Customs DutyCast your net on many watersPlayers in the fishing and aquaculture sub-sector have a reason to smile following the customs duty remission on the importation of nylon yarn and synthetic twine used in the manufacture of fishing nets.

If you must fish, then using imported fishing nets will set you back 25% being the customs duty on imported fishing nets.

Sweet news for a sour sugar sectorSome may call it protectionist but the Government has shown its commitment to protecting the local sugar industry from cheap imports by increasing the import duty on sugar.An imported metric ton of sugar shall now attract import duty at USD 460 as opposed to the previous rate of USD 200.

This move is in line with previous tariff and non-tariff measures implemented to protect the local sugar industry against competition from cheap sugar imports. With the developing discussions around an COMESA-EAC-SADC free trade area, it will be interesting to see how this new duty pans out.

No more hidingAcross the East Africa Community (EAC), the Partner States applied

various rates on the export of raw hides and skins. The differential rates led to cross-border smuggling of hides and skins.

The Ministers of Finance for the Partner States have agreed to harmonize the export duty on raw hides and skins.

The proposed export duty rate on these products is the higher of 80% on

FOB value or USD 0.52 per kg.

Coalition of harmonyThe Government appears to have listened to the submissions made by the private sector to improve the business environment in East Africa.

In response to these submissions, the Cabinet Secretary has proposed a reduction in the import declaration fee (IDF) to 2% from the current 2.25% of the customs value.

The proposed change shall harmonize the IDF charged across the EAC.

Equality in uniform and taxKeen on securing the society against criminals, the Cabinet Secretary has proposed the inclusion of prison authorities in the Exemption Schedule.

This will enable the prison authorities to import goods for their official use duty free. The move will put prison authorities on par with the Kenya

Defense Forces and Police.

Welcome back homeThe Cabinet Secretary has proposed a tax break for residents returning from the diaspora. A returning resident who imports a right-hand vehicle to replace a left-hand vehicle that he owned prior to his return is exempt from import duty and VAT.

This exemption is pegged on the returning resident having owned a left-hand drive vehicle abroad for at least 12 months and disposing off this vehicle to procure a right hand drive vehicle.

Additionally, the vehicle that the returning resident imports should be of a similar value to the one previously owned and disposed.

All in one systemWith effect from 1 July 2015, all imports and exports shall be cleared under the Kenya National Electronic Single Window System (Kenya Tradenet System).

This is expected to augment the Government’s initiatives to speed up cargo clearance.

A healthy smile and beautiful skinKenya is the sole manufacturer of plastic tubes for packing toothpaste and cosmetics in the region. In order to protect this niche industry, the Cabinet Secretary has proposed an increase in the import duty of these plastic tubes from 10% to 25%.ww

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Excise DutyNew pageIn a move to deepen tax administration reforms to ease compliance, a new Excise Bill is in the offing.

Under the Bill, Excise Duty will be imposed only on goods with harmful effects from their production supply, consumption or use.

The tax will be imposed on the units of quantity of the following:

No littering To stem the littering vice with its harmful effects on the environment, the Cabinet Secretary has proposed to increase Excise Duty on non-bio-degradable plastics to KShs 120 per kg.

Papers’ back!In a move aimed at restoring the competitive edge of the packaging industry, the Cabinet Secretary has proposed to reduce the import duty on paper and paper based products from 25% to 10%.

• Sticks of harmful cigarettes and tobacco;

• Volumes of harmful alcoholic beverage and sugar sweetened beverage consumed;

• Volume of polluting fossil fuels;• Age of vehicles;• Weight of environmentally

damaging plastic bags

Healthy drink?Under the Excise Bill, beer or wine made from sorghum, millet or cassava qualify for remission from excise duty.

This move aims to achieve the twin benefits of promoting the manufacture of safe drinks and encouraging use of available agricultural products.

The remission should see a reduction

Kenya is the leading manufacturer of aluminium milk cans in the region.

The proposed change presents a vital lifeline for some of the pioneer paper industries.

Let’s make pasta!The consumption and popularity of pasta in households within the EAC has increased over the years. However, this popular food item is largely imported.

In a move expected to entice investors in the manufacture of pasta and reduce dependence on imports, the Cabinet Secretary has proposed a remission of duty on semolina (the raw material used for manufacture of pasta).

Milking it and can itKenya is the leading manufacturer of aluminium milk cans in the region. In order to protect this position, the Cabinet Secretary has increased the import duty rate from 10% to 25%.

Gas cylinders: Turning up the heatDuring the April 2015 pre-budget consultative meeting held in Arusha, the Ministers for Finance agreed to remove imported gas cylinders from the customs exemption regime.

The minister proposed a duty rate of 25% to protect the local manufacturers of cylinders.

in the consumption of illicit brew by providing cheaper and safer alternatives to the consumers.

Water and all good things for KenyaThe Cabinet Secretary has proposed to remove bottled water and other non-harmful goods from the list of Excisable goods under the Excise Bill.

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Financial Sector ReformsUnder the Vision 2030, Kenya intends to become the leading financial centre in Eastern and Southern Africa. The Nairobi International Financial Centre was first mooted in 2008 and is expected to be fully operational in 2015. This move aims to make Kenya the preferred investment destination for financial services in the region.

In order to enhance the stability of financial institutions, banks and insurance companies are expected to satisfy the following core capital requirements by December 2018:

Sector Old (KShs)

New (KShs)

Bank 1B 5B

General insurance

300M 600M

Life insurance 150M 400M

Following the adoption of a risk-based supervisory model, the requirement for annual licensing of banks has been scrapped. The Central Bank of Kenya will monitor and carry-out risk assessments on banks and retain the power to withdraw the perpetual license upon breach of any of the conditions.

This is a welcome move for the banks as it reduces some of the administrative burdens that were part of the annual banking licence renewal process.

Currently, over 25,000 insurance agents have qualified for the award of Certificate of Proficiency (COP). However, only 5,000 agents have received the COP. This is mainly due to the requirement to have insurance companies recommend the insurance agents. To remedy this situation, the Cabinet Secretary for the National Treasury has proposed the removal of this requirement. This is expected to increase the number of insurance agents in Kenya.

There are proposals to amend Savings and Credit Cooperatives Societies Act to allow the SACCO Societies Regulatory Authority (SASRA) to undertake vetting of directors and key officers. This will increase transparency and good governance in SACCOs.

Further, and in the interest of full disclosure, SACCOs are now required to share both the negative and positive information of members with other financial institutions.

Tightening the security leash on terrorism To assist in the fight against terrorism, the Government is proposing to amend the Proceeds of Crime & Money Laundering Act to strengthen the Financial Reporting Center‘s supervisory role. This will help Kenya improve its international rating on the fight against terrorism.

Buy Kenya Build Kenya Kenya has been accused of producing what it does not consume and consuming what it does not produce. To reverse this trend, the Government will require all public projects to procure at least 40% of contract value from local sources. Through this move, the Government also aims to enhance the growth of SMEs and ensure they diversify from trading in commodities to manufacturing.

Government proposes to establish the National Construction Company under the National Youth Service. Through this company, the Government aims to reduce its construction costs by about 30-50% due to the reduction in cost of labour and machinery.

A competitive business environmentWith the aim of attaining vision 2030 economic pillar, the Government aims to reduce the procedures, time and costs of starting a business, registering property and obtaining construction permits.

In addition, the procedure for paying taxes will be made easier and cheaper to the taxpayer while cross-border trading will also be simplified.

Further, the Government has shown its commitment to ensure accessibility to affordable credit facilities by requiring banks to use the Kenya Bankers Reference Rate (KBRR) as a basis for pricing credit.

Expanding the Digital HorizonWhile expressing its commitment to digitize all Government functions, the

Miscellaneous

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budget proposal sets out the following action plans:• e-Registry for land, companies and

movable assets;• e-Payment platform for all

Government payments; • Harmonization of e-Citizen and

Huduma Centres; and• The M-Akiba mobile facility to

enable purchase of Government bonds at a minimum investment of KShs 3,000.

To help in the diversification of investment, the government is proposing to exempt stamp duty on transfer of assets on REITS and Asset Backed Securities.

Big Brother is watching!The Public Procurement and Disposal Act provides that at least 30% of public procurement be reserved for women, youth and persons with disability.

However, it has emerged that in the 2014/2015 fiscal year, the Government targeted figures were not achieved. Therefore, to enhance compliance, the Government has made it mandatory for all accounting officers to submit quarterly reports to the National Treasury with regards to the 30% requirement.

Since devolution, County Governments have been accused of introducing levies and taxes, without due regard to the impact they have on the businesses. To combat this, the National Government has proposed to introduce guidelines that will govern the drafting of County Finance Acts which will regulate businesses in Counties.

Fuel prices to go up!Following the finalization of the Thika Super Highway and the Northern, Southern and Eastern bypass roads, the Government intends to boost its road maintenance kitty through increasing the Road Maintenance Levy by KShs 3 per litre of fuel. This will ensure that this and other roads in the country remain functional.

Securing your futureFollowing the recent introduction of the NSSF Act 2013, the Government aims to follow this up with changes to the Retirement Benefits Schemes. The Government objective is to ensure good governance of the schemes as well as increasing returns for members.

This will be done through the following proposals:• Allow schemes to invest up to

10% of their assets in private equity and venture capital funds licensed by the Capital Markets Authority. This is meant to diversify their earnings and give them more returns

• Mitigate potential risk by limiting investments in any other asset to a per-issue limit of 15%

• Employers to enjoy a contribution holiday in cases of on-going schemes

• Equal sharing of pension scheme surplus between employers and employees for schemes that are being wound-up or converted

• Pension scheme trustees shall

now serve for 2 terms of 3 years each

• Preparation period for annual audited accounts has been reduced from 6 to 3 months

Fast tracked deliberations Currently, all the statutory instruments for example, rules, orders, regulations, direction, form, tariff , by laws, resolutions, guidelines and all other statutory instruments issued under an Act of Parliament are subjected to the scrutiny of the Committee on Delegated Legislation.

This has curtailed the execution of parliamentary business. The Government proposes to limit the statutory instruments to be tabled before the Committee on Delegated Legislation thereby increasing administrative efficiency.

The budget proposals included in this BudgetBrief may be amended significantly before enactment of the Finance Act. Please note that our interpretation of tax legislation may differ from that of the various Revenue Authorities. Similarly, the content of this BudgetBrief is intended to provide a general guide and should not be regarded as a basis for ascertaining tax liability or as a substitute for professional advice. If you would like specific advice on the contents of this publication, please get in touch with your regular contact at KPMG

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KPMG Kenya Budget Brief 2015