The Kenyan tax landscape in 2024 has underscored the need for corporations to develop mechanisms to navigate frequent tax law changes and introduction of new levies amidst ongoing economic challenges. Within months, tax laws were enacted, suspended, withdrawn, and reinstated. Before we discuss how to manage these uncertainties, let us review some recent developments.
The Finance Bill, 2024, introduced multiple tax changes but faced significant opposition from Kenyans. Although businesses were expected to adjust their accounting and tax systems in anticipation of the new Act, the president declined to sign the Bill into law following protests, led by Gen Z activists.
The Finance Act, 2023 was enacted in June 2023 following the conclusion of the legislative process. This Act introduced significant changes such as increasing the employment tax rates and bands, new tax on income from digital assets, changes in turnover tax thresholds and rate, customs duty rate changes, introduction of eTIMS requirements and certain VAT and withholding tax changes.
This law was initially declared unconstitutional by both the High Court and the Court of Appeal. However, in a significant recent ruling, the Supreme Court upheld the Finance Act, 2023, overturning the Court of Appeal decision. This ruling has resolved some uncertainty around tax administration but has also set a precedent for businesses dealing with other contested tax laws.
Further, the Government introduced a new Social Health Insurance Fund (SHIF) to replace the National Hospital Insurance Fund (NHIF). This law has faced various legal challenges. The High Court declared it to be unconstitutional. However, the Court of Appeal suspended this ruling, allowing for collection of funds and implementation pending its final determination.
The uncertainty surrounding this law raises several questions: If the law is invalidated, will the government refund the collected funds, and how will employers reimburse these amounts, especially for employees who may no longer be with the company? More concerning, the implementation of this new law has proved to be challenging causing distress to patients and businesses.
Another new law was the introduction of the Affordable Housing levy (AHL), under the Finance Act, 2023. The levy however was declared unconstitutional in November 2023, after being in operation for barely four months. This forced the government to draft a standalone legislation to anchor the levy, and deduction took effect from March 2024.
In 2024, new requirements around the eTIMS-compliant invoice system for income tax deductions were introduced. Initially, the system aimed to simplify VAT compliance by auto-populating returns starting February 2024. However, technical challenges with iTax delayed the process, leading to panic among taxpayers.
Taxpayers were later allowed to file the VAT returns as before. This has raised expectations that the eTIMS requirement for income tax might also be waived. However, the KRA issued a Public Notice on 15 October reminding taxpayers of the need to comply with eTIMS requirements.
Unfortunately, this type of uncertainty is not new. For instance, in 2013, the excise duty on fees charged by financial institutions was contested, and after a prolonged suspension, the Court ruled the law constitutional, leaving financial institutions exposed to penalties and interest.
Given this volatile legislative landscape, how can organisations ensure compliance and effectively manage their tax obligations? Here are some strategies to consider:
First, engaging tax advisors is crucial. These experts provide insights into complex changes and their potential impact on the business.
External consultants can monitor tax developments, offering valuable advice to keep companies informed and compliant.
Second, organizations should develop a flexible tax strategy along with a comprehensive tax risk framework. This approach allows businesses to quickly analyse tax changes and make informed decisions that align with their overall strategy. Regular risk assessments and health checks can help identify tax exposures stemming from either missed or incorrectly implemented changes.
Third, adopting agile technology is vital. Tax regulations often change on short notice, so businesses need accounting and tax software that can be adjusted quickly and with minimal disruption. This flexibility ensures organizations can respond effectively to any sudden changes in tax law.
Fourth, conducting scenario analyses can help businesses assess different options for managing tax uncertainty. For example, if a law is suspended, a company may need to weigh the risks of paying tax (which might result in a prolonged refund process) versus waiting for a final ruling (which could lead to overdue payment penalties).
Additionally, the costs of adjusting systems to comply with a law may not be worthwhile if the change is reversed shortly thereafter. Seeking expert advice during scenario analysis is recommended.
Finally, businesses can seek a private tax ruling from the KRA. If a taxpayer is unsure about how to proceed, obtaining a ruling provides clarity and protection from penalties in case of any future disputes. While the taxpayer is not obligated to follow the ruling, it does offer peace of mind and legal certainty.
In conclusion, it is crucial for organisations to be proactive in monitoring tax developments and to adopt strategies that allow them to respond effectively to changes. Being prepared and agile can help businesses mitigate risks and avoid adverse effects from sudden or unclear tax regulations.
The writer is an Associate Director, Tax and Legal Services, PwC Kenya.
