Key Changes Introduced by the Tax Laws Amendment Act, 2024

On December 11, 2024, the President signed the Tax Laws Amendment Act, 2024 (TLAA) into law, with its provisions taking effect on December 27, 2024. The Act modifies several tax-related laws, including the Income Tax Act (ITA), the Value Added Tax Act (VAT Act), the Excise Duty Act, and the Miscellaneous Fees and Levies Act. Below, we highlight some of the significant changes introduced by this Act.

Updates to the Income Tax Act (ITA)

1. Revised Definition of “Royalty”: The TLAA amends the definition of “royalty,” aiming to clarify distinctions between using copyrighted material in software and accessing copyrighted software. While this change provides some clarity, challenges persist in applying it to various scenarios.

2. Withholding Tax Expansion:

   • A 5% withholding tax (WHT) on payments to non-residents and 0.5% to residents for supplying goods to public entities has been introduced, likely increasing supplier costs.
   • Payments for digital content monetization, property, or services through digital marketplaces are now subject to WHT at 5% for residents and 20% for non-residents.

3. Significant Economic Presence (SEP) Tax: The SEP tax replaces the Digital Services Tax (DST), increasing the rate from 1.5% to 3%. Although non-residents with an annual turnover below KES 5 million are exempt, the SEP tax’s application raises concerns about its similarity to the replaced DST.

4. Minimum Top-Up Tax: Aimed at aligning with global tax standards, this tax applies to multinational entities to ensure a minimum 15% effective tax rate.

5. Employment Tax Revisions:

   • Tax-free thresholds for meal and non-cash benefits are increased to KES 60,000 annually.
   • Pension contribution deductions and owner-occupier interest deductions are raised to KES 360,000 annually.
   • The TLAA exempts reimbursements for official duties performed by public officers from tax, albeit without clear expenditure limits.

Key Changes to the VAT Act

1. Relief for Excess VAT Credits: Businesses with VAT credits resulting from changes in tax rates can apply for relief within six months of the TLAA’s enactment. However, clarity is needed on whether this will result in cash refunds or adjustments in VAT filings.

2. Amendments to Exemptions:

   • VAT exemptions now extend to supplies for the National Intelligence Service and Defence Forces Welfare Services.
   • Raw materials for manufacturing textiles and denatured ethanol are exempt from VAT to promote local industries.

3. Repeal of Input Tax Threshold: Businesses must now claim input VAT based on its use in generating taxable supplies, potentially increasing government revenues.

Adjustments to the Excise Duty Act

1. New Definitions: The Act formally defines “digital lender,” aligning their operations with regulatory frameworks, and specifies fee components subject to excise duty.

2. Excise Duty on Imports: Fertilized eggs for incubation are excluded from excise duty, benefiting the local poultry industry. Meanwhile, imported pasta and plastic items face changes to excise tax rates.

3. Increased Rates for Gambling Activities: Excise duty on betting, gaming, prize competitions, and lotteries increases from 12.5% to 15%, addressing concerns over gambling’s societal impact.

Updates to Miscellaneous Fees and Levies

1. Railway Development Levy (RDL): The RDL rate rises from 1.5% to 2%, which will likely increase the cost of imported goods.

2. Support for the Textile Sector: Goods for textile manufacturing are exempted from RDL and Import Declaration Fees (IDF), reducing costs for local producers.

The Tax Laws Amendment Act, 2024, marks a significant overhaul of Kenya’s tax framework. While some changes aim to align the country with global standards, others may introduce compliance complexities for businesses. Stakeholders should review these amendments closely to understand their implications fully.

For further details or professional guidance, reach out to a tax consultant.