By CPA David Ndiritu Mwangi (Principal Consultant, Hisibati Consulting, Nairobi, Kenya)
The Kenyan government tabled the Finance Bill 2021 in Parliament on 11/05/2021. Unlike the prior year, the bill does not introduce new taxes. However the bill proposes significant changes that will indeed have a far reaching effect on multinational organizations operating in Kenya.
The bill seeks to introduce an EBITDA-based interest limitation canon to replace the thin capitalization interest limitation rule. The Bill seeks to amend the Income Tax Act, and introduce a provision that prohibits a deduction of interest from related and third parties in excess of 30% of EBITDA. Currently, foreign entities are prohibited from deducting interest if the debt-to-equity ratio is in excess of 3:1 ratio. This new provision is meant to limit base erosion and profit shifting through interest deduction.
The bill also seeks to reintroduce the definition of the term ‘‘Control’ in relation to a person, which had been deleted by Tax amendments 2020.The bill has expanded the definition of the term beyond the prior 2020 provision which centered on direct ownership of 25% Capital. The widened definition of the term “control” expands the latitude of application of the controlled company rules upon which transfer pricing regulations apply in respect to transactions with associated foreign companies.
The bill requires multinational companies headquartered in Kenya to file with the Kenya Revenue Authority a return of their financial activities in other jurisdictions. The Country –by –Country reporting is meant to curb base erosion and profit shifting and to aid the tax authorities in conducting transfer pricing audits.
A good number of multinational companies enter the Kenyan territory through registration of subsidiaries as marketing agents of their products. Exported services are zero rated for VAT purposes in Kenya. As such, the marketing agents do not charge their holding companies VAT for their marketing services. On contrary they enjoy VAT refunds arising from input VAT they incur in Kenya.
The bill seeks to move exported services from zero rate to exempt status, implying that the said marketing agents will no longer enjoy VAT refunds.