This archive report was first published on 9 June 2020.
Changes in PAYE, Corporation Tax Rates Set to Increase Refunds ¶
On April 25, 2020, the President assented to the Tax Laws (Amendment) Bill 2020, which introduced amendments to various tax laws in Kenya. The amendments aimed to reduce tax rates and provide tax relief to individuals and resident corporations.
However, the effective date of the law has become a point of contention, with the Kenya Revenue Authority (KRA) and tax practitioners having different interpretations. The KRA has issued a public notice stating that the reduced PAYE rate is not applicable from January to March 2020, while tax practitioners argue that the law covers this period.
Section 1 of the Tax Laws (Amendment) Act, 2020, states that the law, except for VAT, comes into operation on the date of assent. This means that the new tax rates should apply from January 1, 2020, to December 31, 2020.
Despite the KRA's interpretation, employees will still file their self-assessment tax returns at the end of the year, and employers will continue to deduct and remit PAYE monthly. This is because PAYE is a way to ensure tax is recovered at the source to maintain high compliance levels.
Corporation tax for resident entities also enjoys a reduced tax rate of 25 per cent under the new law. The relevant provision is the amendment to paragraph 2 of the Second Schedule Head B, which states that the new rate applies for the year of income 2020 and each subsequent year of income.
Companies whose accounting period ends in any day of the year 2020 should be able to benefit from the reduced rates, notwithstanding that the accounting period ended before the law came into operation or that the bulk of the income was earned in the 2019 calendar year.
Regarding personal income tax, employees or taxpayers may have to wait until individual tax returns for the year of income 2020 to be filed and then proceed to determine the amount of tax overpaid and seek a refund from the KRA. Alternatively, the KRA could allow employers to determine the PAYE overpaid for January to March 2020 and offset the same against PAYE for subsequent months of the year 2020.
The second approach is more attractive because it saves the KRA time and resources for processing numerous applications for a refund at the end of the year. It also allows employees to harvest from the generosity of the new law at the earliest.
On June 9, 2020, the Kenya Revenue Authority (KRA) issued a public notice seeking to clarify the effective date for PAYE. The notice stated that PAYE is a monthly tax and therefore the reduced rate is not available from January to March 2020.
However, tax practitioners argue that the law, properly covers the period of January to March 2020 and that upon the filing of the income tax return for the year of income 2020, the KRA will have to refund taxpayers the overpaid PAYE, owing to the reduced tax rates.
Should the revenue authority adopt a different interpretation of this law, it is likely to give rise to tax disputes, which may end up in the Tax Appeals Tribunal and even the Courts.
