Kenya: National tax policy: a more certain future tax regime?

Traditionally, the government of Kenya has been introducing changes to tax laws every year, mainly through an annual finance act. In recent years, Kenya has experienced a very volatile tax regime, which has created serious uncertainty for existing and poten­tial investors in Kenya. Some changes have been inconsistent or against core tax principles.

For instance, April 2020 saw the government introduce a raft of tax legislative changes to minimise the effects of the COVID-19 pandemic on businesses and individuals. Among these changes was a reduction in the standard corporate income tax rate and the top personal income tax rate from 30% to 25% and an increase in personal relief. Two months later, with the finance act, the Government introduced new taxes, includ­ing a minimum income tax, and did away with numerous tax exemptions. Some of the exemptions had existed in the law for a year.

In July this year, the National Treasury released the first draft of the National Tax Policy to the public for comments. The Policy contains principles and guidelines on tax legislation and administration. According to the National Treasury, the policy is intend­ed to promote a predictable tax environment for business and to enhance equity in tax administration. Kenya is among the pioneers in Africa for putting a national tax policy in place.

The proposed principles and guidelines cover the enactment of tax laws, tax rates and tax incentives, as well as tax administration. Among the key ones is the proposal to review tax laws once every 5 years. We expect that in between there will be minor amendments, thereby increasing predictability for significant tax changes. It also proposes stakeholder engagement before changes are made to tax laws.

The policy also suggests a standard income tax rate for all companies (currently at 30%) and a fixed preferential income tax rate, equivalent to 50% of the standard rate. While the guideline is commendable and promotes equity in the corporate income tax regime, there is a need to harmonise the proposals with existing tax incentive regimes, which currently offer preferential corporate income tax rates ranging from exemptions (0%) to 25%. There are also guidelines to make refund processes efficient and effective.

The policy is currently undergoing the public participation process, which allows various stakeholders to present proposals for the enrichment of the policy, before parliamentary approval. If adopted, there will be a sense of optimism for a more certain future tax regime in Kenya.

Read the WTS Global International Corporate Tax Newsletter here.