The CFO conundrum: Navigating intricate tax regulations (part 1)

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CFO East Africa chatted with Daniel Ngumy, managing partner at Anjarwalla & Khanna, Stanbic Bank Kenya's Dennis Musau and EABL's Risper Genga Ohaga for this two-part special feature on tax in Kenya, Uganda, Tanzania and Rwanda.

The Kenya Finance Act, 2023 was signed into law by President Ruto on 26 June 2023. It introduces new tax regulations including mandatory contributions by employers, new income tax bands and value-added taxation (VAT) on petroleum products. The changes are deemed necessary as the government seeks funds to meet debt obligations and fulfil promises made during election campaigns such as expanded housing.

"The recent government has embarked on a mission to substantially boost tax revenue. As a result, they have enacted one of the most comprehensive finance acts witnessed in recent memory. These changes have far-reaching implications," explains Daniel Ngumy, the managing partner at the prestigious law firm Anjarwalla & Khanna.

Dennis Musau, the chief value and finance officer of Stanbic Bank Kenya, concurs.

Dennis Musau

 

He elaborates, "In the banking sector, we've encountered a dual impact from the recent tax adjustments. Firstly, we've seen direct changes like the imposition of excise duty charges and increased frequency in the submission of collected withholding taxes. Moreover, the added tax burden, particularly concerning the employer's contribution to the housing levy, has necessitated substantial operational investments. These investments are primarily aimed at ensuring compliance with the procedural requirements for withholding tax submissions, inevitably raising the overall cost of compliance. Consequently, we've had to reallocate resources to address these new obligations."

Taxation landscape

Well established tax regimes require companies to spend as little time as possible making tax payments. For Kenya it appears more time will be required for payments to be made.

Previously, companies would make payments such as Value-added Taxation (VAT) and withholding tax by a certain date in the month following the transaction. This has been amended to require payment to be made within five working days of the transaction.

“Failure to make this remittance within five working days results in harsh penalties," Daniel explains. "That means companies need to have a running tax calculation to ensure they don’t miss the deadline. The system they implement needs to adjust for weekends and public holidays which adds to the complication. We have seen organisations having to hire a full- time department to deal with this challenge.”

A positive aspect of the Finance Act is that it has effectively eliminated VAT on exported services. Previously VAT of 16 percent was levied on services rendered out in the country to companies outside of Kenya which led to many companies moving their headquarters from Kenya.

However, a new housing levy requires both the employer and employee to contribute 1.5 percent each of their gross salary to a Housing Fund. There have also been reports of a similar levy for the National Hospital Insurance Fund. This has transformed Kenya into a high-tax jurisdiction, potentially posing challenges in attracting and retaining top talent. The aggressive tax collection approach persists, as evidenced by the latest data indicating that Kenya's tax collections surpass the combined total of neighbouring Uganda and Tanzania.

Furthermore, Kenya's taxation landscape is characterised by a multitude of tax types. Notably, excise duty, traditionally associated with sin taxes to discourage the consumption of items like alcohol and cigarettes, has expanded its scope.

Daniel highlights, "Excise duty is now being applied to a broader range of products, including luxury goods and mobile phone charges."

Ambiguity in policy
Risper Genga Ohaga, group CFO of East Africa Breweries Limited (EABL), knows excise duty only too well. She says, “My biggest headache at the moment is taxation. In Kenya, we have had two excise increases in the past year. The ambiguity in tax policy can lead to a lot of disputes with the revenue authority.”

Companies like EABL with operations across East Africa need to be careful about how they handle disputes with the tax authority in one jurisdiction.

“Because the tax authorities are talking to one another, something that begins in Kenya or Uganda will then be picked up by Tanzania. So crossbody groups tend to be very, very careful because if you set a precedent in one country, for example, if you settle in a particular fashion in Kenya, then the Ugandans or Tanzanians will come looking to collect similarly,” Daniel warns.

Risper Genga Ohaga

This vigilance stems from the practicality that taxing a large corporation for an additional 1 percent is more feasible for tax authorities than attempting to collect the same amount from countless individual taxpayers. As a result, prominent enterprises undergo regular audits, typically once every three years.

Elaborating on the audit process, Daniel underscores its depth and duration, taking two to three weeks to complete. This extensive time commitment monopolises the bandwidth of a company's finance team. Additionally, it is uncommon to receive an entirely clean audit outcome. Due to the inherent subjectivity in tax application, auditors invariably uncover issues. Even when addressing previously raised concerns, new matters may emerge during assessments, necessitating diligent resolution to ensure compliance.

This is the first of a two-part special feature on tax in East Africa. Part two is available here.

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