Monday, June 20, 2011

Thoughts on Kenya's 2011 Budget &/or Ministerial Statement

*** Guest Post by Nikhil Hira - Tax Partner at Deloitte Deloitte & Touché Kenya

Well another budget season comes to an end - or has it? We heard Hon. Uhuru Kenyatta deliver his Budget speech (or was it a Ministerial Statement?) on 8 June 2011 amid considerable confusion. It really seems to me that clarity is needed on the New Constitution and what it really means during the Transition as we head towards its full implementation. Ever since the Referendum in August 2010, there have been several instances of us moving to the cliff's edge with one foot over only to be pulled back. This isn't the way to attract the investment we want and need. Indeed if we continue in this vein we will increasingly become the laughing stock of the world.

Enough about the Constitution, let's turn to the budget that was or, perhaps, never was. We are now in the midst of the 21 day period that the Speaker of the House set for public input. What surprises me is that, as of Friday last week, no guidelines had been given as to how this process is supposed to work. Nevertheless, I intend to submit my thoughts on the proposals announced on 8 June. Overall the tax measures were a mixed bag of innovative to the down right impractical.

To me the introduction of the tax free status for Real Estate Investment Trusts albeit from 1 January 2012 was extremely innovative and forward thinking although it remains to be seen what the detailed guidelines will contain. Of course what concerns me is who will actually benefit from this wonderful idea - let's hope it doesn't result in a major scam! By the way, I was asked the other day whether a development of 2 houses on a small plot of land could be set up as a REIT. Well I suppose we will have to wait for the guidelines but I can't see this being possible.

On the other extreme the various measures introduced for personal tax. Great in theory but in practice........

The abolition of the requirement for the employed class to file returns if their only income is taxed under PAYE, was great to hear - after all it means less red tape. But how is to work and given our propensity to evade tax, isn't it likely that a number of people will do just that? It seems the onus is back on the KRA to find and catch the evaders and with a system that is already under strain, one wonders how practical it is.

Similarly, the measure to prevent the use of the Personal Relief (that princely sum of Kshs 1,162 per month) more than once is a great idea but who is responsible for enforcing it and who will be responsible if misused - the first employer, subsequent employers or the employee. It really seems minimal thought went into it. May I suggest some guidelines from KRA or we will all be like the proverbial dog trying to catch it's tail! I understand Rwanda has a scheme for nominating the Principal Employer and in this day and age of info sharing, why not talk to them?

Which conveniently brings me on to the information exchange agreements. Those of you with cross border transactions with related parties, be prepared. - all the revenue authorities are going to be talking about you and it is unlikely to be all good. And even if you don't fall into this category of taxpayer, you will be caught under this sharing arrangement if you have other sources of income cross border so beware!

Then my biggest bug bear - the doubling of WHT on professional fees from 5% to 10%. One of those shock and awe moments for me at least! My, and other suppliers of management and professional fees, cash flow is going to take a severe hit. Add to this the continuing saga of withholding VAT and I must say this measure is entirely counter-productive. It's not going to work I'm afraid.

No reduction in tax rates once again, indeed not since 2005, leaves the taxpayer worse off given inflation. Why this fear of reducing tax rates I am not sure but we have historic evidence of what they can do to collections. I hope the Budgetary Committee takes note of this and pushes for it before Finance Bill 2011 becomes an Act.

3 comments:

Rookieke said...

Looking at the REIT guidelines on the CMA website, I also fear that REITs will be the next big scam/tax avoidance tool. The guidelines are very vague, and save for appointment of a trustee (bank or financial institution), there's very little surveillance or limitation.

On the tax returns filing issue, I get the feeling very few employees declare their other income sources especially from 'side hustles' so maybe there's little to lose there.

Overall, I found the budget a little too theoretical, with little no positive effect on the tax payer or businessmen. He didn't need to waive duty on tsetse fly traps and motorcycle ambulances really.

fredrickgituthu said...
This comment has been removed by the author.
fredrickgituthu said...

Great piece right there... I would like you to share your views on the new requirement by KRA requiring employers to file the employee annual tax returns on behalf of their employees. My view: This being a form of self assessment, meant to enable the employee ensure that his or her taxes have been remitted by the employer in full, it beats logic to transfer the obligation to the employer.