Changes in PAYE, corporation tax rates set to increase refunds
By Patrick Chege | June 9th 2020
This year will go down in history as one that saw the entire world spontaneously face similar challenges occasioned by Covid-19.
The absence of an immediate solution saw governments react in various ways to mitigate the adverse effects of the pandemic. Kenya, like other countries, designed a raft of measures to contain the spread of the virus while proposing others meant to cushion its people from the adverse effects on the economy.
This saw radical fiscal measures proposed through the Tax Laws (Amendment) Bill 2020 (The Bill), which was discussed in Parliament and passed with some amendments. The President assented to the Bill on April 25, 2020.
This law introduced amendments to the Income Tax Act, Value Added Tax Act, 2013, Excise Duty Act, 2015, Tax Procedure Act, 2015, Miscellaneous Fee and Levies Act, 2016, Kenya Revenue Authority Act, 1995 and the Retirement Benefits Act, 1997.
The new law has benefited individuals and resident corporations in terms of reduced tax rates and expanded tax relief.
However, it seems there are varied views concerning the effective date of the law, affecting the reduced Pay-As-You-Earn (PAYE), and corporation tax rates.
This has stirred a lot of debate. Importance of an effective date
The effective date of law sets out the date the law begins to be applied. A law that confers an advantage to taxpayers should be drafted in a manner that is clear to both the taxpayers and the tax administration.
Regardless of the intention of the law, taxpayers tend to interpret the law liberally, to confer a maximum benefit to them, by pushing the effective date as early as possible.
The Kenya Revenue Authority (KRA) on their part, faced with shrinking sources of revenue, low profitability of businesses, retrenchments and the resultant widening of tax shortfall, would prefer an interpretation that reduces the period affected by the reduced tax rates.
This was evident when the KRA issued a public notice on May 7, 2020, seeking to clarify the effective date for PAYE.
Based on the public notice, it appears that PAYE is a monthly tax and therefore, the reduced rate is not available from January to March 2020.
Contrary to this view and that of many tax practitioners is 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.
Upon the signing of the Bill into law on April 25, 2020, the first dilemma was how to determine PAYE for April 2020.
This is because part of the month appeared to be covered by the repealed law, which provided for a maximum rate of 30 per cent while the other part of the month appeared to fall under the new rate of 25 per cent.
This issue was subsequently resolved, and the public notice issued by the KRA confirmed that the rate applicable for the entire month was the new rate of 25 per cent. This was only a partial solution and did not resolve the question of the rate covering the period from January to March 2020.
This leads us to the question that begs an answer: What is the legal position on the period to which the changes apply?
What does the law say?
Section 1 of the Tax Laws (Amendment) Act, 2020 states that the law, except for VAT shall come into operation on the date of assent.
The other amendment was the replacement of the annual rates contained in the Third Schedule Head B.
Other sections of the law governing PAYE largely remain the same. Section 34(1)(a) of the Income Tax Act provides that the total income of an individual shall be charged for a year of income at the individual rates for that year of income.
The term “year of income” is defined in section 2 of the Income Tax Act to mean 12 months commencing on January 1 in any year and ending on December 31 in that year.
Therefore, tying this statement to the annual tax rates provided under the new law, then it follows that the new rates apply for the period January 1, 2020, to December 31, 2020.
Based on the above analysis of the applicable law, the proposition that PAYE is a monthly tax does not affect the applicability of the new tax rates to the period January to March 2020.
Employees will still file their self-assessment tax returns on employment income at the end of the year.
However, PAYE is payable by employers monthly on account of employees, like withholding taxes paid on account of suppliers of designated services.
This is informed by the fact that if employees were to be paid monthly gross emoluments and expected to remit tax the end of the year, the compliance rate would be low because employees would most likely spend all the money including tax by the end of the year.
The requirement that employers deduct, and remit PAYE monthly, does not make personal income tax a monthly tax. Rather, it is a way to ensure tax is recovered at the source to maintain high compliance levels.
Like PAYE, corporation tax for resident entities under the new law enjoys a reduced tax rate of 25 per cent. The relevant provision is the amendment to paragraph 2 of the Second Schedule Head B.
The new sub-paragraph (viii) states that the new rate applies for the year of income 2020 and each subsequent year of income.
In a situation where the accounting period of a company ends on December 31, 2020, there is no challenge in finding that the new rate applies.
However, where the end of the accounting period falls on a day other than December 31, the rule as provided for under section 27 of the Income Tax Act is that the year of income is tied to the date the accounting period falls.
Section 27 (1) on accounting periods not coinciding with the year of income, states; “Where any person usually makes up the accounts of his business for 12 months ending on any day other than December 31, then to ascertain his total income for any year of income, the income of any such accounting period ending on such other date shall, subject to such adjustment as the Commissioner may consider appropriate, be taken to be the income of the year of income in which the accounting period ends.”
Thus corporations 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.
Consequently, companies whose years of income ended on January 31, February 28, or March 31, 2020, are entitled to the reduced corporation tax rate of 25 per cent.
Options open to taxpayers and revenue authority
Regarding personal income tax, and being an annual 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 for a refund from the KRA.
The alternative would be for the KRA to 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.
KRA should adopt the second approach in the spirit of easing taxpayers’ economic pain during the pandemic.
Corporation tax is also likely to result in refunds, especially for companies that were in profit and tax paying position.
This would be as a result of instalment tax paid during the year, based on a higher tax rate of 30 per cent.
The KRA should allow such taxpayers to offset the overpaid tax against future instalment tax, not to insist that the affected taxpayers must apply for a refund and separately continue paying instalment tax.
Obtaining a refund from the KRA has been a tall order in the past and adversely affects cash flow for the business.
It would be a welcome move for the tax to be flexible in allowing offsets to avoid worsening the cash flow challenges that many taxpayers are facing at his time when most businesses have taken a significant hit on their revenues and earnings in the aftermath of Covid-19.
This is the time to be supportive of taxpayers - to enable them to get through this difficult time as we look forward to better days ahead.
-The writer is an Associate Director at Deloitte East Africa, [email protected] The views expressed do not necessarily represent those of Deloitte.
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