Tax Amendment Act 2020

President Uhuru Kenyatta signed the Tax Laws Amendment Act, 2020 effective April 25th, bringing into force tax law changes expected to impact all industries across the economy. The building and construction sector expected to see significant changes especially relating to investment deductions.

According to a review accounting firm PwC, the health sector is one of the beneficiaries after the new Second Schedule introduced capital/investment allowances to hospital buildings which previously were not granted any capital allowances.

The new law allows new hospital buildings to make a 50% deduction on costs in the first year of use and 25% of the residual value per year on reducing balance subject to licensing by the competent authority

However, the construction of hotels and manufactures will be impacted negatively by the reduction of the investment deduction allowances from 100% to 50% in the first year of use.

Under the new Second Schedule, gains accruing from disposal of buildings eligible for capital/investment allowances will no longer be subjected to capital gains tax at 5%. Instead, they will now be subjected to tax a trading receipt or trading loss at the corporate tax rate of 25%.

It is however expected that the disposal of commercial buildings by MSMEs would be subjected to capital gains tax at 5%.

The analysis also notes that the Act has removed the 150% investment deduction allowance that was granted to businesses to encourage them to invest outside Nairobi, Mombasa, and Kisumu.

“The reduction in the rates of investment deduction, which was a key incentive for investment especially in capital intensive businesses will negatively impact the affected sectors such as manufacturing and utilities. Furthermore, the Act has done away with the enhanced allowances to encourage investment outside the main cities. It may be useful to assess the impact of this against the growth of other towns,” says another review of the new tax laws by Deloitte & Touche.

Following the revision of Value Added Tax (VAT) rates and exemption list, the amendments have reclassified asset transfers and other transactions related to the transfer of assets into real estate investment trusts and asset-backed securities from VAT exemption to the list of standard-rated items.

In a bid to increase government revenue from the property sector, the Kenya Revenue Authority (KRA) in conjunction with the Ministry of Lands has also notified all leasehold owners about the obligation to pay land rent annually as required under Section 28 of the Lands Act.

In the notice KRA wants leasehold owners to shift from making rental payments to the government upon transfer or charge of their property, a common trend, to annual payments. This would boost government revenue at these critical times but with the opposite effect on cash flows for lease owners.

Furthermore, the payments may be a significant source of cash outflows if the government brings into force the planned revaluation of land from the 1980s values currently used as the basis for assessing rates.

In the new arrangement, land rates which are currently calculated based on 34% of the unimproved site value will instead be calculated based on 1% of the current value.

“Mortgage lenders ought to monitor this situation very keenly because there could be a rise in “underwater mortgages” – a term used to describe a situation when the actual property value is lower than the mortgage value that a borrower is servicing. This generates a negative equity position and often triggers widespread defaults,” Ken Gichinga, an economist, told the Standard.

Meanwhile, the coronavirus crisis is expected to depress cement consumption following a halt in building activity across the economy while the fate of the government’s affordable housing agenda remains unknown. Mention of the project has been limited since the inception of COVID-19.

Related; Proposed tax changes not good for homeowners and investors