In the Draft Income Tax Bill 2018, the Treasury has proposed withholding tax on demurrage charges paid to non-resident companies at 20 percent. That means non-resident companies will be paying 20 percent of the demurrage charges they receive to the government.
The Income Tax Act defines demurrage charges as “penalty paid for exceeding period allowed for taking delivery of goods, or returning of any equipment used for transportation of goods.”
The Impact
According to an analysis of the Bill by Deloitte Kenya, the added tax burden is likely to negatively business in the country and decrease its competitiveness in the shipping business. As a result, the affected companies will likely increase freight charges, passing the additional costs arising from the tax to importers. That means the cost of doing business will also increase.
Other Proposed Withholding Taxes
The Bill also proposes a withholding tax at the rate of ten percent on the profits of a Kenyan branch or permanent establishment that has been repatriated.
“With the revision of the tax rates for branches from 37.5 percent to 30 percent, it is expected that this measure will bring the effective rate of tax for branches at “par” with the effective tax for resident companies given that dividends paid by resident companies are subject to further tax at five percent and ten percent,” Deloitte says in its analysis on the impact of this tax.
Additionally, withholding tax on rent, premium, or other considerations paid to non-residents has been set at 20 percent for immovable and movable property while a five percent withholding tax on dividends paid Special Economic Zone Developer, Enterprise or operator and those paid by EPZ has been set.
The Bill also introduces a five percent withholding tax on insurance premiums paid to non-residents while withholding tax rate on payments to non-residents with regards to transmission of messages by the internet, radio, satellite, etc has increased from five percent to ten percent.
Withholding tax rate on dividends or bonuses paid to co-operative societies to resident members has risen from five to ten percent. According to Deloitte, this tax, which aims to increase revenue collection, may discourage a saving culture among Kenyans.
On the other hand, withholding tax management and professional fees paid by mining firms and petroleum contractors to non-resident mining and petroleum sub-contractors has reduced from 12.5 percent to ten percent.
RELATED; Proposed Corporate Income Tax Increase Could Impact Business Investment- Deloitte Kenya
