The Quagmire around New PAYE Rates

By Brian Kangetta, Director – Andersen Tax in Kenya

In his 25^th March 2020 address to the nation, His Excellency President Uhuru Kenyatta announced a number of measures that were aimed at cushioning businesses and Kenyan citizens at large from the negative effects of the Coronavirus pandemic. Key among these were the lowering of the Corporate Tax rate from 30% to 25%, lowering of the Value Added Tax rate from 16% to 14%, and lowering of the highest individual tax rate from 30% to 25% as well as increasing the tax-free income to KShs 24,000 per month.

Exactly a month down the line, on 25^th April 2020, His Excellency assented to the Tax Laws (Amendment) Bill, 2020, thus giving it legal effect and breathing life into most of the proposals announced a month earlier. It is, however, important to note some wording of the now Tax Laws (Amendment) Act, 2020. With regard to income tax amendments, it states that the Act shall “…come into operation on the date of assent”, which date is 25^th April 2020. The Act then proceeds to delete the rates of tax (and income bands) that were previously applicable, and replaces them with the new tax rates. In this respect, the Act reads that “The individual rates of tax shall be …(the new rates)”. One can simply conclude that the new rates of tax become applicable from 25^th April 2020, but there is more.

It is generally understood that employment income, similar to many other types of income, is earned as one carries out his or her employment. In other words, the salary for April 2020, though paid towards the end of April 2020, actually fell due to the employee as and when he or she carried out his or her duties on a day to day basis. If an employee’s income was to be apportioned based on the 22 working days in April, a significant portion of the salary would have been paid before the President assented to the Bill, and this income would therefore have suffered tax at the previously applicable rates. Does this then mean that the April salary, at least a significant portion thereof, should be subjected to tax at the previously applicable rates, and the benefits of the new rates will only be felt when running the May 2020 payroll?

A good number of employers delayed processing the April 2020 payroll, awaiting the Presidential assent of the Tax Laws (Amendment) Bill, 2020, and informing them that this wait was all in vain may deal them a very harsh blow. More importantly, affected employees celebrated as soon as the President announced the relief measures towards the end of March 2020, and it would border on cruelty to now postpone their joy to the end of May 2020, assuming these salaries will even be processed in the first place.

A deeper reading of the Income Tax Act reveals that Kenya’s tax system is actually an annual tax system. The Act provides for income tax to be charged “…for each year of income” and defines a year of income to mean “the period of twelve months commencing on 1^st January and ending on 31^st December in that year”. It is for this reason that the replaced income bands and the new income bands are annual bands, and not monthly bands. It is also for this reason that the amendment relating to Corporate Tax is “for the year of income 2020 and each subsequent year of income”. For Corporate Tax, it is therefore clear that the reduced 25% rate shall apply to periods commencing 1^st January 2020 – and this means that entities whose financial year is not the calendar year may need to separate their year of income – but for the individual, it appears that there is still some ground to be covered.

The individual is definitely supposed to be taxed on an annual basis, with the year of income being 1^st January to 31^st December. However, this individual has most probably suffered tax at 30% between January and March. When the time to file his or her tax return for 2020 comes, there will be need to clarify to him or her whether the new rates apply for the entire calendar year or not. Will the tax return for year 2020 be split to accommodate the old/ higher rates for the period January to March and the new/ lower rates for April to December? It does not appear that this is what the Act intended when it provided for an annual tax system. The clarity in relation to taxation of corporate entities should indeed be laid out in relation to individuals.

It would be sincerely appreciated if Parliament confirmed that the new individual rates of tax apply to the entire year 2020, but probably there is no reason to burden Parliament with trivial matters. The legislature probably already foresaw such occurrences and addressed them by including a provision in the Income Tax Act to the effect that where amendments are made to rates of tax and personal relief but assessments have been made having regard to previously applicable tax rates, “…then all necessary adjustments shall be made to the assessments to give effect to the rates of tax and of personal reliefs for that year of income as specified in [the Income Tax] Act as amended for that year of income”. It looks like the Kenya Revenue Authority can take the initiative and provide guidance on implementation.

If indeed the new tax rates are applicable for the whole of 2020, most employees will end up in a refundable position when filing their tax returns for year 2020 (before 30^th June 2021), and handling employee refund claims will definitely present a challenge for KRA. As the quoted provision suggests, KRA could consider notifying employers to pass the necessary adjustments in the May 2020 payroll workings, so that employees are repaid the January to March over-deducted tax, and KRA is then spared the nightmare of dealing with refund claims in June 2021.

Brian Kangetta is a Director at Andersen Tax, Kenya: Brian.Kangetta@AndersenTax.co.ke