By SCOLA KAMAU Special Correspondent
In Summary
- Government’s directive with effect from June 12 to allow corporate and business entities to pay vacation trip expenses for their staff on annual leave in Kenya and deduct such expenditures from their taxes may not work without a law in place.
- Other sectors, experts said, may also demand a directive on tax refunds, further constraining the government’s budget, as KRA has to seek finances to pay up.
- The tourism sector has been hurting due to insecurity, a situation worsened by travel advisories. Tourism sector players are calling for immediate negotiations with the countries that issued them to reverse the travel advisories.
Tax experts have pointed out possible
complications in the implementation of new proposals announced a week
ago by President Uhuru Kenyatta to promote domestic travel and lift the
troubled tourism sector which has been hit by a wave of cancellations in
the wake of travel advisories by the US, UK and France.
A review by consulting firms
PricewaterhouseCoopers (PwC) and Deloitte East Africa shows that the new
incentives and directives will require changes in several existing laws
to give them legal grounding.
They, however, said the incentives have the
ability to boost the tourism sector, which is under siege from rising
insecurity and travel advisories, after international arrivals slumped
by a third.
On May 23, President Kenyatta, among other things,
revoked an earlier Treasury circular restricting the public service
from holding conferences and other meetings in private hotels.
This is expected to open up a lucrative income
stream for private hotels, as the public service is one of the biggest
spenders on conference tourism.
“This will have a positive impact by directing
more business from the government to private hotels. However, the
measure has to be seen in light of the government’s attempts to allocate
more resources to development expenditure as opposed to recurrent
expenditure,” said Steve Okello, partner and head of tax at PwC.
“The measures being proposed by the government are
admirable, but subject to further queries. For a start, there is a need
for further stakeholder engagement in order to align the expectations
of government with that of employers and their employees,” he said.
The government’s directive with effect from June
12 to allow corporate and business entities to pay vacation trip
expenses for their staff on annual leave in Kenya and deduct such
expenditures from their taxes may not work without a law in place,
experts said.
“Generally, for any expenses to be deductible by
an employer, the expense must be incurred wholly and exclusively in the
production of income. Paying for an employee’s holiday is really an
expense of the employee, so for the employer to get a deduction, the law
needs to be changed,” said Nikhil Hira, a tax partner at Deloitte East
Africa.
“The concern is that there is no mention of
whether the employee will be taxed on the benefit. Strictly, where an
employer pays an expense on behalf of an employee, then it is the
benefit of the employee, which should be taxed.”
The government hopes that this initiative will
give at least 25,000 Kenyans a chance to go for a week’s holiday every
year. But it is not yet clear, for example, if employers will be
expected to actually pay the trip expenses in advance or will reimburse
expenses incurred by an employee.
“The government should clarify that such vacation
relief will not be seen as a ‘taxable benefit’ to the employee where the
company claims a corporate tax deduction, otherwise it will be simply
seen as giving with one hand and taking back with the other,” he said.
President Kenyatta also directed that all
outstanding income tax related refunds running into billions of
shillings owed to the tourism industry players be paid out by Kenya
Revenue Authority not later than May 29. This is expected to free up
more cash in the sector for expansion. But experts have reservations on
this.
“I am not sure how much income tax refund is due
to the players in the industry, but I cannot believe it is significant,
so this measure may be superficial. The question must be that if there
are refunds, can KRA actually issue them given that collection of
revenue is difficult anyway?” asked Mr Hira.
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