Understanding the Proposed Finance Bill 2024: Implications for Payroll, Businesses, and Employees

The Finance Bill 2024, introduced by the Cabinet Secretary for the National Treasury and Economic Planning, proposes significant amendments to various tax laws in Kenya. These changes aim to enhance revenue collection and streamline tax compliance. Here's a detailed look at what you need to know about the proposed bill and its impact on payroll, businesses, and employees.

Key Highlights of the Finance Bill 2024

Motor Vehicle Tax:

• New Tax Rate: A motor vehicle tax of 2.5% of the vehicle's value, with a minimum of KES 5,000 and a maximum of KES 100,000.
• Impact: This could increase the cost of vehicle ownership, affecting both businesses and employees who use personal vehicles for work.
   

VAT Registration Threshold:

• Increase: The VAT registration threshold will rise from KES 5 million to KES 8 million.
• Impact: Small businesses with revenues between KES 5 million and KES 8 million will no longer be required to register for VAT, potentially reducing their administrative burden but also affecting input tax credit claims.

Minimum Top-Up Tax:

• New Tax: Introduces a minimum top-up tax of 15% for multinational enterprises with a consolidated annual turnover of EUR 750 million (approximately KES 108 billion).
• Impact: Ensures that large multinationals pay a minimum level of tax in Kenya, aligning with global tax standards.

Digital Service Tax Replacement:

• Change: Replaces the Digital Service Tax with a Significant Economic Presence (SEP) tax, taxing non-resident persons at 30% of taxable profit derived from digital services in Kenya.
• Impact: This change significantly increases the tax on income from digital services, which was previously taxed at 1.5%.

Broadened Definition of Royalty:

• Expansion: Includes payments for the use or right to use software, both proprietary and off-the-shelf, under the definition of royalty.
• Impact: This may lead to higher withholding taxes on software-related payments, affecting businesses that rely on imported software.

Pay As You Earn (PAYE) Adjustments:

• Proposed Changes: Adjustments to PAYE rates are not explicitly detailed but are anticipated as part of broader income tax reforms.
• Impact: Could affect employees' net income and payroll administration processes.

Impact on Payroll

The proposed changes in the Finance Bill 2024 have several implications for payroll:

• Increased Tax Withholding: Higher withholding tax rates on interest and other income types will necessitate adjustments in payroll systems to ensure compliance.
• Pension and Retirement Funds: Changes in tax treatment of pensions and contributions to post-retirement medical funds will affect how employee benefits are managed and taxed.
• Digital Service Tax: Companies that rely on digital platforms for their operations will need to factor in the new tax when calculating net income for employees involved in these services.

Impact on Businesses

Businesses in Kenya will need to adapt to several new tax regulations:

• Compliance Costs: The need to update systems and processes to comply with new withholding tax rates and digital service tax regulations may increase operational costs.
• Cash Flow Management: Higher withholding rates and new taxes could impact cash flows, requiring businesses to strategize on managing their finances more effectively.
• Sector-Specific Adjustments: Industries such as digital content creation and shipping will see direct impacts from specific tax rate changes, necessitating sector-specific planning and adjustments.

Impact on Employees

Employees will experience changes primarily in their take-home pay and benefits structure:

• Higher Withholding Taxes: Employees earning interest or other income types subject to higher withholding taxes may see reduced net income.
• Retirement and Medical Funds: Contributions to registered pension funds and post-retirement medical funds will be affected by the new tax regulations, potentially altering the benefits received upon retirement.
• Digital Economy Workers: Those involved in the digital economy will need to be aware of the new digital service tax and how it affects their earnings and tax obligations.
   

The Finance Bill 2024 brings significant changes to Kenya’s tax landscape, impacting payroll, businesses, and employees. It's crucial for all stakeholders to understand these amendments and prepare for their implementation to ensure compliance and optimize financial planning. Adapting to these changes proactively will help mitigate any adverse effects on cash flow and employee benefits, ensuring smoother transitions and sustained business operations.

If you need help navigating the constantly changing tax environment on payroll, contact us at www.elevatehr.co/payroll and we’ll take care of your payroll.