Maximizing Growth: Understanding the Tax Incentives for Businesses in Kenya

The economic landscape is ever-evolving, and governments frequently implement measures to stimulate growth and investment. In this vein, the Tax Laws (Amendment) Act, assented to on 25th April 2020 in Kenya, introduced significant changes to various tax legislations.

One of the notable amendments is the repeal and replacement of the Second Schedule to the Income Tax Act, which previously addressed capital allowances. The updated version, now titled “Investment Allowance,” brings about key changes designed to encourage businesses to invest and expand their operations.

Investment Allowance Highlights

  • Rationalized Capital Allowances Rate: The most prominent feature of the Investment Allowance is the rationalization of the capital allowances rate, allowing businesses to claim up to a maximum of 100%. This adjustment aims to provide a more favorable environment for companies looking to recover their capital expenditure.
  • Reducing Balance Basis: Under the new Investment Allowance, claims are made on a reducing balance basis. This means that businesses can gradually recover the cost of their investments over time, aligning with the assets’ actual value.
  • Decelerated Claims: To encourage immediate investments, the legislation introduces a decelerated claims approach. Businesses can claim 50% of the capital allowances in the first year of investment, with the remaining 50% distributed at different rates (10% or 25%) on a reducing balance. This innovative structure aims to strike a balance between immediate tax relief and sustained, long-term benefits.
  • Rates of Deduction: The rates of deduction vary based on the type of capital expenditure incurred. The rates for different categories are as follows:
    • (a) Buildings:
      • Hotel Buildings: 50% in the first year of use
      • Buildings used for manufacture: 50% in the first year of use
      • Hospital buildings: 50% in the first year of use
      • Petroleum or gas storage facilities: 50% in the first year of use
      • Residual value to items (a)(i) to (a)(iv): 25% per year on a reducing balance
      • Educational buildings, including student hostels: 10% per year on a reducing balance
      • Commercial building: 10% per year on a reducing balance
    • (b) Machinery:
      • Machinery used for manufacture: 50% in the first year of use
      • Hospital equipment: 50% in the first year of use
      • Ships or aircraft: 50% in the first year of use
      • Residual value items (b)(i) to (b)(iii): 25% in the first year of use
      • Motor vehicles and heavy earth-moving equipment: 25% in the first year of use
      • Computer and peripheral computer hardware and software calculators, copiers, and duplicating machines: 25% in the first year of use
      • Furniture and fittings: 10% per year on a reducing balance
      • Telecommunications Equipment: 10% per year on a reducing balance
      • Filming equipment by a local film producer licensed by the Cabinet Secretary responsible for filming: 25% per year on a reducing balance
      • Machinery used to undertake operations under a prospecting right: 50% in the first year of use and 25% per year on a reducing balance
      • Machinery used to undertake exploration operations under a mining right: 50% in the first year of use and 25% per year on a reducing balance
      • Other machinery: 10% per year on a reducing balance
    • (c) Purchase or Acquisition of an Indefeasible Right to Use Fiber Optic Cable by a Telecommunication Operator:
      • 10% per year on a reducing balance
    • (d) Farmworks:
      • 50% in the first year of use and 25% per year on a reducing balance

Conclusion

These changes in the Investment Allowance, outlined in the amended tax laws, reflect the government’s commitment to fostering economic growth by providing businesses with attractive incentives for investment.

Companies should carefully consider these amendments to optimize their capital expenditure and leverage the evolving tax landscape for long-term success. As always, consulting with tax professionals is advisable to ensure compliance and maximize the benefits of these incentives.