The National Assembly’s Departmental Committee on Finance and National Planning has differed with the National Treasury over a proposal to empower the Kenya Revenue Authority (KRA) to deem a prescribed threshold of undistributed income as distributed dividends to shareholders and, therefore, subject the same to Withholding Tax.
Whereas the National Treasury proposed to amend Section 24 of the Income Tax Act and adopt a minimum of 60 percent as the threshold for deemed dividend distribution, the committee is now proposing that the same be placed at a maximum of 40 percent.
The two proposals differ not just on the proposed thresholds but more significantly on the fact that whereas the National Treasury is proposing adoption of a floor as the threshold, the House Committee is proposing adoption of a ceiling as the threshold.
According to the Income Tax Act, the rate of Withholding Tax on deemed dividends is five percent for residents and 15 percent for non-residents.
‘Clause 16 is proposing to amend Section 24(1) of the Income Tax Act by introducing a minimum deemed dividend distribution threshold of 60.0 percent of undistributed income. The proposal seeks to discourage the indefinite retention of profits solely for purposes of deferring the taxation of dividends. Stakeholders raised significant concerns regarding the proposed 60 percent threshold arguing it risks creating cash flow constraints,’ Finance and Planning Committee Chairman, Kuria Kimani, told Parliament.
‘To balance revenue objectives and business sustainability, the Finance and Planning Committee observes that a 60 percent deemed dividend threshold could place undue pressure on companies and constrain investment decisions. The committee is, therefore, proposing to moderate the threshold to a maximum of 40 percent to achieve the balance between revenue mobilization and business continuity,’ Kimani told the House.
The difference between the National Treasury and the House Committee means that in an instance where a company has Sh1 billion worth of undistributed income, the National Treasury proposal would deem at least Sh600 million as distributed dividends to shareholders while the House Committee would deem a maximum of Sh400 million.
Despite the House committee differing with the National Treasury and tabling a counter proposal of a maximum of 40 percent, analysts still contend that going this route would still leave businesses exposed from a cash flow and capital position.
‘Most global jurisdictions including the United States, United Kingdom, South Africa, India and Nigeria, do not impose mandatory dividend distribution percentages. Instead, they rely on principles-based anti-avoidance rules to address unreasonable profit accumulation,” Deloitte East Africa says.
The Institute of Certified Public Accountants (ICPAK) says the proposal interferes with legitimate commercial and business decisions.
The accountants’ body added that dividend declaration is ordinarily a commercial decision made by the company’s board and shareholders after considering operational requirements, expansion plans, debt obligations, liquidity needs and future investment strategies.
Other stakeholders argue that there should be no uniform distribution level and that KRA should pursue its investigations on specific cases.
“We recommend that the proposal be withdrawn so that the provision continues to apply on a case-by-case basis in order to accommodate the working capital needs of businesses across diverse industries. The proposals treat all businesses as though they have the same capital needs,” law firm Anjarwalla and Khanna said.
The proposal by the committee is now due for consideration by the Committee of the Whole House where legislators go through a bill and its proposals on a clause-by-clause basis.