KENYA: HIGHLIGHTS OF COVID-19 LEGAL RESPONSE MEASURES
KENYA: HIGHLIGHTS OF COVID-19 LEGAL RESPONSE MEASURES
A. KENYA COVID-19 COUNTRY OVERVIEW
COVID-19 has had a significant impact on Kenya, in the same way in which other countries across the world have had to shoulder the burden of the pandemic. Kenya reported its first case of confirmed COVID-19 infection on Friday 13th March, 2020. By the beginning of May, Kenya was the fourth most impacted country in the East / Horn of Africa region only behind Djibouti, Sudan and Somalia. Since then, and by 19th July, 2020, the Ministry of Health had reported two hundred and thirty-four (234) deaths. By 22nd July, 2020, the Cabinet Secretary for Health, through a press release, had reported fourteen thousand eight hundred and five (14,805) cases of infections.
The government of Kenya put in place a set of measures to curb the spread of the virus. It rolled out mass testing in various hot spots, shut down its borders, banned local and international flights and public gatherings, closed schools, recommended that all public and private sector workers work from home and effected a dusk to dawn curfew.
The government has since relaxed some of these measures in an endeavour to balance out the negative spill-over effects of the measures on the economy. From July, the President lifted the cessation of movement orders in and out of Nairobi and other counties that were locked down, eventually resumed local air travel and international travel and reopened places of worship with safety restrictions in place. Beyond this, there have been legislative and policy developments geared towards cushioning against the negative effects of COVID-19, which are addressed in this article.
B. HIGHLIGHTS OF KEY LEGISLATIVE DEVELOPMENTS
1. CHANGES IN CORPORATE LAW
At the onset of the pandemic, convening of general meetings was the greatest challenge facing companies largely due to directives on social distancing and the ban on public gatherings. Whereas the Companies Act is silent on virtual meetings, the Registrar of Companies issued guidelines on holding virtual and hybrid – a combination of online and physical general meetings.
• Private Companies except sole member companies, are required to conduct annual general meetings. However, Section 242(2) of the Companies Act provides room for them to pass written resolutions that have the same effect of those passed in a general meeting, permitting business continuity without physical contact. The only exceptions are passing of resolutions to remove a director or an auditor before expiry of their term of office.
• Public Companies are required to hold an annual general meeting within six (6) months from their accounting reference date, irrespective of other meetings held within that period. Failure to comply with this requirement is considered an offence under the Companies Act. The Guidelines issued by the Registrar of Companies offered public companies two options. The first option is to postpone their AGMs in accordance with the provisions of the Companies Act through electronic applications whilst bearing in mind the potential impact of the postponement on the interests of the company and the shareholders. Alternatively, companies may refer to their articles of association to verify whether they may conduct virtual and/or hybrid general meetings. Companies that have adopted the model articles of association have room to conduct virtual or hybrid general meetings on the basis that the articles provide that it is immaterial whether any 2 or more members attending the meeting are in the same place. While maintaining all other compliance requirements for conducting a general meeting, public companies that choose to conduct virtual or hybrid meetings are required to ensure that they provide the right level of guidance to shareholders in relation to meeting protocols, methods of participating and voting whilst putting in place mechanisms to limit technology risks and enhance security.
• Listed Companies must adhere to the same rules that apply public companies that are not listed and additionally obtain a written no-objection from the Capital Markets Authority (CMA) at least within fourteen (14) days prior to issuing the notice of the intended general meeting.
To fill the current legal gap, the Business Registration Service has proposed amendments to the Companies Act and prepared the Companies (General) (Amendment) Regulations, 2020 that provide detailed modalities of holding, participating and voting in virtual and hybrid meetings.
2. TAX MEASURES
Most of the legislative changes introduced as measures of dealing with effects of COVID-19 have occurred within the country’s tax regime. These changes have largely been implemented to reduce the impact of the pandemic on tax payers whilst balancing the country’s economic outlook
a) Small Businesses
Changes in turnover tax. Turnover tax is now payable by resident persons whose annual turnover from business is more than Kshs. 1 million (approximately US$10,000). Prior to the changes made under the Tax Laws (Amendment) Act, the minimum threshold of turnover tax was Kshs. 500,000 (approximately US$5,000). To cushion small businesses further, the rate of turnover tax has been reduced from 3% to 1%. Previously turnover tax did not apply to income from incorporated companies, over and above other corporate tax requirements.
Removal of presumptive tax. Prior to the Tax Laws (Amendment) Act, 2020, persons liable to pay turnover tax were also obligated to pay presumptive tax at the rate of 15% of the amount payable for a Single Business Permit or trading licence by the county government. The collection of presumptive tax has now been removed.
b) Foreign entities
Foreign entities have largely been affected by changes made to Kenya’s withholding tax regime meant to compensate for the loss of revenue to the Kenyan Government caused by the COVID-19 pandemic. These changes may have a long-term negative effect on the economy in relation to foreign direct investment and cost of doing business. These changes include:
Increase of withholding tax rate on dividends payable to non-resident shareholders. Withholding tax applicable for dividends paid to non-resident shareholders has increased from 10% to 15%.
Introduction of withholding tax applicable to special economic zone enterprises, developers and operators. Withholding tax on dividends paid and received by special economic zone enterprises, developers and operators is now applicable. Dividends paid by these entities to non-resident shareholders will now be subject to withholding tax at 15%, while dividends received by them will be subject to withholding tax at the resident rate of 5%. Previously special economic zone outfits and their non-resident shareholders were exempt from withholding tax. The aim of the exemption was to promote the Government’s export policy and enhance foreign direct investment.
Introduction of withholding tax on income from sales promotion, marketing, advertising services and transportation of goods (except air and shipping) by non-residents. Non-residents that supply marketing, sales promotion, advertising or transportation of goods services (except air and shipping transport) are now subject to withholding tax at the rate of 20% of the gross pay.
Withholding tax on reinsurance premiums paid to non-residents. Reinsurance premiums paid to non-residents are now subject to withholding tax at a rate of 5%. This tax does not apply to premiums paid in respect of aviation insurance.
c) Manufacturing Industry
Removal of extra 30% on electricity deduction for manufacturing companies. Manufacturers are no longer entitled to 30% deduction on electricity expenditure from their profits, over and above the actual electricity expense. The 130% deduction was meant to promote the Kenya Government’s Big 4 Agenda Pillar on Manufacturing and support manufacturing companies to bear the high cost of electricity.
d) Power Producers
Investment deduction reduced to 50% for power producers. The investment deduction rate for power producing companies has been reduced to 50% on capital costs. Investment deduction is a tax advantage that allows a percentage of purchasing or investment value incurred in the construction of a power generating plan to be deducted from taxable profits. Prior to the Tax Laws (Amendment) Act, 2020, the investment deduction rate was 100% for projects within Nairobi and 150% for projects outside Nairobi County.
Introduction of compensating tax. Power producers are now subject to compensating tax at the rate of 30%. Previously independent power producers enjoyed exemption from compensating tax, allowing them to pay dividends on untaxed gains or profits limiting their ability to extract profits to shareholders during tax loss periods resulting from the investment deductions made above.
e) Landlords
Increase in residential rental income (RRI) bands. The Finance Act, 2020 has increased the amount of rental income that qualifies for Residential Rental Income (RRI). The qualifying income now ranges from Kshs. 288,000 to Kshs. 15 million per annum up from bracket of Kshs. 144,000 to Kshs. 10 million per annum, allowing landlords to earn more rental income. However, these changes shall be applicable from January 2021.
f) Other Tax Measures
Corporate Income Tax. Resident corporate income tax is now levied at 25% down from 30%, following a presidential directive to cushion against the economic effects of COVID-19. However, the rate of corporate income tax for foreign companies remains at 37.5%.
Reduction of income tax for employees. The Government of Kenya reduced its Pay As You Earn (PAYE) bands to cushion salary earners from the adverse impact of the pandemic.
Reduction of VAT. Kenya’s Value Added Tax (VAT) rate is currently levied at 14% down from 16%.
3. ADMINISTRATION OF JUSTICE
The Judiciary has stepped up efforts to incorporate the use of technology in delivering judicial services. By 1st July, 2020, an electronic filing (e-filing) system of cases was rolled out in Nairobi courts. Consequently, the courts have been using ICT platforms to conduct hearings and deliver judgements and rulings in line with protocols issued by the Ministry of Health that support social distancing.
The newly introduced e-filing system is the creation and submission of case documents electronically (online) to court registries. It is a web-based application that sits on a server and can be accessed from any location with internet connection. The e-filing system provides a platform for lawyers and litigants to initiate and complete the process of filing cases online remotely, essentially doing away with the need for physical presence in courts
The e-filing system is supported by Practice Directions on Electronic Case Management issued by the Chief Justice designed to support courts and legal practitioners to maximize the use of technology within the confines of the law.
4. COMMERCIAL & PROPERTY TRANSACTIONS
The Business Laws (Amendment) Act, 2020 came into effect immediately prior to reports of the first cases of COVID-19 reported in Kenya. While the Act was not designed as a targeted intervention for COVID-19, its provisions have had a positive impact on the ease of doing business in Kenya particularly within the context of the pandemic. Some notable developments involve the legal recognition of e-signatures for commercial transactions including property transactions, electronic stamping and registration of documents, and the simplification and digitization of land transactions. These provisions are yet to be fully implemented.
C. CONCLUSION
These measures have collectively enhanced business continuity in spite of the disruptions caused by the pandemic. It is expected that these measures will be continuously reviewed and enhanced to accommodate long term effects of the pandemic.