The World Health Organization (WHO) categorized the Coronavirus 2 (COVID-19) as a pandemic in the whole world. The detected cases of Covid-19 are quickly rising in many countries, with major adverse effects on health and mortality. To fight the outbreak and spread of the virus, countries are imposing unprecedented measures. The result has been that economic activity has decreased sharply in many countries and greater uncertainty has eroded confidence.
In the face of this crisis, the priority is to respond quickly to keep the productive capacity of economies intact as much as possible, avoiding the destruction of the economic base.
Impact on Kenyan Economy
The Central Bank of Kenya (CBK) has advised following a Monetary Policy Committee meeting held on 23 March 2020 that due to pandemic, economic growth is expected to decline significantly in 2020, from a baseline estimate of 6.2 percent to possibly 3.4 percent, arising from reduced demand by Kenya’s main trading partners, disruptions of supply chains and domestic production.
This would be the lowest economic growth projections in the last 12 years. The fundamental concerns and anxieties centre on the health impact, job losses, and duration of the crisis. The ongoing interventions by the Government are aimed at containing the pandemic and moderating the economic and social impact. We have already seen a complete shut-down of tourist related businesses.
We wait and see what fiscal measures Kenyan authorities prescribe having seen most countries in the developed
world offer various forms of grants, rent relief, 3 month mortgage relief and tax reliefs for its citizens.
1. Self-assessment of tax payable
Kenya operates a self-assessment tax regime where taxpayers are required to assess the tax payable for a given year of income and pay to the tax to the Kenya Revenue Authority (KRA). Based on business operations, the taxpayers would either use prior year basis or current year basis to estimate the tax payable which would be paid in four equal instalment taxes. In view of the anticipated negative business interruptions due to Covid-19, the taxpayers should assess their operations and may adopt to use current year basis to estimate the tax payable.
2. Seeking extension of time to pay the tax due
Similarly, the TPA allows for the extension of time to pay the taxes. Taxpayers requiring this extension should apply in writing to KRA seeking for either an extension of time or an arrangement to pay the taxes in instalments to avoid incurring late payment interest.
3. Seeking extension of time to submit returns
The Tax Procedures Act (TPA) allows for the extension of time to submit the returns. Taxpayers, requiring this extension should make the application in writing to the Kenya Revenue Authority (the KRA) pointing out they are unable to meet the set statutory deadlines or they have encountered challenges in submitting tax returns due to operational challenges. The application should be done at least fifteen (15) days before the due date for the monthly returns such as Pay As You Earn (PAYE), Value Added Tax (VAT), withholding (WHT)) and within thirty (30) days before the due date for corporation tax which is annual return.The application would further exempt the taxpayer from late submission penalties. The above said, the application of extension does not waive the taxpayer from paying the taxes due.
4. Lodgment of objections and Tax Appeals documents
The TPA provides for time limits for the lodgment of objections against Kenya Revenue Authority (KRA)’s tax decisions and appeals to Tax Appeals Tribunal (TAT), High Court and Court of Appeal. We note that the Secretary to the TAT issued a notice directing the taxpayers that no parties would be allowed into the TAT registry as a measure to contain spread of Covid-19. In view this, the parties have been directed to submit all documents including Notices & Memoranda of Appeals, Statements of Facts, Submissions, Urgent applications and filing fee deposit slips shall be forwarded to firstname.lastname@example.org
CBK Fiscal Policy Measures
The Government of Kenya has implemented some measures meant to contain the virus as well as cushion the households from economic shocks as a result of Covid-19 outbreak in Kenya. For instance, the CBK issued directives to banks to extend loan repayment period to the borrowers as they are expected to be strained financing impacting on meeting their loan obligations when they fall due. In light of this, the CBK has made available KES 35.2 billion to commercial banks to support the directives issued. Further, CBK directed telecos to waive charges on money transfer between banks and mobile phone wallet account as well as increase the daily remittance limit. This is all aimed at ensuring that citizens cushioned from additional costs as they strive to contain the worrying virus.
Business Analysis, Debt Negotiation and Restructuring
Organizations have been forced to go back to the drawing board to determine the effect of the pandemic on the operations and current and future performance their business. Realignment of the business strategy in the event of a delayed economic recovery is critical at this stage. It is our view that banks will look at each application on a case by case basis.
Companies are already foreseeing challenges in servicing their debt obligations as they fall due. In addition, CBK has lowered the Central Bank Rate (CBR) to 7.5 percent from 8.25 percent. Further, CBK has proposed to reduce the Cash Reserve Ratio (CRR) to 4.25 percent from 5.25 percent, releasing KES.35.2 billion as additional liquidity availed to banks to directly support
borrowers that are distressed as a result of COVID-19.
The proposed measures provided by the CBK are a welcome move and we hope for a quick action by lenders.. In light of this however, it is important to go well prepared to the respective lender.Preparing financial projections with scenario analyses allows both parties to objectively assess the projected financial performance of the business and put in place the most appropriate debt structure.
Notwithstanding the Covid-19 crisis, taxpayers are still required to comply with their tax obligations under the various tax legislation to the extent that there is no change in law or policy by the government.
As at today, the Government of Kenya has not yet issued any tax policy measures that would cushion the taxpayers from anticipated negative effect of the Covid-19 outbreak. The above said, we highlight some various alleviating tax measures under the existing tax laws that taxpayers could consider while remaining complaint.
This is aimed at ensuring that the statutory deadlines are met by the parties concerned.With respect to appeals to courts, the Chief Justice (CJ) issued a directive on the suspension of operations of the Judiciary (including Tribunals) with the exception of urgent matters. However, there is no clear guidance on what constitutes an urgent matter and as such this would cause more confusion especially on tax matters. The above said, we note that the TPA does not give the CJ the power to issue any directive to the KRA on its tax implementation and enforcement measures. In view of this, we caution taxpayers to ensure they try and adhere with provide statutory deadlines. We continue to monitor and follow whether the Government of Kenya through Cabinet Secretary (CS) for National Treasury or KRA would issue any guidelines on tax compliance and other tax related matters as we all strive to contain Covid-19 with its dire negative effects to business operations.