TAX AMNESTY ONFOREIGN INCOME

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TAX AMNESTY ON FOREIGN INCOME PAGE 2

After numerous iterations, twists and turns, the Finance Bill 2018 (the 2018 Finance Bill) has now proposed to extend the amnesty on foreign income (the Amnesty) for a further period of twelve (12) months as from 1 July 2018 and to

Background

The proposed legal changes

The 2018 Finance Bill seeks to repeal the current section 37B of the Tax Procedures Act, 2015 (TPA), (which provides for the Amnesty) by replacing it with a new section 37B. The proposed new provision retains most of the current wording of section 37B, except for the following significant amendments:

Analysis

TAX AMNESTY ON FOREIGN INCOME:

WHERE TO NOW?

The tax amnesty was granted to Kenyan taxpayers who owned foreign assets. A taxpayer was entitled to seek amnesty in relation to those foreign assets for periods ending on or before 31 December 2016. The amnesty application was required to be filed on or before 30th June 2018 (the Existing Amnesty).

What is the effect of the effective date being 1 July 2018?

c. a new subsection 37B(4) is proposed to be introduced in the following terms: "The funds transferred under the amnesty shall be exempt from the provisions of Proceeds of Crime and Anti-Money Laundering Act, 2009 or any other Act relating to reporting and investigation of financial transactions, to the extent of the source of the funds excluding funds derived from proceeds of terrorism, poaching and drug trafficking."

The effective date for the new section 37B as stipulated under the 2018 Finance Bill is 1 July 2018.

It is interesting to note that the proposed effective date of the new provision is 1 July 2018, a date falling after the expiry of the Existing Amnesty which has a finite period ending 30 June 2018, as provided for under the current section 37B of the TPA. Therefore, strictly speaking, the 2018 Finance Bill introduces a new amnesty beginning 1 July 2018, as the Existing Amnesty will expire on 30 June 2018.

b. the returns for the year ending 2017 (previously ending 2016) are to be submitted

a. the cut-off date for the period covered under the amnesty is extended from 31 December 2016 to 31 December 2017;

30 June 2018); andon or before 30 June 2019 (previously

cover any year of income ending before 31 December 2017.

TAX AMNESTY ON FOREIGN INCOME PAGE 3

Can a person still file a return based on the current section 37B prior to 30 June 2018?

Some of the questions that will need to be considered carefully include the following:

a. Is it legally possible to amend the provisions of POCAMLA and other legislation relating to reporting and investigation of financial transactions under the TPA?

What is the impact on individuals who have taken the Existing Amnesty under the current section 37B?

What is the effect of the new section 37B(4) which extends the Amnesty to anti-money laundering and other financial legislation?

b. What other legislation relating to reporting and investigation of financial transactions could possibly be covered?

Anyone who has taken the Existing Amnesty based on the current provisions of the law will benefit from the tax amnesty provided they have met the legal requirements, including those relating to repatriation of “funds” and filing the returns on iTax in the required form since the Existing Amnesty has not been rescinded.

The important question is whether an individual can seek to update their return to cover the period ended 31st December 2017. The proposed section 37B does not deal with this situation. However, it should be possible, presumably through filing a fresh return for the period ended 31st December 2017.

It would be expected that the Kenya Revenue Authority (KRA) will issue fresh Guidelines dealing with these practical issues and providing modalities for filing updated returns. It is also the case that the iTax platform would need to be updated to release a new template of a return for the amnesty for the period ending 31 December 2017 (the current return on iTax is for the period ending 31 December 2016).

Given the fact that the current section 37B continues to be effective until 30th June 2018 (the last day of the current amnesty), an individual taxpayer can proceed to file a return based on the current provisions of the law (as discussed above, the changes in the 2018 Finance Bill do not take effect until 1 July 2018, a date falling after the expiry of the current amnesty).

The proposed section 37B as currently drafted in the 2018 Finance Bill only applies to the TPA. An argument could be made that each of the statutes should be independently amended if section 37B(4) is to have force of law. This is especially so, given the fact that certain sections of POCAMLA are drafted so as to supersede all other written laws, including in certain cases, the provisions of the Income Tax Act. The validity of this provision may be questionable if subjected to judicial scrutiny unless steps are taken to amend the various statutes as well. There are also serious constitutional concerns which arise with the wide ranging scope of the proposed section 37B(4).

A number of legal questions arise as a result of the proposed introduction of the new section 37B(4). As drafted, the intention of this new provision appears to exempt any funds transferred or repatriated to Kenya from the provisions of the Proceeds of Crime and Anti-Money Laundering Act, 2009 (POCAMLA) or any other legislation relating to reporting and investigation of financial transactions.

TAX AMNESTY ON FOREIGN INCOME PAGE 4

This is a very wide and sweeping statement which potentially extends to a large number of statutes, including (but not limited to):

i. The Banking Act, Chapter 488 of the Laws of Kenya;

iii. The Anti-Corruption and Economic Crimes Act, No 3 of 2016;

iv. The Bribery Act, No. 47 of 2016; and

d. Would the Cabinet Secretary be empowered to amend these pieces of legislation through the 2018 Finance Bill without having brought it before Parliament?

On a careful reading of the new proposed section 37B(4), it appears that the broader language granting amnesty from reporting and investigation of financial transactions only applies to “funds transferred” to Kenya. To quote, section 37B(4) states that “…the funds transferred under the amnesty shall be exempt from the provisions of Proceeds of Crime and Anti-Money Laundering Act,

ii. The Central Bank Act, Chapter 491 of the Laws of Kenya;

made to the initial Finance Bill that had been published.

c. What would be covered under the broader amnesty relating to reporting and investigation of financial transactions set out in section 37B(4)?

v. Leadership and Integrity Act, 2012.

holding USD 50,000, the individual would be required to transfer or repatriate to Kenya the bank account balance of USD 50,000 and only this amount would be covered under the provisions of section 37B(4). The other assets would receive amnesty from taxation but would not fall under the broader amnesty under section 37B(4) as they would not have been "transfered" to Kenya. It would therefore appear that anyone seeking to receive the broader amnesty relating to reporting and investigation of financial transactions would have to fully liquidate their assets in order to repatriate them to Kenya.

2009 or any other Act relating to reporting and investigation of financial transactions…” This is of critical importance, given the fact that as currently drafted, only the amount that is repatriated to Kenya will be covered under the provisions of section 37B(4). To put it another way, if an individual has “hard” assets worth USD 4,000,000 and a bank account

The KRA through various Guidelines issued in 2017 clarified that the “funds” to be repatriated consisted only of the amounts held in cash in offshore accounts and not “hard” assets such as property. Individuals taking up the Existing Amnesty were therefore not required to liquidate their “hard” assets in order to participate in the Existing Amnesty. The broad understanding of the Guidelines as issued by the KRA is that individuals were fully covered under the Existing Amnesty where they declared all their assets (both liquid and illiquid assets) provided that they repatriated the cash held in offshore accounts.

The significant difference between the Finance Bill and other proposed laws is that the Finance Bill enters into force in accordance with its terms on the dates stipulated within it prior to Parliamentary debate and enactment, in so far as the amendments relate to taxes or duties. This unique procedure is provided for under the provisions of the Provisional Collection of Taxes and Duties Act (the PCTDA). The Finance Bill is subsequently tabled before Parliament for debate before being enacted into law, often with changes

TAX AMNESTY ON FOREIGN INCOME PAGE 5

What is the way forward for a taxpayer with assets and income to be declared? Which amnesty should they take?

The PCTDA does not appear to allow the Cabinet Secretary to bring to immediate effect any provisions of the Finance Bill which are not directly connected to a tax or a duty. Such provisions would have to wait for Parliament to enact the Finance Bill into an Act of Parliament in order to have legal effect.

The issue therefore is whether the proposed section 37B(4) which seeks to amend the provisions of POCAMLA and other legislation relating to reporting and investigation of financial transactions will take effect on 1 July 2018 as indicated in the 2018 Finance Bill, or whether such provision can only enter into force after Parliamentary enactment. We believe the legal position prior to such enactment by Parliament may be questionable but this would be an issue for judicial interpretation, if this provision were to be challenged in a court of law.

Can the 2018 Finance Bill be amended through the Parliamentary enactment process and if so, what would be the position in law for a taxpayer who has relied on the provisions of the 2018 Finance Bill prior to Parliamentary enactment?

Parliament can amend a provision in any Bill before enacting it into statute. In the past, it has not been unusual to find that Parliament had amended the Finance Bill by inserting new provisions and deleting others prior to the enactment into an Act of Parliament. It is therefore possible for Parliament to entirely delete the proposed amendments relating to the new amnesty provisions, although we believe this would be an unlikely outcome given the political willingness of the Government to enhance repatriation of amnesty funds to Kenya.

It is of course the case that if a court were to strike out the new amnesty provisions especially in light of the money laundering issues, then it will not be possible for a taxpayer to rely on the new amnesty law.

If a taxpayer has already decided to take advantage of the Existing Amnesty, we consider that there would be no advantage in deferring their decision in order to take the Amnesty under the 2018 Finance Bill as the Existing Amnesty is under a law that is properly in force.

Having said that, if Parliament does not enact the new amnesty provisions, it would be possible for a taxpayer to argue that they validly applied for amnesty and had the legitimate expectation that they would be granted such amnesty, to the extent that they applied prior to Parliament rejecting the new amnesty provisions. That said, it would take the taxpayer’s time and energy to fight out the issue through a court of law.

A taxpayer who decides to wait for Amnesty under the 2018 Finance Bill would have to be confident that Parliament will pass the new law as drafted, and in addition, that no court will declare the new provisions illegal or unconstitutional. If the Amnesty under the 2018 Finance Bill is challenged and such challenge is upheld by a court of law, it may be that the Amnesty under the 2018 Finance Bill will not come into force in the form currently drafted.

TAX AMNESTY ON FOREIGN INCOME PAGE 6

THE TEAM

Daniel NgumyPartner

E: dng@africalegalnetwork.com

Atiq AnjarwallaSenior Partner

E: aanjarwalla@ach-legal.com

Should you have any queries or need any clarifications on the tax amnesty, please do not hesitate to contact Atiq Anjarwalla or Daniel Ngumy.

Anjarwalla & Khanna3rd floor, The Oval

Junction of Ring Road Parklands & Jalaram Road WestlandsNairobi, Kenya

T +254 203 640 000 | +254 703 032 000 | +254 203 640 201Email: info@africalegalnetwork.com