Tax experts have pointed out possible complications in the implementation of new proposals announced a week ago by President Uhuru Kenyatta to promote domestic travel and lift the troubled tourism sector which has been hit by a wave of cancellations in the wake of travel advisories by the US, UK and France.
A review by consulting firms PricewaterhouseCoopers (PwC) and Deloitte East Africa shows that the new incentives and directives will require changes in several existing laws to give them legal grounding.
They, however, said the incentives have the ability to boost the tourism sector, which is under siege from rising insecurity and travel advisories, after international arrivals slumped by a third.
On May 23, President Kenyatta, among other things, revoked an earlier Treasury circular restricting the public service from holding conferences and other meetings in private hotels.
This is expected to open up a lucrative income stream for private hotels, as the public service is one of the biggest spenders on conference tourism.
“This will have a positive impact by directing more business from the government to private hotels. However, the measure has to be seen in light of the government’s attempts to allocate more resources to development expenditure as opposed to recurrent expenditure,” said Steve Okello, partner and head of tax at PwC.
“The measures being proposed by the government are admirable, but subject to further queries. For a start, there is a need for further stakeholder engagement in order to align the expectations of government with that of employers and their employees,” he said.
The government’s directive with effect from June 12 to allow corporate and business entities to pay vacation trip expenses for their staff on annual leave in Kenya and deduct such expenditures from their taxes may not work without a law in place, experts said.
“Generally, for any expenses to be deductible by an employer, the expense must be incurred wholly and exclusively in the production of income. Paying for an employee’s holiday is really an expense of the employee, so for the employer to get a deduction, the law needs to be changed,” said Nikhil Hira, a tax partner at Deloitte East Africa.
“The concern is that there is no mention of whether the employee will be taxed on the benefit. Strictly, where an employer pays an expense on behalf of an employee, then it is the benefit of the employee, which should be taxed.”
The government hopes that this initiative will give at least 25,000 Kenyans a chance to go for a week’s holiday every year. But it is not yet clear, for example, if employers will be expected to actually pay the trip expenses in advance or will reimburse expenses incurred by an employee.
“The government should clarify that such vacation relief will not be seen as a ‘taxable benefit’ to the employee where the company claims a corporate tax deduction, otherwise it will be simply seen as giving with one hand and taking back with the other,” he said.
President Kenyatta also directed that all outstanding income tax related refunds running into billions of shillings owed to the tourism industry players be paid out by Kenya Revenue Authority not later than May 29. This is expected to free up more cash in the sector for expansion. But experts have reservations on this.
“I am not sure how much income tax refund is due to the players in the industry, but I cannot believe it is significant, so this measure may be superficial. The question must be that if there are refunds, can KRA actually issue them given that collection of revenue is difficult anyway?” asked Mr Hira.
Other sectors, experts said, may also demand such a directive on tax refunds, further constraining the government’s budget, as KRA has to seek finances to pay up.
“If the same provision is not applied to other sectors in the economy that are similarly impacted, they may seek to demand the same treatment for reasons of equity,” said Mr Okello.
The tourism sector has been hurting due to insecurity, a situation worsened by travel advisories. Tourism sector players are calling for immediate negotiations with the countries that issued them to reverse the travel advisories.
“Even with the incentives, the industry’s performance is predicted to slump in 2014 if the government does not address the core issue — to bring back confidence to the markets both local and international. Insecurity affects all tourists whether local, regional or international,” said Waturi Matu, the East Africa Tourism Platform co-ordinator.