Tightening of licensing frameworks creates dynamic accounting market in Kenya

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n our last report on Kenya, we noted that the Institute of Certified Public Accountants of Kenya (ICPAK) was planning to issue practising certificates for taxation, advisory and consultancy services.

From 1 January 2021, ICPAK has issued four categories of practicing certificates, which include:

• Composite licence covering all accountancy services;
• Audit and assurance licence for auditors;
• Taxation practitioners licence for tax practitioners;
• Accounting controls and consultants licence.

MGI Alekim partner Felix Kimoli explains that the move was in response to requests by members for issuance of multiple licences for practice in different capacities and has given the institute a wide pool of professionals to keep an eye on. “It has given the market competence and impetus and clients have viewed it positively as they are being served by professionals who are regulated, having the institute as their reference point,” he says. “Clients are also able to confirm independently the status of the practitioner before they engage them.”

Joseph Chege, managing partner at PrimeGlobal member firm Fine Accounting Services, agrees that the introduction of standalone licences was meant to spur growth in the accounting service sector as well as instil customer confidence. However, any conclusions on the success of this initiative must be tempered by recognition of the extraordinary circumstances the industry has had to cope with over the last 12 months.

“There were many freelance consultants looking to take advantage of the new licensing regime to improve their profiles but were let down by dwindling opportunities for business owing to the adverse effects of the pandemic on the economy,” says Chege. “Further, some experienced accountants already in formal employment who were angling for new opportunities had to shelve their plans.”

Most firms have applied for the composite licence which is by default the licensing regime for firms and practitioners already in practice, although Crowe COR managing partner Cephas Osoro notes that there are members who do not wish to attest to assurance reports. “It is still too early to assess the impact of this in our market,” he says. “However, I do know that most clients prefer a one-stop-solution firm.”

With categorisation and multiple licensing, practitioners can choose the areas they want to practice or specialise in says George Kimeu, managing partner Kreston KM Kenya. “In many cases, we have noted that our clients want to get all their services under one roof and for this reason, our firm has chosen to go for the composite services category with specialisations in the various departments that provide audit and assurance services, tax services and accounting controls and consulting,” he says. “This is mainly because clients who require audit and assurance services will inevitably also require their tax returns to be filed with the tax authorities as well as other professional services.”

The impact of government measures to increase scrutiny of compliance and widen the tax base has had a more immediate impact on the profession according to Chege. “Enhanced scrutiny of tax compliance by the Kenya Revenue Authority (KRA) has created more business opportunities for auditors and tax consultants,” he says. “The KRA places more emphasis on audited accounts, especially when dealing with a corporate body. Other regulatory bodies, such as the Capital Markets Authority (CMA) have placed a high threshold for regulated entities to engage professionals such as accountants and auditors.”

HLB Cezam associate director Patricia Mwendwa says her firm’s tax experts have spent considerable time monitoring regulatory and procedural developments, understanding and communicating the impact, and supporting clients to implement changes. “We have increased the regularity of communication with clients, especially through formal notification letters, reminder letters as deadlines approach, and telephone calls where a detailed discussion is required,” she adds.

“We are also finding a need to keep reassuring our clients on compliance following increasing tax demand or tax audit notices from the revenue authority. While growth in the tax advisory service line did not significantly overtake other services in 2020, we note that many new enquiries are tax-related and existing clients are requiring more time on tax advisory.”

The KRA’s tax base expansion programmes aim to bring in more than half a million people who were previously outside the tax bracket, explains Kimoli, by identifying Kenyans involved in gainful business who ought to be paying taxes.

Some of the measures put in place include acquiring information for tax base expansion purposes through access to key databases in the private and public sectors and appointing key taxpayers, counties, parastatals, ministries, and government agencies as withholding tax agents to capture and provide details of their suppliers.

Osoro agrees that the KRA has been very aggressive in assessing and demanding tax from taxpayers over the last two years, which has in turn increased the volume of tax work as practitioners assist their clients in resolving disputes and ensuring compliance. “Reforms of minimum tax, digital services tax and turnover tax are meant to increase the tax base and improve revenue collections, which have been badly hit by the impact of Covid-19 on the economy,” he says.

“The government’s high debt obligations have compounded the problem and this has left the KRA with no choice but to look for additional tax revenue, although a recent court ruling temporarily halted collection of minimum tax and the matter is still in court. In my opinion, the accounting profession will play a significant role in enhancing compliance, which should lead to improved revenue collections.”

The aggressive KRA compliance checks and audits have demanded a keen eye from accounting professionals in terms of reconciling tax returns which include value added tax, pay as you earn, digital services tax, minimum tax, advance tax on commercial vehicles, and corporate tax.

That is the view of Victor Chiuri, tax team leader at DFK member firm KKCO East Africa, who notes that the national treasury successfully used the Finance Act, 2020 to introduce minimum tax at 1% of gross turnover and a digital services tax at 1.5% of the gross transaction value.

“These taxes took effect from 1 January 2021 and have increased the scope of work in terms of additional tax computation, return filing and processing tax payment for accounting professionals,” he says. “However, Covid–19 has had a huge impact on businesses generally,” adds Chiuri. “The effect on the accounting profession can be seen in diminished cash flow, reduced scope of work for firms and even cancellation of assignments.”

Increased scrutiny and widening of tax base have positively impacted the accounting profession in Kenya in that more businesses in the small and medium enterprises sector are seeking the services of accountants in order to meet tax compliance requirements, adds Kimeu. “We have noted an increase in the number of clients seeking our services in order to meet these requirements,” he says.

From a regulatory perspective, Mwendwa notes that there have been a number of significant developments over the last 12 months. Perhaps the most significant of these is the Finance Act 2020 which (in addition to amending exclusions and rates on existing taxes) introduced the following new taxes:

• Minimum tax – a tax of 1% on gross turnover payable by all companies whose minimum tax is greater than tax on profit in a given tax period;
• Digital services tax – a tax of 1.5% on the gross transaction value of services provided through a digital marketplace in Kenya.

“The Finance Act 2020 also extended an amnesty on penalties and interest through the voluntary tax disclosure programme,” says Mwendwa. “This runs for three years from 1 January 2021 and offers tax payers the opportunity to correct tax non-compliance occurring between 1 July 2015 and 30 June 2020.”

Other new legislation includes:

• Tax Laws (Amendment) (No. 2) Act, 2020, which removed the Covid-19 mitigation tax concessions on individual income tax, corporate tax and VAT;
• Business Laws (Amendment) Act, 2020 and Business Laws (Amendment) (No. 2) Act, 2021, which introduced amendments to various laws with the aim of enhancing the ease of doing business in Kenya;
• Companies (Beneficial Ownership Information) Regulations, 2020, which requires all companies to submit to the registrar of companies an e-register of all beneficial owners;
• VAT (Electronic Tax Invoice) Regulations 2020, which requires all persons registered under the VAT Act to install registers that ensure data security and transmit tax invoice data to the Kenya Revenue Authority’s system.

“The highest individual income tax band has been reinstated to 30% from the 25% which was Covid-19 relief last year,” says Kimoli. “The new bands have removed two tax bands which were there before (15% and 20%) and the threshold for the lowest band has been raised from KES12,298 to KES 24,000 per month, while the highest tax band threshold has been lowered from KES47,059 to KES32,333 per month. The personal relief of KES2,400 per month has been retained.”

The corporate income tax rate has been revised to 30% from 25% for 2021 onwards. “The minimum tax shall be payable by the twentieth day of the fourth, sixth, ninth and twelfth month of the accounting period,” explains Kimoli. “Taxpayers will be required to pay the higher of instalment tax or minimum tax. The VAT rate has been reinstated to 16% from the 14% given as a relief last year.”

Osoro observes that the forthcoming Finance Bill 2021 is expected to introduce significant changes and reforms to further improve revenue collection and management of public debt. “A tender has been advertised seeking consultants to advise treasury on managing the ballooning public debt,” he concludes.