PUBLIC NOTICES 24/07/2023 Fringe Benefit Tax, Deemed Interest Rate and Low Interest Benefit

The Kenya Revenue Authority (KRA) issued a Public Notice on July 24, 2023, updating key interest rates for Fringe Benefit Tax (FBT), Deemed Interest Rate, and Low Interest Benefit. For the quarter spanning July, August, and September 2023, the Market Interest Rate for FBT purposes under Section 12B of the Income Tax Act (Cap 470) was set at 11%. Similarly, the Deemed Interest Rate under Section 16(2)(ja) of the Income Tax Act was also prescribed at 11% for the same period, with a 15% withholding tax applicable. Furthermore, the prescribed rate for Low Interest Benefit under Section 5(2A) of the Income Tax Act was set at 10% for the extended period of July to December 2023. This notice is crucial for employers and entities engaged in loan arrangements, necessitating a review of their payroll and tax compliance frameworks to ensure adherence to the updated rates and avoid penalties.

The Kenya Revenue Authority (KRA) regularly issues public notices to inform taxpayers of changes and updates to tax rates and regulations. A significant notice released on July 24, 2023, addressed the Market Interest Rate for Fringe Benefit Tax (FBT), the Deemed Interest Rate, and the Prescribed Rate for Low Interest Benefit. These rates directly impact how certain employee benefits and inter-company loan arrangements are taxed in Kenya, making the notice critical for all employers, financial institutions, and entities involved in such transactions.

This article aims to dissect the KRA's pronouncement, providing a comprehensive overview of the updated rates and their implications for legal and tax practitioners. Understanding these adjustments is paramount for ensuring compliance with the Income Tax Act (Cap 470) and mitigating potential tax liabilities and penalties. The notice underscores the KRA's continuous effort to align tax administration with prevailing economic conditions, particularly market interest rate fluctuations, which directly influence the valuation of non-cash benefits and certain financial arrangements.

The taxation of benefits provided by employers to employees, as well as certain interest-free or low-interest loan arrangements, is governed primarily by the Income Tax Act (Cap 470) of Kenya. Fringe Benefit Tax (FBT) is levied on employers who provide loans to their employees, directors, or their relatives at an interest rate lower than the prevailing market interest rate. Section 12B of the Income Tax Act mandates this tax, with the market interest rate typically determined by the average 91-day Treasury Bill rate for the preceding quarter, as prescribed by the Commissioner.

Separately, the concept of 'Deemed Interest' arises under Section 16(2)(ja) of the Income Tax Act, particularly in scenarios involving interest-free borrowings between resident companies and non-resident connected entities. In such cases, interest is 'deemed' to have been paid at a prescribed rate, and withholding tax is applicable on this deemed amount. Furthermore, Section 5(2A) of the Income Tax Act addresses the 'Low Interest Benefit,' which pertains to the taxable value of benefits arising from low-interest loans provided to employees and directors. These provisions collectively ensure that non-cash benefits and certain financial arrangements are appropriately brought within the tax net, preventing tax avoidance through artificially low or zero-interest transactions.

The KRA Public Notice of July 24, 2023, specifically outlined three key rates. For the purposes of Fringe Benefit Tax under Section 12B of the Income Tax Act, the Market Interest Rate was set at 11% for the months of July, August, and September 2023. This rate is crucial for employers who have extended loans to their staff at rates below 11% during this period, as the difference between the market rate and the actual interest charged constitutes a taxable benefit to the employee, on which the employer is liable to pay FBT. The FBT is charged on the total taxable value of the fringe benefit provided in a month and is due and payable by the 10th day of the following month.

Concurrently, for the Deemed Interest Rate under Section 16(2)(ja) of the Income Tax Act, the prescribed rate was also 11% for the same quarter (July, August, and September 2023). This rate is particularly relevant for resident entities that have received interest-free or low-interest loans from non-resident associates. The KRA deems interest to have accrued at this 11% rate, and a withholding tax of 15% is then applicable on this deemed interest. This withholding tax must be deducted and remitted to the Commissioner by the 20th day of the month following the month of computation. This provision aims to prevent base erosion and profit shifting through intra-group financing arrangements.

Finally, the notice stipulated a prescribed rate of 10% for the Low Interest Benefit under Section 5(2A) of the Income Tax Act. Notably, this rate was applicable for a longer duration, covering July, August, September, October, November, and December 2023. This rate is used to calculate the taxable benefit arising from low-interest loans provided to employees and directors, forming part of their employment income. The longer applicability period for this rate suggests a degree of stability in the KRA's assessment of the benefit derived from such loans over the latter half of the year. Practitioners must ensure that payroll systems are updated to reflect these rates accurately, as non-compliance can lead to significant penalties, including a 25% penalty on the tax due and additional charges for late payment.

It is imperative for legal and tax professionals to advise clients on the precise application of these rates, considering the specific nature of the loan (employee vs. inter-company) and the residency status of the parties involved. The KRA's consistent issuance of these quarterly or semi-annual updates necessitates continuous monitoring and proactive adjustments to tax planning and compliance strategies. The distinction in the applicability periods for the FBT/Deemed Interest Rate (quarterly) and the Low Interest Benefit (semi-annually) also requires careful attention to avoid misapplication.

The KRA Public Notice of July 24, 2023, served as a critical update for Kenyan taxpayers, establishing the applicable interest rates for Fringe Benefit Tax, Deemed Interest, and Low Interest Benefit for specified periods in 2023. Practitioners must ensure that their clients, particularly employers and companies with inter-group loan arrangements, are fully aware of these rates and their implications. Accurate calculation and timely remittance of FBT and withholding tax on deemed interest are essential to avoid penalties and maintain tax compliance.

Moving forward, legal and tax professionals should advise clients to implement robust internal controls and review mechanisms for all loan arrangements and employee benefits. Continuous monitoring of KRA public notices and legislative changes, especially those pertaining to the Income Tax Act, will be crucial. As the KRA consistently updates these rates, proactive engagement with tax advisors and regular system updates will be key to navigating Kenya's dynamic tax landscape effectively.