Experts warn on pitfalls of proposed forex policy

Tuesday, June 11th, 2024 01:30 | By

The Finance Bill 2024’s move to curtail the timeframe for claiming foreign exchange (Forex) losses from five years to three is a shift that could negatively affect business forecasting and investor trust in Kenya, tax experts have said.

The experts from accounting firm PKF said this reduction directly impacts the strategic financial planning of companies, as it limits their ability to mitigate losses through future profits. Such a change, they said, not only poses a challenge to the fiscal strategies of businesses but also signals a potential shift in the economic landscape, affecting investment decisions at a broader scale.

They therefore urged the government and National Treasury to align National Tax Policy and the Finance Bill 2024 by the proposed amendment they viewed as “repugnant to the provisions of the National Tax Policy.”

Proposed amendments

“To this end, the government and the National Treasury need to consider some of the proposed amendments that are repugnant to the provisions of the National Tax Policy such as the proposed reduction in the time period of claiming realised foreign exchange losses from five years to three years,” PKF said during a Financial Year 2024/25 National Budget Review press briefing.

National Treasury published the National Tax Policy last month, after consideration by the National Assembly. The policy is part of the government’s efforts to enhance predictability and transparency of tax policies. It provides guidelines to the tax systems and administration reforms.

Some of the policy guidelines include a comprehensive review of tax laws every five years to align with other government policies and international best practice as well as aligning tax changes to the Medium- Term Revenue Strategy (MTRS).

These policy guidelines are intended to improve the predictability of tax rates thus facilitating investment decisions. Critics argue that the proposed shift in policy, from a five-year to a three-year period for claiming deductions on forex losses, could lead to increased tax burden that businesses may face.

With a reduced timeframe to claim deductions, businesses would have to account for their losses over a shorter period, potentially leading to a heavier tax load. They said increased tax burden could put a strain on the financial health of businesses, especially those operating on thin margins or those in their growth phase, where profits are typically reinvested back into the business.

Furthermore, this policy shift could also impact foreign investments. The prospect of larger tax liabilities materialising sooner could deter businesses from engaging in transactions involving foreign currency. This could result in a decrease in foreign investments, potentially slowing down the growth of businesses that rely heavily on international transactions.

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