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Companies bill amendment proposal given to Hon Abdulswamad Shariff Nassir - MP Mvita by ICPAK Coast Branch

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Proposed Amendments to the Companies bill 2015 Kenya

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Companies bill amendment proposal given to Hon Abdulswamad Shariff Nassir - MP Mvita by ICPAK Coast Branch

  1. 1. TO: HON ABDULSWAMAD SHARIFF NASSIR FROM: ICPAK COAST BRANCH SUBJECT: THE COMPANIES BILL, 2015 - NATIONAL ASSEMBLY' BILLS NO. 22 DATE: 31/07/2015 Companies Bill 2015 “711. (l) A company that complies with the conditions of subsection (2) in respect of a financial year is exempt from the requirements of this Act relating to the audit of accounts for that year. (2) The conditions are that the company qualifies as a small company in relation to that year; that its turnover in that year is not more than seven hundred and twenty million shillings; and that the value of its net assets specified in its balance sheet as at the end of that year is not more than three hundred and sixty million shillings.” Proposed Amendment “711. (l) A company that complies with the conditions of subsection (2) in respect of a financial year is exempt from the requirements of this Act relating to the audit of accounts for that year. (2) The conditions are that the company qualifies is a turnover of not more than five million shillings; This shall be subject to revision periodically by the Cabinet Secretary responsible for the National Treasury in accordance with the prevailing economic environment and in line with the threshold for registration for VAT and Turnover tax..” Debating Points  A small business in Kenya as per turnover tax regulations and VAT registration is a business with a turnover (sales revenue) below Kshs 5,000,000 in any 12 month period. Why apply different thresholds for tax purposes and for audit exemption requirement?  Small and Medium Enterprises who are the majority of employers would not get appropriate advice and quality services to enable determine the correct amount of tax, leading to harassment and paying of unnecessary penalties and interest for non-compliance, plus the potential to increase corruption levels.  We believe this Bill has taken figures from the UK Companies Act and translated using an exchange rate of around Kshs 110 per £ 1 see below
  2. 2. “A company may qualify for an audit exemption if it has at least 2 of the following:  an annual turnover of no more than £6.5 million  assets worth no more than £3.26 million  50 or fewer employees on average” https://www.gov.uk/audit-exemptions-for-private-limited-companies We know that Kenya and the UK economies are not comparable, hence using GBP figures converted to Kenya Shillings in making our regulations for small company exemption, does not take into account the relative differences in the size and structure of our economies.  Adverse Impact on Small and Medium Enterprises (SME) The latest known number of companies registered in Kenya are 191,692. KRA’s LTO office (qualifying threshold Kshs 500 Million) was 1060 as at September 2010, of these 125 were Government owned entities audited by Auditor General. We can safely assume current number of LTO taxpayers do not exceed 1,500, it is also expected that 90% of these are audited by the Top 10 firms. If this legislation is passed in its current state almost 190,000 companies will not require an audit. This would lead to them not getting benefit of quality accountancy/audit services, business advise to grow their business and appropriate tax compliance consulting services. This will lead to lower tax revenues as business, are likely to report lower earnings, less tax compliance leading to increase in disputes between taxpayer and the KRA (national revenue collection agency) and the SME will be paying unnecessary penalties and interest plus possibly facilitating payments, which would increase the cost of doing business in Kenya.  The bill has a potential of rendering the Accountancy profession including auditors irrelevant as auditing is the backbone of Corporate Governance and fair financial reporting.  The bill is creating unemployment instead of having legislation that enhances jobs creation. A majority of the small firms do not have a single business in the KRA Large Taxpayer category These will have to shut down! Say each SMP employs on average 15 staff who get trained and either join the ranks of SMP or get employed as trained professional accounting staff in Business (mainly SME’s), NGO’s and National and County governments. This is a valuable service SMP provide to the economy, this would be lost if SMP’s collapse. Immediate job losses be estimated to be 12,675 staff.  The latest known number of companies registered in Kenya are 191,692. KRA’s LTO office (qualifying threshold Kshs 500 Million) was 1060 as at September 2010, of these 125 were Government owned entities audited by Auditor General. We can safely assume current number of LTO taxpayers do not
  3. 3. exceed 1,500, it is also expected that 90% of these are audited by the Top 10 firms. If this legislation is passed in its current state almost 190,000 companies will not require an audit. This would lead to them not getting benefit of quality accountancy/audit services and business advise at a reasonable cost, to grow their business and appropriate tax consulting services. This will lead to lower tax revenues as business, are likely to report lower earnings, less tax compliance leading to increase in disputes between taxpayer and the KRA (national revenue collection agency) and the SME will be paying unnecessary penalties and interest plus possibly facilitating payments, which would increase the cost of doing business in Kenya. “244. (l) A private company is required to have secretary only if it has a paid up capital of five million shillings or more. (2) If a private company does not have a secretary- (a) anything authorized or required to be given or sent to, or served on, the company by being given or sent to, or served on its secretary- (i) may be given or sent to, or served on, the company itself; and (ii) if addressed to the secretary, is taken to be treated as addressed to the company; and (b) anything else required or authorized to be done by the secretary of the company may be done by- (i) a director; or (ii) a person authorized generally or specifically for that purpose by the directors.” Proposed Amendment 244. All private companies are is required to have a company secretary. No person shall qualify for appointment as a company secretary unless he is qualified under the Certified Public Secretaries of Kenya Act, CAP 534 of the Laws of Kenya. Debating Points  The Institute of Certified Public Secretaries of Kenya (ICPSK) is the professional organization for Certified Public Secretaries. The Institute is established under the Certified Public Secretaries Act, Cap 534 of 1988 and dedicated to the promotion, growth, development and regulation of
  4. 4. the governance and corporate secretarial profession in Kenya. If this Section 244 is enacted into law, then sound Corporate Governance of companies will be undermined, company directors especially of small and medium sized businesses are not trained in the law related to governance of companies including filing of Annual returns at the registrar of companies, preparing minutes of Annual General Meeting etc.  When companies seek finance from banks and other financial institution’s part of the requirement is to get to know the borrower, hence the require 3rd party confirmed information on the Directors, Shareholder, share capital and indebtedness, this confirmation is usually given by Company Secretaries.  Very few companies have a share capital of Kshs Five (5) Million, and this threshold ignores the fact that older established companies have a Share Capital of Kshs 200 (Two Hundred) but have revenue reserves (also part of equity), running into hundreds of Millions of Kshs, hence share capital is not an appropriate measure in this instance. “245. Every public company is required to have at least one secretary.” Proposed Amendment “All public companies are is required to have a company secretary. No person shall qualify for appointment as a company secretary unless he is qualified under the Certified Public Secretaries of Kenya Act, CAP 534 of the Laws of Kenya. Justification It is important that a person appointed as a company secretary is a trained person and member of a professional body which regulates his professional conduct and can discipline the member if need be.
  5. 5. “624. (l) A company qualifies as small in relation to its first financial year if the qualifying conditions are satisfied in that year. (2) A company qualifies as small in relation to a subsequent financial year if the qualifying conditions- (a) are satisfied in that year and the preceding financial year; (b) are satisfied in that year and the company qualified as small in relation to the preceding financial year; and (c) were satisfied in the preceding financial year and the company qualified as srnall in relation to that year. (3) The qualifying conditions are satisfied by a company in a year in which it satisfies two or rhore of the following requirements (a) it has a turnover of not more than seven hundred and twenty million shillings; (b) the value of its net assets as shown in its balance sheet as at the end of the year is not more than three hundred and sixty million shillings; and (c) it does not have more than fifty employees. (4) For a period that is only part of a company's financial year, the maximum figures for turnover are to be adjusted proportionately. (5) In this section, "the number of employees" means the average number of persons employed by the company in the year, determined as follows (a) ascertain for each month in the financial year the number of persons employed under contracts of service by the company in that month (whether throughout the month or not); (b) add together the monthly totals; and (c) divide the result obtained under paragraph (b) by the number of months in the financial year. (6) This section is subject to section 625.” Proposed Amendment 624. (l) A company qualifies as small in relation to its first financial year if the qualifying conditions are satisfied in that year. (2) A company qualifies as small in relation to a subsequent financial year if the qualifying conditions- (a) are satisfied in that year and the preceding financial year; (b) are satisfied in that year and the company qualified as small in relation to the preceding financial year; and (c) were satisfied in the preceding financial year and the company qualified as small in relation to that year. (3) The qualifying conditions are satisfied by a company in a year in which it satisfies two or more of the following requirements (a) it has a turnover of not more than five million shillings; This shall be subject to revision periodically by the Cabinet Secretary responsible for the national treasury in accordance with the prevailing economic environment and in line with the threshold for registration for VAT and Turnover tax. (b) the value of its net assets as shown in its balance sheet as at the end of the year is not more than Two decimal five million shillings; and shall be revised periodically by the Cabinet Secretary responsible for the national treasury in accordance with the prevailing economic environment. (c) it does not have more than 20 employees.
  6. 6. (4) For a period that is only part of a company's financial year, the maximum figures for turnover are to be adjusted proportionately. (5) In this section, "the number of employees" means the average number of persons employed by the company in the year, determined as follows (a) ascertain for each month in the financial year the number of persons employed under contracts of service by the company in that month (whether throughout the month or not); (b) add together the monthly totals; and (c) divide the result obtained under paragraph (b) by the number of months in the financial year. (6) This section is subject to section 625.” Debating Points  A small business in Kenya as per turnover tax regulations and VAT registration is a business with a turnover (sales revenue) below Kshs Five (5) million in any 12 month period. Why apply different thresholds for tax purposes and for Company Law purposes?  Small and Medium Enterprises who are the majority of employers would not get appropriate advice and quality services to enable determine the correct amount of tax, leading to harassment and paying of unnecessary penalties and interest for non-compliance, plus the potential to increase corruption levels, as businesses opt to settle with the KRA officer, rather than pay to KRA.  We believe this Bill has taken figures from the UK Companies Act and translated using an exchange rate of around Kshs 110 per £ 1 see below “A company may qualify for an audit exemption if it has at least 2 of the following:  an annual turnover of no more than £6.5 million  assets worth no more than £3.26 million  50 or fewer employees on average” https://www.gov.uk/audit-exemptions-for-private-limited-companies We know that Kenya and the UK economies are not comparable, hence using GBP figures converted to Kenya Shillings in making our regulations for small company exemption, does not take into account the relative differences in the size and structure of our economies.  Adverse Impact on Small and Medium Enterprises (SME) The latest known number of companies registered in Kenya are 191,692. KRA’s LTO office (qualifying threshold Kshs 500 Million) was 1060 as at September 2010, of these 125 were Government owned entities audited by Auditor General. We can safely assume current number of LTO taxpayers do not exceed 1,500, it is also expected that 90% of these are audited by the Top 10 firms. If this legislation is passed in its current state almost 190,000 companies will not require an audit. This would lead to them not getting benefit of quality accountancy/audit services, business advise to grow their business and appropriate tax compliance consulting services. This will lead to lower tax revenues as business, are likely to report lower earnings, less tax compliance leading to increase in disputes between taxpayer and the KRA
  7. 7. (national revenue collection agency) and the SME will be paying unnecessary penalties and interest plus possibly facilitating payments, which would increase the cost of doing business in Kenya.  The bill has a potential of rendering the Accountancy profession including auditors irrelevant as auditing is the backbone of Corporate Governance and fair financial reporting.  The bill is creating unemployment instead of having legislation that enhances jobs creation. A majority of the small firms do not have a single business in the KRA Large Taxpayer category These will have to shut down! Say each SMP employs on average 15 staff who get trained and either join the ranks of SMP or get employed as trained professional accounting staff in Business (mainly SME’s), NGO’s and National and County governments. This is a valuable service SMP provide to the economy, this would be lost if SMP’s collapse. Immediate job losses be estimated to be 12,675 staff.  The latest known number of companies registered in Kenya are 191,692. KRA’s LTO office (qualifying threshold Kshs 500 Million) was 1060 as at September 2010, of these 125 were Government owned entities audited by Auditor General. We can safely assume current number of LTO taxpayers do not exceed 1,500, it is also expected that 90% of these are audited by the Top 10 firms. If this legislation is passed in its current state almost 190,000 companies will not require an audit. This would lead to them not getting benefit of quality accountancy/audit services and business advise at a reasonable cost, to grow their business and appropriate tax consulting services. This will lead to lower tax revenues as business, are likely to report lower earnings, less tax compliance leading to increase in disputes between taxpayer and the KRA (national revenue collection agency) and the SME will be paying unnecessary penalties and interest plus possibly facilitating payments, which would increase the cost of doing business in Kenya.

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