https://www.islamicfinancenews.com/a-birds-eye-view-of-global-islamic-agricultural-financing.html?access-key=6b73e3e68e1204087db8f566beb01d57

The original article first published in Islamic Finance News can be found at the above link

The IFN guide is found at the link below

https://www.islamicfinancenews.com/

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RESIDENTIAL RENTAL INCOME

The following key pointers are important for you to ensure you comply with the MRI regulations from the onset and avoid the penalties and interest that come with non-compliance.

1. MRI is a tax payable by resident persons on residential rental income received.

It is payable by property owners whose residential rent income is Kshs. 12,000 per month (Kshs 144,000 per year) to Kshs. 10 million per annum.

2. The rate of tax is 10% on the gross rent income received. No expenses are allowed for deduction.

3. MRI returns are filed monthly through the iTax portal, on or before the 20th of the following month.

For example Rent received in January is declared and tax paid on or before 20th February.

4. Where there is no rent income received in a given month, you are required to file a NIL return for that month.

5. MRI is a final tax and therefore rental income declared under MRI shall not be declared under the annual return.

6. Late filing of MRI returns attracts a penalty of:

a. Kshs. 2,000 or 5% of the tax due whichever is    higher for individuals.

b. Kshs. 20,000 or 5% of the tax due whichever is higher for corporates

7. Late payment penalty is 5% of the tax due while late payment interest is 1% per month.

FRINGE BENEFIT TAX

For the purposes of Section 12B of the Income Tax Act, the Market Interest Rate is 7%. This rate shall be applicable for the three months of January, February and March 2020.

DEEMED INTEREST RATE

For purposes of section 16(5), the prescribed rate of interest is 7%. This is applicable for the months of January, February and March 2020.

Withholding tax rate of 15% on the deemed interest shall be deducted and paid to the Commissioner by 20th of the month following the month of computation.

LOW INTEREST BENEFIT

For the purposes of section 5(2A) of the Income Tax Act, the prescribed interest rate for the period of six months covering January-June 2020 shall be 7%.

Contact Infromation;

Mombasa (Head Office):

Rashid Ahmed Lootah Road, 3^rd Floor, Ace House

Telelphone: 0727399199

Nairobi

TRV Towers, Suite 7F, 3^rd Parklands

Telephone: 0707688699

Eldoret

2^nd Floor, Oloo Steet, Opposite Nandi Plaza.

Email contact                     acemsa@acegroup.co.ke info@acegroup.co.ke       Website: http://www.acegroup.co.ke

TURNOVER TAX (TOT)

Turnover tax was re-introduced in the Finance Act 2019 effective 1^st January 2020 with similar regulations previously applied.

Notable changes are;

1. Monthly submission of the TOT returns by 20^th of the following month.
2. Presumptive tax is still applicable in addition to the TOT
3. Presumptive tax can be claimed as a credit against TOT payments.

Previous regulations include;

• 3% TOT on gross turnover. No expenses deductible.
• Gross turnover should not exceed 5 million a year.
• TOT does not apply to Limited Companies, Employment Income, Management Income, Professional Income, Rental Income and VAT registered individuals’ or businesses with  over 5m turnover a year.
• Commissioner approval is required to remain in the normal income tax regime.
• Late submission penalty – Kshs. 5,000 for each month.

PRESUMPTIVE TAX (PT)

Presumptive tax remains at 15% of the single business permit.

Notable changes as a result of the Finance Act 2019;

1. PT is no longer a final tax.
2. PT can be claimed as a credit against TOT payable.

Previous regulations that are still effective;

• Payable by individuals to whom a business permit or a trade license is issued by the County Government.
• Payable at the time of payment for the County Government business permit or trade license.
• Commissioner approval is required to remain in the normal income tax regime.
• PT does not apply to Limited Companies, Employment Income, Management Income, Professional Income, Rental Income and VAT registered individuals’ or businesses with  over 5m turnover a year.
• Late submission penalty – 5% of the PT due.

FINANCE ACT – SUMMARY OF TAX CHANGES

• Income earned by individual in the Ajira Programme is exempt from tax for first three years on set criteria.
• The amount withdrawn from the National Housing Development Fund to purchase a house by a contributor who is a first-time home owner is exempt from tax
• The amount of affordable housing relief shall be 15% of the employee’s contribution but shall not exceed KES 108,000 per annum.
• Plastics recycling plant will be entitled to a reduced corporate income tax rate of 15% for the first five years upon commencement of its operations.
• Import Declaration Fee (IDF) to 3.5% of the customs value of goods imported for home use.

• IDF reduced to 1.5% on customs value of raw materials imported by manufacturers, approved imports by the CS and input for construction of homes under the affordable housing scheme approved by CS.
• Railway Development Levy (RDL) from 1.5% to 2% of the customs value of goods imported for home use.
• Withholding VAT reduced to 2%.
• Non-registered persons importing taxable services will now be required to account for reverse VAT.

Excise Duty rate changes

Excise Duty rate changes – Other items (Sin Tax)

INDIVIDUAL TAXATION

A person is considered to be tax resident in Kenya if they:

• have a permanent home in Kenya and were present in Kenya for any period in a particular year of income under consideration, or
• do not have a permanent home in Kenya but were:
  • present in Kenya for 183 days or more in that year of income, or
  • Present in Kenya in that year of income and in each of the two preceding years of income for periods averaging more than 122 days in each year of income.

Individual Tax Bands and Rates

• Residential rental income – 10% of gross residential rental income received payable monthly before the 20^th of the following month. Annual gross residential rental income should not exceed 10 million shillings.
• Life, health and education relief is 15% of the premium paid but cannot exceed Kshs. 60,000 p.a
• Affordable housing tax relief – 15% of gross emoluments at a maximum of Kshs. 108,000 p.a (Starts at time of application and awaiting allocation of a house under the affordable housing scheme)

• Mortgage interest on owner occupied house at a maximum amount of Kshs. 300,000 p.a is deductible
• Gratuity and payments to a registered pension scheme is deductible to a maximum of Kshs. 240,000 p.a but cannot exceed 30% of the emoluments.
• Home ownership savings plan – Contributions not exceeding Kshs. 96,000 p.a are deductible.
• Bonuses and overtime paid to low income earners is tax free.
• Kshs. 2,000 per day allowance for travelling for an individual outside his normal place of work is tax free.

TAXABLE EMPLOYEE BENEFITS

• Motor vehicles benefit taxed at 2% of the cost of the vehicle or the prescribed rate; whichever is higher.
• Telephone and mobile is taxed at 30% of cost to employer
• Furniture – 1% of the cost to the employer
• Housing – higher of market rate or actual rent paid or 15% of total employee income.
• Employee loans are subject to Fringe Benefit Tax (FBT)

MONTHLY NHIF CONTRIBUTIONS

Changes in NHIF Regulations;

• Limit cover to a maximum of one spouse and five children
• New members will have to wait for 90 days before accessing services or benefits in addition to making a one year upfront payment within the 90 days waiting period.
• Late payment of contributions will attract a fine of 50% of the monthly contribution and a requirement to pay one year in advance. Benefits and services will be restricted for a period of 30 days.
• Defaulting for more than 12 months will require re-registration and benefits and services can only be accessed after 90 days of resuming payments. A one year upfront payment will be required.
• Access to specialized services shall be restricted to a 6 months waiting period following card maturity for new members.
• Access to maternity benefit will be restricted to 6 months waiting period following card maturity for both principal members and spouse declared.
• Any dependent declared after registration shall be subject to the 6 month waiting period for specialized and maternity services.
• For inpatient and medical outpatient, additional dependents will be eligible for the benefit apply after 30 days waiting period. Same applied for a change of spouse.
• Government funded programmes like free maternity, health insurance subsidy, elderly persons with severe disabilities and Inua Jamii have been exempted from this changes.

Contact Infromation;

Mombasa (Head Office):

Rashid Ahmed Lootah Road, 3^rd Floor, Ace House

Telelphone: 0727399199

Nairobi

TRV Towers, Suite 7F, 3^rd Parklands

Telephone: 0707688699

Eldoret

2^nd Floor, Zion Mall.

Telephone: 0707688699

Email contact                    acemsa@acegroup.co.ke info@acegroup.co.ke   Website: http://www.acegroup.co.ke

https://www.researchgate.net/profile/Mohamed_Ebrahim19/achievement/5fa4eb61e548525a5cee61ec via @researchgate

Nice work, Mohamed!Your research items reached 3,500 reads Achieved on November 6, 2020

When businesses have grown to a size that the ‘rule of thumb’ approach is no longer appropriate, then some form of market-based pricing methodology must be used. The principle here is to find some standard variable within companies which appear to be consistently priced by the capital market. 

As expected, there are a large number of such variables, including annual earnings, sales turnover, book value, fixed asset value, and net worth. The variable to be used depends on the type of company. The three most commonly used in practice are:

• Price Earnings (P/E) multiples 
• Market to net worth (Tobin’s Q)
• Market to book (M/B) value ratios

103.1 Price Earnings Multiples

The price-earnings ratio is calculated as the ratio of the price per share divided by the underlying earnings per share. 

Usually, a company publishes it’s earning per share under a number of different bases: basic earnings per shares which is simply the published earnings divided by the numbers of shares in issue. 

If the company has a number of share options in issue to its employees and directors, then it will also produce a ‘diluted’ earnings per share calculated on the basis that all options are taken up.

Analysts can use different variants of the PE ratio. Some prefer to use a historical PE using the average of quoted figures over the last 12 months. This historical or ‘trailing’ PE ratio is claimed to remove price ‘noise’ (the random fluctuation) from the share price. Other analysts prefer a ‘leading’ PE ratio being the estimate from forecasts of the next twelve months earnings figures.

The magnitude of the PE ratio indicates the degree of volatility attaching to the firm’s earnings stream. A low ratio suggests a low value is being placed on the earnings stream and hence (other things being equal) the higher its volatility and vice versa.

The Challenges to using PE methods

The challenges of using the PE method are as follows:

• First, it is reliant upon an accounting estimate of earnings. As we outlined earlier, the accounting model makes a number of assumptions about the temporal matching of cash flows to time periods which even though firms may be acting quite consistently in their application of the Generally Accepted Accounting Principles (GAAP) can result in quite different outcomes across and between industries. 
• Second, is that the model avoids the valuation issue in that it is transferring the problem of valuation to the market in assuming that a benchmark PE say for the market as a whole, or an industrial segment, however, constructed, represents an appropriate price for earnings either across the market or across the industry.  
• Third, it assumes that the market does in fact value earnings rather than some other aspect of the companies financial output such as dividends, or growth in earnings or indeed risk and the market is an efficient market. 

103.2 Market to net worth (Tobin’s Q)

This particular ratio has an impeccable academic pedigree. It was first proposed by the Nobel Prize-winning economist James Tobin in 1969 and since that time has developed a small but influential following. 

Its principal advantage as a metric is that it would appear to allow us to determine whether a market is over or undervalued. However, its use at the individual stock level is more questionable.

Tobin defined Q as the ratio of total capital value (equity plus debt) to the replacement (or reproduction cost) of all capital market assets. The long-run equilibrium for this ratio is one. Taking this ratio to the firm level:

Following Modigliani and Miller’s proposition 1 that total market capitalisation is the sum of the value of equity and the value of debt, then an ‘equity version of Q can be defined as:

When viewed this way all that Tobin’s Q is saying is that the rate of return the firm generates on the replacement cost of its net assets is equal to the rate of return required by equity investors. To see this, let us assume that the market value of the firm’s equity is the capitalised value of the economic earnings of the business (E):

However, the economic profit of the business is the replacement cost of the firm’s net assets (CR) multiplied by the rate of return on that invested capital (rRC):

As a result, Q becomes:

If Q = 1, then this ratio simply asserts that at long-run equilibrium the rate of return on invested capital must equal the firm’s cost of capital (i.e., the required rate of return on equity) or, to put it another way, the rate of return on new capital invested in firms (the internal rate of return on the capital invested) is equal to the rate of return on existing capital traded in the market (the required rate of return on equity). We have met this concept already in that, in the long run, the net present value of an internal investment is driven down to zero, i.e., the point at which the internal rate of return on the firm’s investments equals the firm’s cost of capital. This is important (even if it is a rather unsurprising result) for reasons we return to when we discuss the problems of estimating the growth rate of the firm. 

To what extent can Tobin’s Q and the implied relationship between equity value and a firm’s net worth be used for prediction purposes?  Smithers and Wright (2000) have conducted studies on the properties of their equity version of Q. They demonstrate that over time, and at the level of the market Q exhibits strong mean reversion. This is what we would expect if at the market level, the internal rate of return on invested capital was markedly different from the prevailing market required rates of return. Firms that earned greater than the market rate would attract investors, and hence their equity prices would rise, and firms earning a lower than the market rate would find their share price falling.  

There is some evidence that Q is also a superior leading indicator for share price changes than either the P/E ratio (where earnings are the fundamental lead indicator) or dividend yield (where dividends are the fundamental lead indicators). In causality tests, Smithers and Wright report that net worth (the fundamental in the Q ratio) has only a 1.4per cent probability of no predictive power, whilst dividends and earnings have 43.8 per cent and 88.6 per cent probability respectively. They also found that net worth only really works as a predictor when used as a ratio with equity value rather than on its own.

In practice, the application of Tobin’s Q invariably relies upon the use of accounting information as a proxy for replacement cost. This leads to a more measurable market to book ratio. 

103.3 Market to book (M/B) value ratios

The market to book ratio is a pragmatic interpretation of Tobin’s Q. This ratio assumes that there is a consistent relationship between market value and the net book value of the firm, or to put it another way that the market prices one Unit (pound, dollar, shilling, dinar, riyal, dirham) of book value in one firm, the same as in another.  

Summary and Conclusion 

Like with all other valuation methods, this method is suited to particular situations and has fundamental assumptions, which need to hold, which would due to market inefficiencies not always hold. Therefore it is an indicative value subject to negotiation. It should be noted that the concept can be applied to the valuation of non-quoted companies too.