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KENYA REVENUE AUTHORITYKENYA REVENUE AUTHORITY

PRESUMPTIVE TAX METHODS

Presentation to the CIAT Technical Conference on The Examination Functions of

Tax Administration

ROME 2015

Ms. Alice Owuor

COMMISSIONER - DOMESTIC TAXES DEPARTMENT


Presentation Outline

Contents

Introduction

Kenyan Experience

Assessment Methods

Presumption through Legislation

Information Technology and Future of Presumptive Examination

Conclusion


INTRODUCTION Presumptive taxation involves the use of indirect means to ascertain

tax liability, which differ from the usual rules based on the taxpayer's accounts and records.

This implies there is a presumption that the taxpayer's income is no less than the amount resulting from application of the indirect method.

Presumptive techniques aim at:

a) Providing objective indicators for tax assessment, where the requisite accounts are unavailable or unreliable.

b) Encouraging taxpayers to keep proper records because this method has a possibly of higher tax burden in the absence of such accounts and records


INTRODUCTION Presumptive techniques aim at:

c) The dual outcome of both simplifying the compliance burden on taxpayers with low turnover as it minimizes administrative burden of auditing such taxpayers.

d) Minimizing tax avoidance and evasion schemes, where presumptive indicators are difficult to hide compared to normal accounts /records.


The Kenyan Tax Administration Experience

The Kenyan economy is predominantly a cash economy, where the indigenous private sector is dominated by SMEs cutting across all key sectors including farming.

The Presumptive Income Tax (PIT) was introduced and was applicable as a withholding tax on payment of agricultural produce at 2% of the gross amount paid. This was as a result of lack of proper record keeping and was found to be more convenient in the determination of correct taxes than receiving incomplete records and using presumptive methods of examination


The Kenyan Tax Administration Experience

Where PIT was deducted, this became a final tax, and no self assessment return and accounts were required.

Corporate bodies undertaking farming activities had no option to make an election, and therefore had to submit self assessments and accounts.

Presumptive Income Tax Act was however suspended by the Finance Act 2001, upon which the self assessment regime was fully embraced.


Assessment Methods Used in Kenya

The common methods used by the Kenyan Tax Administration include: Net worth; Means test; Bank deposit; Expenditure method and Percentage mark-up method

The Examination approach is risk based and commonly apply presumptive methods particularly on the SMEs and Real Estate Residential rental income in particular.

A range of formal indirect income measurement methods are used in the examination of the taxpayer’s economic activities.


Assessment Methods used in Kenya Cont’d…

Net worth method: also known as an asset betterment or asset accretion method.

− Its based on increases in net assets, after adjustments for non-deductible expenditure and non-taxable income.

Bank Deposit Method:

− Operates on the premise that money received must either be deposited or spent.

− Has been widely used by the Tax Administration in examination of records even of large enterprises



Source and Application of Funds Method - also referred to as the excess expenditure method or means test.

− Used where its evident that the taxpayer’s declared income could not sustain the evident wealth, expenditure, or lifestyle of the taxpayer.

− Method requires a detailed analysis of all funds; so far this has been applied in a few cases especially of sole proprietorships.



Percentage mark-up method

− This involves the application of a dependable industry ratio to a known base figure (e.g. Customs imports) to establish a taxpayer’s gross receipts.

− The method is applied only when the auditor can ascertain the number of units handled by the taxpayer and also knows the price or profit charged per unit.

− It is also used where cost to income ratios have been benchmarked eg in the construction sector; services sector etc


Presumption Through Legislation The Real Estate sector is often characterized with poor record

keeping or lack of records by property owners, expenses cannot be easily determined hence difficulty in determination of taxable net rent.

With focus on matching revenue growth from the sector, with business boom in the construction, The Finance Act 2015 introduced a raft of amendments.

This law introduced a Tax Amnesty regime: where expense records are unavailable, the amnesty law deems and allows 40% of gross rent as expenditure. This presumption simplifies declaration process and is cost effective to both the taxpayer and tax administration.


Taxation Challenge – Small & Micro Enterprises

Small and Micro taxpayers comprise 98% of registered tax payers but contribute less than 20% of revenue.

The small and micro taxpayers segment is further broken down into a micro segment with turnover of below USD 50,000 and falling under the Turnover Tax (TOT) regime and the small taxpayer segment between USD 50,000 – USD 350,000.

The approach to enhance their compliance is therefore different from the formal taxpayers since the SMMEs sector is characterized by poor record keeping; low revenue contribution yet with high administrative costs if records are to be examined. .


CHARACTERISTICS OF SMMEs Nomadic nature - they follow customers Quick switch from one business to another on the basis of

need or season No record/poor record keeping Poor management skills Part time activity for some traders Cash based transactions Spread throughout the country in cities as well as in rural areas

hence compliance monitoring and examination of records is a challenge even if presumptive methods were to be used. A simplified turnover based presumptive tax was intoduced


SMMEs – TAX REVENUE vs COST OF COLLECTION

The Sector is expensive to tax for limited revenues

LARGE TAXPAYERS (LTO)

69% OF REVENUES

MST:31% OF

REVENUE

LTO:21% OF COSTS

MST 79%

OF COSTS


Presumption Through Legislation Cont’d... The Turnover Tax (TOT) Legislation: This targets the micro

and small resident taxpayers with a gross income of less than Kshs. 5 Million (US $50,000).

Charged at 3% of turnover and payments made on a quarterly basis.

This category largely constitutes the informal sector in Kenya.

There is no requirement to register for VAT.

NB: This is not applicable to rental income.


Turnover Tax Collection

Turnover Tax: Upon implementation of this regime, revenue inflows began to be realized from the informal sector (depicting an exponential growth as depicted below).

However, the dip in FY 2013/14, came with the advent of devolution, where County governments preferred to give tenders for work/supplies to those in the formal regime.

Turnover Tax collections - FY 2011/12 – FY 2014/15 (USD Millions)

2011/12 2012/13 2013/14 2014/15

1.84M 2.21M 1.94M 7.24M


Information Technology and the Future of Presumptive Examination

The Kenyan tax administration reform agenda is leveraging on technological advancements for efficiency.

A key ongoing initiative is the Data Warehouse & Business Intelligence (DWBI) project, through which 3rd party data matching will guide assessments and audit activity.

Full roll-out of the Domestic Taxes Integrated Tax Management System (iTax) where all declarations will be done within the automated platform should see a reduction in the need for presumptive examination of records due to leveraging on data matching.


Information Technology and the Future of Presumptive Examination

The Tax Administration targets full automation and is ensuring that IT systems are able to fully integrate allowing for a single view of the taxpayer.

To date the reform strategy has resulted in a number of achievements particularly with regard to Domestic Taxes Operations leading to more than 70% growth in tax collections over a period of just 5 years as a result of leveraging on intelligence (see next slide).


Automation Strategic Initiatives: ‘Fully Automated Single Collector’

Business Goal Strategic ICT Objective

Customs Modernisation STP and iCMS

Tax Modernisation

iTax and TIMS

Analytic Capability

DWBI Solution

Operational Support

IFMIS (New ERP)

Enterprise Risk Mngt

Alternate Data Centre (ADC)


Information Technology and the Future of Presumptive Examination Cont’d...


Conclusion

There is no single approach to presumptive examination that can be described as ideal; it depends the nature of business and the taxpayer activities and records available.

Investing in integrated technology platforms which can receive and cross match 3rd party data with declarations made minimizes the need for presumptive examination and hence attaining efficiency in tax administration.


Conclusion Cont’d...

Taxpayers need to be encouraged, and educated in the need to maintain accurate books and records to accurately determine their tax liabilities and also provide adequate audit trails.

In the absence of proper records, presumptive methods remain the alternative to determination of taxable income.


END OF PRESENTATION END OF PRESENTATION

THANK YOUTHANK YOU

1 kenya revenue authority presumptive tax methods presentation to the ciat technical conference on...

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