Taxation in Kenya

CPA Riogi Mose&

Joshua Aura Mentorship Academy

August 8, 2015

Taxation in KenyaTable of Content

Section Overview Page

Sections:1 Introduction 62 Pay As You Earn (PAYE) 103 Value Added Tax (VAT) 154 Corporate Tax 205 Withholding Tax 296 Excise duty 34

Joshua Aura Mentorship Academy & CPA Riogi Mose August 8, 2015

Taxation in Kenya Introductions…….

Introductions ……

• There are various types of business formations recognized in law in Kenya

A Limited Company Branch of Foreign registered companies (Certificate of Compliance)

Subsidiaries Partnerships (Ordinary and Limited Liability – LLP)

Sole Proprietorship

Introductions ……•There are few statutory restrictions on the type of business formation to operate. •A branch for tax purposes is a company incorporated outside Kenya and has been registered under the Kenyan Companies Act and received a Certificate of Compliance•For tax purposes, sole proprietorships and partnerships are not independently taxed but their incomes taxed on their individual owners

Introductions ……Illustrative incorporation process map

PAY AS YOU EARN (PAYE)Definition of terms“Employer” includes any resident person responsible for the payment of, or on account of, emoluments to an employee.Resident individual- A person is resident if they:• Have a permanent home in Kenya and were in Kenya even for a single day in the tax year (calendar year)

• Do not have a permanent home in Kenya but were in Kenya for:

• 183 days or more in aggregate during the current tax year

• an average of more than 122 days per year in the current tax year and the two preceding years

PAYE…….Income Tax Act (Sec 5(2))

“gains or profits” include: wages, salary, leave pay, sick pay, payment in lieu of leave, fees, commission, bonus, gratuity, or subsistence, travelling, entertainment or other allowance received in respect of employment or services rendered.

PAYE guide (2009)

Wages, salary, leave pay, sick pay, payment in lieu of leave, directors’ fees and other fees, overtime, commission, bonus, gratuity or pension.

Cash allowances The amount of any private expenditure of the employee paid

by the employer otherwise than as a loan. Non-cash benefits where the aggregate value exceeds KES

3,000 pm Value of housing where provided by the employer.

Taxation in Kenya Allowances and reliefsDescription Allowances p.aPersonal relief 2015/2016 13,944Insurance relief (Lower of )

15% & 60,000

Mortgage relief on owner occupier property (Interest)

150,000 (max)

Car benefit Higher of commissioner’s rate, 2% of initial cost of car p.m (subject to terms of usage and ownership)

Domestic benefits Telephone 30% of costFurniture 1% p.m or 12% p.a

Housing benefit 15% of total (employment) income or rentals paid or market value and 10% for Agricultural staff

Taxation in Kenya Deadlines for submissionObligation DeadlineRemit monthly PAYE and FBT

9th of the following month or last working day where 9th falls on a weekend or public holiday.

File annual self assessment returns (SARs)

Effective 1 July 2013, individuals earning income in Kenya are required to file an individual Self Assessment Return as per the Finance Act 2012 gazetted in Feb 2013.

Payment of monthly NHIF dues

9th of the following month

Payment of monthly NSSF dues

15th of the following month.

Payment of monthly National Industrial Training Levy (NITA)

10th of the following month

VALUE ADDED TAX (VAT)Rates of Tax• Two rates for VAT:

0% for zero rated supplies - such as export of goods and service, supply of natural water excluding bottled water by any political division approved by cabinet secretary for water.

16% for any other supply.• Exempt goods- medicaments, live animals, maize, fertilisers,

unprocessed milk, plant and machinery of chapter 84 and 85, vegetables, aeroplanes.

• Plant and Machinery- such as boilers, turbines, Agricultural, horticultural or forestry machinery for soil preparation or cultivation; lawn or sports-ground rollers, milking machines, machinery for animal feeds, Electrical capacitors, fixed, variable or adjustable.

VALUE ADDED TAX (VAT)Accounting for VAT

“input tax” means tax paid or payable on the supply to a registered person of any goods or services to be used by him for the purpose of his business (“VAT on purchases”)

“output tax” means tax which is due on taxable supplies (“VAT on sales”)

VAT registrationA person is required to register for VAT if he supplies taxable goods or services in excess of KES 5M per annum or provides professional services e.g. accountants, tour and travel consultants, engineers, Lawyers* etc

Time to account for VAT:• Earlier of raising an invoice/fee note, architect’s certificate,

delivery of goods or services and actual receipt of cashVAT filing is due on or before 20th of the following month and invoices

should be filed within one month from their receipt and 2 months with permission from the Commissioner

VALUE ADDED TAX (VAT)Example

Taxable sales at 16% VAT @ 16%

Sales 1,000,000

160,000

Purchases 800,000 128,000

VAT Payable to KRA

32,000

Tour and Travel Companies and Commission agents VAT @ 16%

Cash received by client

1,000,000 Cash paid to service providers 800,000

Commission earned 200,000

VAT due and payable to KRA 32,000

CORPORATE TAXDefinition of terms“Income tax” relates to all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya.“Income chargeable to tax” includes gains and profits from business and rights granted to another person for use or occupation of property among others.

Resident to a body of persons, means:•That the body is a company incorporated under a law of Kenya; or•That the management and control of the affairs of the body was exercised in Kenya in a particular year of income under consideration; or•That the body has been declared by the Minister/CS by notice in the Gazette, to be resident in Kenya for that year of income.

CORPORATE TAXTax Rates

Tax rateResident Company 30%Non-resident company (branches) 37.5%Person with annual gross business income below Ksh 5M (w.e.f 1 Jan 2008) 3%Newly listed company At least 20% share capital listed (1 Jan 2002)*3

27%

At least 30% share capital listed ( 1 Jan 2003)*5

25%

At least 40% share capital listed (1 Jan 2006)*5

20%

SME’s listing on the NSE 25%Export Processing Zones (Second 10 years)

25%

Residential rental income tax (Max income 10M p.a)

12%

CORPORATE TAXCapital allowances

Details Rate p.a

Investment allowance

Within Nairobi, Kisumu and MombasaOutside Nairobi, Kisumu and Mombasa>200 MBuilding/ Machinery used for manufacture including electricity generation

100%150%

Wear and tear allowance

Class 1-Tractors, combined harvestersClass 2- computer and computer peripheralsClass 3- motor vehicles- lightClass 4- all other machinery including shipsTelecommunication equipment for Telco operators

37.5%30%25%12.5%20%

Software allowance Capital expenditure on the purchase or acquisition of the right to the use of a computer software

20%

Farm work • Farmhouses (cost restricted to 1/3)-• Labour quarters:• Immovable buildings necessary for proper

operation of farm:• fences, dips, drains, water & electricity

supply works other than machinery, windbreaks, other works necessary for proper operation of the farm:

100%

IBD Buildings used as a factory, mill , storage 10%

CORPORATE TAXDue dates, penalties and finesTax Deadline/Obligation Penalty Interest

Instalment tax payment- companies other than agricultural companies

Four instalments of 25% each due by 20th of the 4th, 6th , 9th and 12th month of the accounting year

20% of the amount due

2% per month

Instalment tax payment- agricultural companies

Two instalments of 75% and 25% due by 20th of the, 9th and 12th month respectively of the accounting year

20% of the amount due

2% per month

Balance of tax payment

4 months after accounting period

20% of the amount due

2% per month- Should not exceed principal tax

Filing of self assessment return

6 months after accounting period

Higher of 5% of the normal tax and Kshs 1,000

WITHHOLDING TAX (WHT)Definition of terms• WHT is a portion of payment withheld by the party making payment to

another (payee) and paid to the Tax Authority.• The objective of the WHT system is that tax is withheld (retained) by

the payer and given directly to the Tax Authority, at the time the payer makes payment to the payee.

• The tax collected under this system belongs to the payee with respect to payments, while the payer is only an agent for the Tax Authority.

• WHT is payable to KRA by 20th of the month following the month in which WHT was deducted.

• The person who deducts WHT (Payer) furnishes the Payee with the WHT certificate showing the amount of WHT deducted.

WITHHOLDING TAX (WHT)Payments subject to WHT• Section 35 of the ITA sets out the payments that are subject to withholding tax

Payments to Residents:• Management or professional

fees (if more than 24k a month) – technical, management, contractual, training.

• Dividend• Interest • Pension in excess of tax

exempt amounts• Royalty-Right to use• Commission/fee for provision

of insurance cover• Winnings - betting & gaming

Payments to Non-residents:• Management/professional fees • Royalty• Rent for use or occupation of

property• Dividend• Interest and deemed interest• Pension or retirement annuity• Payment to sportsmen or

artists • Winnings - betting & gaming

WITHHOLDING TAX (WHT)Rates for WHTPayment Resident Non- residentManagement and professional fees (management fees, technical fees, contractual, consultancy, training fees, agency fees)

5 20

Contractual fees 3 20Dividend •>12.5%voting power•<12.5%voting power•Qualifying dividend

Exempt55

1010

Qualifying Interest: •Housing bonds •Bearer Instruments•Other

102015

N/AN/AN/A

Royalties, Natural Resource income 5 20Rent: Immovable property Others

N/AN/A

3015

• WHT rate on dividend paid to citizens of East Africa Community Partner States-5%

• WHT rate on management/professional/training fees paid to citizens of East Africa Community Partner States-15%

WITHHOLDING TAX (WHT)Rates for WHT

WITHHOLDING TAX (WHT)Rates for WHT

EXCISE DUTY - Cap. 472, Customs and Excise Act

Definition of terms• An excise or excise tax is a form of tax on consumption levied on

goods produced or manufactured within a country.• It is generally an indirect tax i.e. the burden of tax is

passed to consumer rather than being borne by producer/manufacturer

• Excise duties are distinguished generally from other indirect taxes in the following ways:

a) Excise duties typically target a narrow range of products.b) Excise duties are very ‘heavy’, accounting for higher fractions

of the retail price of products.c) Excise duties are mostly specific though in some cases a hybrid

of specific and ad-valorem rates may be used.

EXCISE DUTYRates for Excise DutyCategory Goods description Excise duty rateBeer Beer KES 70 per litre or 50%

whichever is higherOther alcoholic beverages

Wines KES 80 per litre or 50% whichever is higher)

Spirits KES 120 per litre or 35% whichever is higher

Tobacco and tobacco products

Cigarettes KES 1,200 per mile or 35% of RSP

Soft drinks Carbonated drinks 0.07Water KES 3 per liter or 5% of

whichever is higherExcisable services Mobile cellular phone

services0.1

Money transfer services and fees

0.1

Budget Highlights - Summary

Corporate Tax

• Landlords owning residential property whose gross rental income is below Kshs 10M per year to be taxed at 12%

• Public lotteries to be taxed at 5 percent of the lottery turnover and bookmakers shall be taxed at 7.5 percent (previously 20%) of the gross betting revenues.

• The tonnage of ships qualifying for investment deduction has been reduced from 495 tons to 125 tons. The rate of the investment deduction has been increased from 40% to 100%.

• The period for carrying forward tax losses now extended to ten years from the current 5 years

• Asset transfers and other transactions related to the transfer of assets into Real Estate Investment Trusts (REITs) and Asset Backed Securities (ABS) exempt from stamp duty.

Capital Gains Tax• Sale of quoted (listed) shares to attract WHT at 0.3% of transaction

value• Non listed shares and property to continue attracting CGT at 5%

Budget Highlights - Summary

Withholding Tax

WHT on training and contractual fees paid by petro and mining sector players pegged at 12.5% and 5.625% respectively

Customs duty Import duty on made up fishing nets increased from 10% to 25% Specific import duty on sugar at $ 460 per metric tonne (from 200) IDF reduced from 2.5% to 2.0%

Countries with tax treaties with Kenya UK, Germany, Canada, Denmark, Norway, Sweden, Zambia, India, France &

Mauritius, EAC partner states, Iran and Kuwait negotiated but not yet ratified