An outline of taxes for individuals and businesses in Kenya

Kenya has a broad taxation system covering income taxes, value-added tax (VAT) and Customs and excise duties. These are governed by independent legislation that make provisions for the charge, assessment and collection of the respective taxes.

The Kenya Revenue Authority (KRA) employs different sections that deal with the above taxes, and has the authority to conduct reviews of companies to confirm that they are paying the correct taxes. Equally important for the protection of revenue leaks is corporate governance, which is at the core of the country’s business operations.

Corporate Entities

The operation of corporate entities in Kenya is governed by certain rules and regulations. A corporate entity that intends to conduct business in the country can either operate as a company or a branch.

Under the Companies Act, 2015, one or more persons are able to form a company and a private company should operate with no more than 50 members. Foreign entities are allowed to conduct business in the country as a company or a branch.

The act governs the set-up and operation of corporate entities. Any person who wishes to establish a corporate entity in the country is required to submit the necessary documentation – such as memorandum, articles of association, and details of directors and shareholders – to the registrar of companies.

The registrar of companies is a position established under the Companies Act, and the individual is responsible for registering and regulating the operations of corporate entities in Kenya, as well as registering incorporated trusts and business names.

Companies are required to file annual returns with the registrar and file any changes in the corporate status, company name, share capital and directorship, among other changes.

Sector-Specific Rules

Companies operating in certain sectors of the economy may be required to obtain additional approvals and licenses from the relevant regulatory bodies that govern them.

For instance, banks are regulated by the Central Bank of Kenya through the Banking Act; insurance companies are regulated by the Insurance Regulatory Authority through the Insurance Act; while telecommunication companies are regulated by the Communication Authority of Kenya.

Further, county governments have certain by-laws governing businesses that operate in their localities that establish levies, fees, related charges and business permits.

The Capital Markets Authority (CMA) governs the issuance of shares to the general public. All companies that intend to list on the Nairobi Securities Exchange (NSE) must apply to the CMA and the NSE. There are set terms and conditions for listing which the companies must comply with in order to be granted the necessary approvals.

Required Filings

Tax laws apply to corporate entities – local and foreign – conducting business in the country, whether incorporated or operating through permanent establishments. All corporate entities are required to register for a Personal Identification Number (PIN) with the KRA. They are also required to file for applicable tax obligations that may include income tax, Pay As You Earn (PAYE, or personal taxes), VAT or excise duties.

It is also necessary to register with the National Hospital Insurance Fund, which is mandated to collect contributions as well as run a national health cover and the National Social Security Fund, which is the body mandated to collect and administer pension contributions. In addition, corporate entities are required to register with the National Industrial Training Authority.

Easing Registration

In a bid to promote both local and foreign investment in the country, the government has embarked on a raft of reforms to ease the cost of doing business in Kenya. Notable pieces of legislation that have been enacted in the recent past include the Insolvency Act, 2015; the Companies and Insolvency Legislation (Consequential Amendments) Act, 2015; the Business Registration Service Act, 2015; and the Special Economic Zones Act, 2015. The set-up of one-stop investment offices known as Huduma – or “service” – Centres has also eased the process of registering businesses.

Navigating the regulatory environment in the country has proved challenging at times and the assistance of professional service providers comes in handy. It is the responsibility of every entity to ensure that it complies with all regulatory requirements, including tax.

Corporate Taxation

Corporate entities operating in the country are subject to corporate income tax, which is governed by the Income Tax Act, Cap 470 of the Laws of Kenya. This is the tax levied on the revenues of legal entities.

Kenya taxes corporations on income derived or accrued within the country. Companies that operate branches outside of the country are required to report their total income to the state, and claim a relief of any tax paid in the foreign countries if there is a Double Tax Agreement in place between Kenya and that country.

Corporation tax is imposed on taxable income, which is the accounting calculation of profit or loss adjusted for certain allowable and non-allowable expenses. Expenses are deductible if they were wholly and exclusively incurred in the generation of taxable income.

The corporation tax rate for resident companies is 30%. This rate is reduced in special cases, like for a newly listed company or a company constructing a minimum number of housing units in the country.

In Kenya, residency may be granted for a legal entity through the incorporation, management and control of said entity, and a declaration by the cabinet secretary in charge of the Treasury that the individual operating the business is a resident.

Non-resident companies with a permanent establishment in Kenya are taxed on the income earned or derived within Kenya at a rate of 37.5%, with some restrictions on deductible expenses. Non-residents without a permanent establishment are taxed under the withholding tax system in cases where the payments made are eligible to withholding tax.

Resident companies or non-resident companies with a permanent establishment in Kenya are allowed to offset their taxable losses against their taxable income in the year in which the losses occur, and over next nine years of income, if needed.

A partnership is taxed at the partners’ level and not the entity level, whereby the partners are subject to tax on the partnership’s earnings for each year of income irrespective of whether the earnings are distributed or not.

The Income Tax Act exempts the income of certain entities upon satisfying the following criterion:

• The organisation is established solely for the relief of poverty or distress of the public; or

• It is established for the advancement of religion or education. This is upon satisfying the commissioner that the income is to be expended either in Kenya or in a way that results in a benefit to the residents of Kenya.

Advance Tax & Withholding Tax

The Income Tax Act provides for the payment of various taxes by resident corporations either in advance or through third parties. These include:

• Advance tax. This is paid in respect of every commercial vehicle; and

• Withholding tax. This is imposed on certain services and it is deducted on payments made to the service providers. These taxes are allowed as credits when entities are declaring and paying their final corporation tax at the end of the tax year.

Instalment Taxes

Every person who is chargeable to tax is required to pay instalment tax. The amount of instalment tax payable by any person for the current year of income shall be lesser of:

• The amount equal to the tax that would be payable by that person if his total income for the current year was an amount equal to his instalment income; or

• The amount specified in the preceding year assessment multiplied by 110%. Instalment tax is payable in four equal instalments, due by the 20th day of the fourth, sixth, ninth and 12th months of a year of income. This schedule is applicable to all persons other than agricultural companies, which are required to pay instalment tax in two remittances of 75% and 25% in the ninth and 12th month, respectively.

Final Tax & Self-Assessment Return

When the final tax amount is determined, it is payable by the last day of the fourth month following the end of the year of income. If an individual elects to compute his or her own taxes, a self-assessment return is due on or before the end of the sixth month following the end of the year of income. The payment of taxes and filing of tax returns have been automated and are now done through an online platform known as iTax.

Capital Allowances

The Income Tax Act provides a range of capital allowances – amounts deductible for tax purposes – for persons engaged in various business activities. These include:

• Investment deduction. This is provided mainly to entities undertaking manufacturing activities;

• Industrial Building Allowances. This is provided based on qualifying assets utilised by persons during a year of income to generate taxable income;

• Wear and tear allowance. This is granted on the purchase of machinery;

• Farm works allowance. A credit that is provided on the purchase and installation of farm works on agricultural land; and

• Shipping allowance. This is provided to persons carrying on the business of a ship owner.

Penalties & Interest

Failure to pay taxes or file a return within the time limits specified in the act will result in penalties and interest. These are assessed on the taxpayer and are deemed to be taxes due and payable.

Capital Gains Tax

Capital gains tax had been suspended in Kenya since 1985. However, from January 1, 2015 the tax was re-introduced on the transfer of property located in the country, regardless of whether or not the property was acquired before January 1, 2015. Capital gains tax is levied at the rate of 5% on net of the transfer value over adjusted cost.

It is a final tax and cannot be offset against other income taxes. Despite various controversies on the matter, the KRA has been of the view that capital gains tax is a transaction-based tax and should therefore be paid upon transfer of property, but no later than the 20th day of the month following that in which the transfer was made.

Its introduction was marked by challenges on its implementation and administration, especially in relation to gains realised from listed securities. Effective January 1, 2016, securities traded on the Nairobi Securities Exchange were exempted from capital gains tax.

Turnover Tax

In a bid to rope the small and medium-sized enterprises into the tax net, the government introduced a measure known as turnover tax. This is payable by any person whose income from business exceeds KSh500,000 ($4880) but does is not more than KSh5m ($48,800) in a year of income. This is based on the gross income earned by these businesses and the tax has different payment schedules than corporate tax.

The turnover tax is usually a final tax, and eligible persons are free to apply for exemption from this tax. There are attendant penalties for failure to pay or a failure to file a return.

Collection of this tax has faced challenges due to lack of goodwill among the affected taxpayers – mainly the informal sector – as well as a limited capacity by the KRA to enforce compliance.

Personal Taxation

This tax is governed by the Income Tax Act. It entails the taxation of both resident and non-resident individuals, and unincorporated entities in Kenya. Under the act, residency can arise when an individual has:

• A permanent home in Kenya and was present in Kenya for any period of the year of income under consideration; or

• No permanent home in Kenya, but: i) was present in Kenya for a period(s) amounting to 183 days or more in the year of income under consideration; or ii) was present in that year of income and in each of the two preceding years of income for periods averaging more than 122 days. Persons who are residents for tax purposes are taxed on their worldwide employment income, while non-resident persons are taxed on any income that is derived or deemed to be derived from Kenya.

Employers

An employer is defined under the Income Tax Act to include any resident person responsible for the payment of, or on account of, emoluments to an employee; or an agent, manager or other representative so responsible in Kenya on behalf of a non-resident employer.

The employer is required to deduct tax from the emoluments paid to an employee on a monthly basis. Tax deducted should be remitted to the KRA by the 9th day of the following month.

Although it is the employee’s responsibility to obtain a PIN, an employer should ensure that all the employees have PIN since it is an offence to pay an employee who does not have one. The penalty for such an offence is KSh2000 ($19.51) for every payment made.

Taxation Of Employment Income

Income tax is charged upon all the income of a person, whether resident or non-resident, which was accrued in or derived from Kenya. Income from employment includes wages, salary, leave pay, sick pay, payment in lieu of leave, overtime, commission and any other benefit earned or accrued by virtue of employment.

Any income or benefit that an employee accrues from employment is subject to tax. However, some benefits are exempt from tax. These include medical insurance provided by the employer to the employee and his dependents; reimbursement of expenses; and non-cash benefits up to a maximum of KSh36,000 ($351) per annum.

Employees are allowed to deduct certain items against their gross employment income, including contributions to a qualifying House Ownership Savings Plan, owner-occupied mortgage interest up to the set limits (see analysis) and qualifying pension contributions.

Filing & Penalties

The responsibility of filing individual self-assessment returns falls on the employees themselves – that is, each employee is responsible for filing for their own returns.

Under the Income Tax Act, individual self-assessment returns should be filed with the KRA by June 30 of the year following the year of income. With the introduction of online tax filing, individuals are required to file their returns online.

Non-compliance with PAYE rules carries a penalty of 25% of the amount of the unpaid tax. In addition, interest of 1% per month is charged for the period that the tax remains unpaid.

Vat Act

In September 2013 the existing legislation regarding VAT was repealed and in its place the Value Added Tax Act, 2013 was enacted. This brought drastic changes to the measure, including the shorting of long lists of exempt and zero-rated supplies. The shift was perhaps indicative of the generalised trend towards consumption-based taxes.

The scope and coverage of VAT is broad since it applies to all imports, supplies, manufactured goods and services provided in Kenya, except those specifically listed as exempt. VAT is also chargeable on anything specified by the cabinet secretary.

Vat Rates

For VAT purposes, goods and services (supplies) are categorised as follows:

• Taxable supplies at the standard rate;

• Zero-rated supplies; and

• Exempt goods. VAT is charged on taxable supplies at the specified rates. The exempt supplies are not subject to VAT and are listed in the First Schedule to the VAT Act. Zero-rated supplies are listed in the Second Schedule to the VAT Act and are taxed at 0%. All other supplies are taxable at the standard rate of 16%.

The VAT liability or credit is determined by the difference between VAT charged on the supply of goods and services (output VAT) and VAT incurred on purchases, including imports (input VAT). VAT is payable when the output tax is more than the input tax. There are several restrictions on the deductibility of input VAT, in which case it may be expensed or capitalised. Persons in VAT-recoverable position arising from the supply of zero-rated supplies are required to file a claim within 12 months from the date the tax becomes due and payable.

Withholding VAT has been reintroduced where select corporate entities, government departments, ministries and parastatals are mandated to withhold VAT at 6% of the taxable value from their suppliers during payment and remit the same to the KRA. They are then required to issue withholding VAT certificates to the suppliers.

Registration Requirements

A taxable person is required to register for VAT as soon as the registration threshold is met. Any person who in the course of business has supplied or expects to supply taxable goods or services with a value of KSh5m ($48,800) or more in a period of 12 months should register for VAT.

Upon registration, the person is required to comply with the VAT Act by ensuring that:

• VAT is charged on all taxable supplies made at the specified rates;

• A valid tax invoice is issued on supplies made;

• Monthly VAT returns are filed by the 20th day of the following month; and,

• Where the output tax (VAT on sales) exceeds the input tax (VAT incurred on purchases), the difference should be paid to the KRA when filing the monthly VAT return. If the input tax exceeds the output tax, the excess amount is carried forward to be offset against future output tax obligations. However, if an entity is dealing with zero-rated supplies, it would always be in a VAT-refund position. The excess credit would be refunded in line with the existing VAT provisions.

It is important to note that only registered traders are allowed to charge VAT on their sales. It is an offence to charge VAT if one is not registered.

Export of goods and taxable services are zero rated, that is, taxable at a zero rate. This is, however subject to the satisfaction of the commissioner that such a supply took place in the course of a registered person’s business.

Imported & Exported Services

As noted above, exported taxable services are zero rated and hence not subject to VAT. Conversely, when imported services are made to a registered person, he is deemed to have a taxable supply.

Reverse VAT is payable only when a registered person is not entitled to a credit for part of the input tax payable (to the extent the registered person’s imported services are incurred for the purpose of generating exempt supplies).

The VAT Act provides the definition of importation and export as such: “export” means to take or cause to be taken from Kenya to a foreign country or to an export processing zone; “importation” means to bring or cause to be brought into Kenya from a foreign country or from an export processing zone.

Non-payment or the late payment of tax attracts simple interest at 1% per month for the period in which the tax remains outstanding, up to a maximum equalling the principal amount. The penalty for late filing of the monthly VAT 3 return is KSh20,000 ($195) or 5% of the tax due, whichever is higher.

Following the enactment of the VAT Act, 2013, the cabinet secretary was to update VAT regulation to be in tandem with the act. The process of issuing regulations is in progress.

In the interim, the subsidiary legislation under the repealed VAT act remains in force – so far as it is not inconsistent with the 2013 act – until subsidiary legislation with respect to the same matter is made under the VAT Act, 2013.

Withholding Tax

In Kenya, a resident person or a person having a permanent establishment is required to withhold tax on various types of payments made to both residents and non-residents in line with the Income Tax Act.

Withholding tax is applicable on payments such as dividends; interest; commission; royalties; management, professional and training fees; sporting and entertainment income; pension retirement annuities; rent; and agency, consultancy and contractual fees. Real estate rent to non-residents is also subject to withholding tax.

Whether or not payments are subject to withholding tax depends on the nature of the payment and whether it would fall under any of the broad classifications listed above.

Treaties & Computation

Lower rates of withholding tax are applicable on some payments to residents of countries that have a double tax agreement with Kenya. Kenya has entered into such treaties with the UK, Denmark, Norway, Germany, India, Canada, Sweden, Zambia, South Africa and France. Where the treaty rate is higher than the non-treaty rate, the lower rate applies.

Withholding tax is based on gross fees before other charges such as VAT. When the fee is negotiated net of taxes – especially by non-residents – the amount should be grossed up using the appropriate rate of tax that is applicable for the country in which the payments are being remitted.

Tax Payment, Returns & Penalties

The person making the withholding tax payment acts as an agent of the KRA by deducting the tax due and remitting the same to KRA by the 20th day of the month following the deduction.

Failure to withhold and remit the tax to KRA brings a penalty of 10% – subject to a maximum of KSh1m ($9760) – and interest of 1% per month for the period the tax remains outstanding. Interest is restricted to a maximum of the principal tax owed.

Every person who has deducted and paid tax is required to file the annual withholding tax return by the last day of February of the following year. In addition, a certificate of withholding tax in the prescribed form should be issued to the person from whom tax has been withheld.

International Trade & Excise Duties

International trade has been on an upward trajectory in Kenya. The trend is largely attributable to developments in the oil and gas industry, as well as the expansion of manufacturing entities in the region and across the country.

Customs and excise duties are administered under two acts in Kenya; the Excise Duty Act, 2015 for excise duty administration and the EAC Customs Management Act, 2004 for Customs duties administration.

Excise duties are imposed on specified imported or locally manufactured goods and services listed under the First Schedule to Excise Duty Act, 2015. Goods liable to excise duty include wines and spirits, beer, bottled water, soft drinks and cigarettes.

Excisable services include mobile and wireless phone services, fees on money transfer services and fees charged by financial institutions. The value of imported goods for purposes of levying excise duty is the sum of the value of such goods ascertained for the purposes of import duty and the amount of import duty, suspended duty and dumping duty, if any is applicable.

Customs

Customs duties include import duty, excise duty, VAT, an import declaration fee and a railway development levy.

Customs duties are payable by importers at the point of importation. Importers are required to correctly compute and pay taxes based on the applicable principles of Customs valuation, tariff classification and rules of origin. The following duties and charges are applied depending on the type of goods:

• Import duty – 0-25% (with some sensitive items attracting 35-100%);

• Excise duty – Various specific (per quantity) duty rates with a few ad-valorem (percentage based on value) rates;

• VAT – 0% or16%;

• Import declaration fee – 2%; and

• Railway development levy – 1.5%. In terms of import duty rates, Kenya and other East African countries employs a three-band structure:

• Raw materials – 0%;

• Intermediate goods – 10%; and

• Finished goods – 25%. Some raw materials that may also be intermediate or finished goods may be charged more than 0%.

Preferential Rates Of Import Duty

Kenya is currently a member of the EAC as well as the Common Market for Eastern and Southern Africa (COMESA). Any goods imported from an EAC or COMESA country will therefore be taxed at a lower preferential import duty rate. For EAC imports, the duty rate is zero whereas duty rates for COMESA imports are in range of 0-1%.

Transfer Pricing

Kenya continues to attract foreign investment, particularly multinational corporations who are keen to make an entry into the larger East African market. This has presented challenges to the taxman who has had to contend with complicated accounting systems used by these multinationals.

In a bid to ensure that they contribute their fair share of taxes from the income derived in Kenya, the KRA has intensified efforts to curb any accounting malpractice that may result in reduced tax liabilities for these entities.

Transfer Pricing in Kenya is governed by Section 18 of the Income Tax Act and the Transfer Pricing Rules, 2006, which empower the commissioner to adjust the profits of a person who carries on business in Kenya with a related non-resident person, where the business is such that it produces to the resident person either no profits or less than ordinary profits.

The Income Tax Act requires that transactions between the person in Kenya and any related non-resident party should be at arm’s length, i.e. the price charged for the transactions should be the same as what is payable between independent enterprises.

In line with the transfer pricing rules, a Kenyan branch will be under the obligation to prepare sufficient transfer pricing documentation in support of any transaction with a related non-resident entity. This would include transactions with the head office or with other country branches.

The transfer pricing documentation should, at a minimum, provide details in regard to the following:

• The transaction under consideration;

• The selection of the transfer pricing method and the reasons for the selection;

• The application of the method, including the calculations made and price adjustment factors considered;

• The assumptions, strategies and policies applied in selecting the method; and

• Other information as may be necessary regarding the transaction.