Kenya's recent tax changes and regulations

Kenya has a broad taxation system covering income taxes, value-added tax (VAT) and Customs and excise duty. These are governed by independent legislations that make provisions for the charge, assessment and collection of the respective taxes. The Kenya Revenue Authority (KRA) has different sections that deal with the above taxes and have authority to undertake reviews on companies to confirm they are paying the right tax.

Equally important for protection of revenue leakage is corporate governance which is at the core of operation of businesses in Kenya.

Corporate Entities

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

The Companies Act governs the set up and operation of corporate entities. Any person who wishes to establish corporate entities in the country is required to submit the necessary documentation, e.g., memorandum and articles of association, details of directors and shareholders, etc., to the registrar of companies.

A private company requires a minimum of two shareholders, while a public company must have minimum of 50 shareholders. Foreign entities can operate in the country as a company or a branch.

Registrar

As established under the Companies Act, the remit of the registrar of companies entails registering and regulating the operations of all corporate entities in the country. The registrar is also responsible for registering incorporated trusts and business names.

Under the Companies Act, companies are required to file annual returns with the registrar. They are also required to file notice of any changes to the business, including to the corporate status, company name, share capital and directorship.

Sector-Specific Rules

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

For instance, banks are regulated by the Central Bank of Kenya through the Banking Act, and insurance companies are overseen by the Insurance Regulatory Authority through the Insurance Act, while telecommunication companies come under the remit of the Communication Authority of Kenya. Furthermore, county governments have certain by-laws governing businesses operating in their localities which establish levies, fees and related charges, as well as business permits.

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

Across The Board

Tax laws apply to corporate entities, both local and foreign, conducting business in the country whether they are incorporated or operating through permanent establishments.

All corporate entities must register for a personal identification number (PIN) with the KRA. They are also required to register for applicable tax obligations, which include income tax, pay as you earn (PAYE, or personal taxes) for employees, VAT and excise duty.

In addition, corporate entities are also required 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, they are required to register with the National Industrial Training Authority.

Easing Business Registration

In a bid to attract both local and foreign investments by easing the cost of doing business, the government has embarked on a raft of reforms to ease the complexity surrounding the registration of businesses. For example, the government has embarked on a countrywide project to establish a network of one-stop investment centres, known as Huduma, or “service”, centres. These investment centres facilitate investments by bringing together all the relevant government agencies in one location. This will help to ensure the efficient and transparent provision of services to investors.

Through these investment centres, the government aims to reduce the time it takes to register a business to one day by enabling investors to more quickly and easily obtain all the necessary documents and statutory approvals that are needed to set up a business in Kenya.

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

Corporate Taxation

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

Kenya taxes corporations on income derived or accrued from within the country. Companies which operate branches outside the country are required to report all their income in the country and claim a relief of any tax paid in foreign countries if there is a double tax agreement in place between Kenya and the other country.

Corporation tax is imposed on the taxable income, which is the accounting profit/loss adjusted for allowable and disallowable expenses. The deductibility of expenses is premised on the fact that they were wholly and exclusively incurred in the generation of taxable income.

The corporation tax rate for resident companies is 30%. In Kenya, residency for a legal entity may arise through incorporation, management and control of said entity and the declaration by the Cabinet secretary in charge of the Treasury that the person is a resident.

Non-resident companies with a permanent establishment (PE) in Kenya are taxed on the income earned or derived from within the country at the rate of 37.5%, with some restrictions on deductible expenses. Non-residents without a PE in the country 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 PE in Kenya are allowed to offset their taxable losses against their taxable income in the year in which they occur and in the next four succeeding years of income.

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 they are distributed or not.

The Income Tax Act provides a provision for the exemption of the income of certain entities upon satisfying the following criterion:

• It is established solely for purposes of 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 circumstances in which the expenditure of that income is for purposes which result in the benefit of 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 two taxes are allowed as tax credits when entities are declaring and paying their final corporation tax.

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 by the 20th day of the fourth, sixth, ninth and 12th months of a year of income.

Final Tax & Self - Assessment Return

The final tax is payable by the last day of the fourth month following the end of the year of income, while the self-assessment return is due on or before the end of the sixth month following the end of the year of income. The return should be accompanied by the audited financial statements.

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 on qualifying assets utilised by persons during a year of income to generate taxable income;
• Wear and tear allowance. This is provided on the purchase of machinery;
• Farm works allowance. This 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 returns within the time limits specified in the act attracts penalties and interest. These are assessed on the taxpayer and are deemed to be taxes due and payable.

Capital Gains Tax

Capital gains tax (CGT) has been suspended in Kenya since 1985. With effect from January 1, 2015, however, CGT was reintroduced on the transfer of property situated in Kenya, whether or not the property was acquired before January 1, 2015.

The 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 over the matter, the KRA has been of the view that CGT is a transaction-based tax and should therefore be paid upon transfer of property, and not later than the 20th day of the month following that in which the transfer was made.

Since the introduction of the tax, there have been a number of challenges in its implementation and administration.

For securities traded on the NSE, for instance, a proposal was recently been made in the Finance Bill, 2015 to tax such gains at 0.3% of the gross amount payable per transaction. This basically moves this from the ambit of CGT to withholding tax. The legislation around CGT is constantly being refined and investors are advised to ensure their information is up to date or to seek guidance.

Turnover Tax

In a bid to rope small and medium-sized enterprises into the tax net, the government introduced a tax known as turnover tax. This tax is payable by any person whose income from business is over KSh500,000 ($5500) but does not exceed KSh5m ($55,000) in a year of income. This tax is based on the gross income earned by businesses in this segment and has different payment schedules from corporate tax.

This is usually a final tax and the eligible persons are free to apply for exemption from this tax. There are attendant penalties for failure to pay or file the returns as required by the act.

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

Personal Taxation

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

• A permanent home in Kenya and was present in Kenya for any period in the year of income under consideration; or
• No permanent home in Kenya, but: i. was present in Kenya for a period or periods 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 deemed to be resident 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.

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, and 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 ninth 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 PINs since it is an offence to pay an employee who does not have a PIN. The penalty for such an offence is KSh2000 ($22) for every payment made.

Taxation Of Employment Income

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

Taxable & Non- Taxable Income

Any income or benefit that an employee accrues from employment income is chargeable 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 ($396) per annum.

Allowable Deductions

Tax legislation states that employees are allowed to deduct against their gross employment income the contributions to a qualifying house ownership savings plan, owner-occupied mortgage interest up-to the set limits and qualifying pension contributions.

Return Filing

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 filling, individuals are required to file their returns online.

Penalties & Interest

Non-compliance with PAYE rules attracts a penalty of 25% on the unpaid tax. In addition, an interest of 2% per month is also chargeable for the period that tax remains unpaid.

VAT Act

In September 2013, the VAT Act was repealed and in its place the VAT Act, 2013 was enacted. This brought with it drastic changes including the removal of long lists of exempt and zero-rated supplies. This 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 or zero-rated.

VAT is administered through the VAT Act and is chargeable on the supply of goods and services in Kenya (including anything specified by the Cabinet secretary as such) and on the importation of goods and services into Kenya.

VAT Rates

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

• • Taxable supplies at standard rate (16%);
• • Zero-rated supplies (0%); or
• • Exempt goods. VAT is charged on the supply of 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, which is 16%.

VAT payable is the difference between VAT charged on supply of goods and services (output VAT) and VAT incurred on purchases or imports (input VAT). There are several restrictions on the deductibility of input VAT in which case it may be expensed or capitalised.

Persons in a VAT-recoverable position arising out of supply of zero-rated supplies are required to lodge a claim within 12 months from the date the tax becomes due and payable.

Withholding VAT has been reintroduced where selected corporate entities, government departments, ministries and parastatals are mandated to withhold VAT at 6% from their suppliers during payment and remit the same to the KRA. They are consequently 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 or both with a value of KSh5m ($55,000) 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 tax invoice is issued on supplies made;
• Monthly VAT returns are filed by due date; 20th 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, on the other hand, the input tax exceeds the output tax, the excess amount is carried forward to be offset against future output tax. 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 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 rate of zero. 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 services are zero-rated and hence not subject to VAT. On the other hand, where imported services are made to a registered person, he is deemed to have made a taxable supply to himself. Reverse VAT is payable only to the extent that a registered person is not entitled to a credit for part of the input tax payable.

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

Penalties & Interest Regime

Non-payment or late payment of tax attracts interest at 2% per month compounded for the period the tax remains outstanding, up to a maximum of the principal amount. The penalty for late filing of the monthly VAT 3 return is KSh10,000 ($110) or 5% of the tax due, whichever is higher.

Following the enactment of the VAT Act, 2013, the Cabinet secretary was to update the VAT Regulation, to be in tandem with the VAT Act, 2013. The process of issuing regulations is currently ongoing and we expect that regulations are likely to be released before the end of 2015.

Withholding Tax

In Kenya, a resident person or a person having a PE (branch) is required to withhold tax on various payments 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 and pension retirement annuities, as well as agency, consultancy and contractual fees.

In addition, 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 payments and whether they would fall under any of the classifications above.

Double Taxation Treaties

Lower rates of withholding tax are applicable on some payments to residents of countries that have double tax agreements with Kenya. Kenya has entered into double tax treaties with the following countries: the UK, Denmark, Norway, Germany, India, Canada, Sweden, Zambia and France.

Where the treaty rate is higher than the non-treaty rate, the lower rate applies.

Basis Of Computation

Withholding tax is based on gross fees before other charges, such as VAT. Where 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 payment acts as an agent of the KRA by deducting the tax due and then remitting the same to the KRA by the 20th of the month following the deduction.

Failure to withhold and remit the tax to the KRA attracts a penalty of 10%, subject to a maximum of KSh1m ($11,000), and interest at 2% per month on the tax due for the period the tax remains outstanding. Interest is, however, restricted to a maximum of the principal tax owing.

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 on whom tax has been withheld. 

Customs, International Trade & Excise Duties

International trade has been on an upward trajectory in Kenya. This is mainly attributable to the developments in the oil and gas industry as well as the regional expansion of manufacturing entities in the country.

Customs and excise duties are administered under two acts in Kenya: the Customs & Excise Act, 2010 (for excise duty administration) and the East African Community Customs Management Act, 2004 (for Customs duties administration). Excise duty in Kenya is managed and administered under the Customs and Excise Act, Cap 472, which was enacted in 1978. However, plans are currently under way to enact an autonomous Excise Duty Act for administration of Excise Duty in Kenya.

Excise duty is imposed on specified imported or locally manufactured goods and services listed under the Fifth Schedule to the Customs and Excise Act. Goods liable to excise duty include, among others, 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 as ascertained for the purposes of import duty and the amount of import duty, suspended duty and dumping duty, if any.

Customs Duties

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

Customs duties are payable by importers of the goods 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, to mention but a few. When goods are imported, the following duties/charges are applied depending on the type of goods:

• Import duty – 0-25% (with some sensitive items attracting 35-100%);
• Excise duty – 0-130%;
• VAT – 0% or 16%;
• Import declaration fee – 2.25%; and
• Railway development levy – 1.5% In terms of import duty rates, Kenya and other East African countries employ a three-band structure:
• Raw Materials – 0%;
• Intermediate goods – 10%; and
• Finished goods – 25%.

However, some raw materials that may also be intermediate or finished goods may be charged more than 0% duty rate.

Peferential Rates Of Import Duty

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

Transfer Pricing

Kenya continues to attract foreign investment, particularly from multinational corporations that 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 these multinational companies contribute their fair share of taxes from the income derived in the country, the KRA has intensified efforts to curb any accounting malpractice which 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 empowers 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 country’s 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 that payable between independent enterprises.

In line with the transfer pricing rules, the branch will be under an 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 branches.

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

• The details of 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
• Such other background information as may be necessary regarding the transaction.