Kenya: Tax

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This country-specific Q&A provides an overview to tax laws and regulations that may occur in Kenya.

It will cover witholding tax, transfer pricing, the OECD model, GAAR, tax disputes and an overview of the jurisdictional regulatory authorities.

This Q&A is part of the global guide to Tax. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/tax-second-edition/

  1. How often is tax law amended and what are the processes for such amendments?

    Amendments to tax laws in Kenya are done annually by Parliament through the Finance Act. The Finance Act introduces the substantive amendments to existing provisions in the different tax laws.

    Most of the proposed amendments are contained in the budget statement presented by the Cabinet Secretary in charge of National Treasury to the Parliament. The proposed amendments are subsequently tabled in Parliament through the Finance Bill. Some clauses of the Finance Bill enter into force on the budget day pursuant to the Provisional Collection of Taxes and Duties Act (Chapter 415, Laws of Kenya).

    Recently, Kenya has undertaken a Tax Rewrite programme which all tax legislation has been modernised. Pursuant to this programme, a new Value Added Tax Act was enacted in 2013, a new Tax Appeals Tribunal Act in 2013, a new Tax Procedures Act in 2015 and a new Excise Duty Act in 2015. The drafting of a new Income Tax Bill is in progress and is anticipated to be complete by mid-2018.

  2. What are the principal procedural obligations of a taxpayer, that is, the maintenance of records over what period and how regularly must it file a return or accounts?

    The principal procedural obligation of a tax payer is to file accurate returns for all tax obligations and to pay tax on or before the due date. The due dates for filing tax returns depend on the return in question being filed, as set out below:

    (a) Individuals are required to file a self-assessment tax returns not later that the last day of the sixth month following the end of a calendar year;

    (b) Taxpayers, other than individuals, are required to file self-assessment tax returns not later than the last day of the sixth month following the end of the accounting period;

    (c) An employer us required to file pay as you earn (PAYE) returns before the tenth (10th) day of the month following the end of each quarter;

    (d) A taxpayer registered for value added tax (VAT) is required to file VAT returns not later than the twentieth (20th) day of the subsequent month.

    A taxpayer is required under the Tax Procedures Act, 2015 to maintain all the documents required under a tax law for a period of five years from the end of the reporting period to which the documents relates.

  3. Who are the key regulatory authorities? How easy is it to deal with them and how long does it take to resolve standard issues?

    The Kenya Revenue Authority (KRA) is the agency of the Government of Kenya tasked with the collection and receipt of all taxes and the general administration of tax laws. The KRA usually undertakes routine tax audits every 2 – 3 years to assess the level of compliance with tax obligations. Tax audits usually take between 1 – 2 months to conclude. The KRA communicates the audit finding firstly through an audit report and if its findings are not satisfactorily addressed, through a tax assessment which sets out the areas of non-compliance with tax obligation and the amount of tax, penalties and late payment interest due.

    Should a taxpayer disagree with the tax assessment raised by the KRA, a tax dispute is deemed to have arisen. The procedure for resolving tax disputes with the KRA is set out under the Tax Procedures Act, 2015. In summary, a taxpayer who is aggrieved by a tax assessment is required to file a notice of objection within 30 days of being notified of the tax decision. The KRA is required to issue a decision on the objection within 60 days of receipt of the notice of objection.

  4. Are tax disputes capable of adjudication by a court, tribunal or body independent of the tax authority, and how long should a taxpayer expect such proceedings to take?

    The Tax Appeals Tribunal Act, 2013 (the TAT Act) established the Tax Appeals Tribunal (the Tribunal) to hear and determine appeals filed against any tax decision made by the Kenya Revenue Authority. Matters before the Tribunal are required to be heard and determined within a period of ninety days (in practice the period is much longer, often as much as one (1) year). However, some matters may take longer depending on the complexity of the issues.

    A party who is aggrieved with the decision of the Tribunal is required to file an appeal to the High Court. The decision of the High Court can further be appealed to the Court of Appeal. Appeals to the High Court and the Court of Appeal are only on matters of law.

    An appeal to the High Court and the Court of Appeal respectively can take between 1 to 3 years to be heard and determined.

  5. Are there set dates for payment of tax, provisionally or in arrears, and what happens with amounts of tax in dispute with the regulatory authority?

    The payment dates vary depending on the specific tax in question, as set out below:

    (a) Withholding tax – a taxpayer who makes certain types of specified payment (e.g. management and professional fees) is required to deduct withholding tax at the appropriate rate and remit the tax to the KRA on or before the 20th day of the month following the month in which the deduction is made. Failure to make a deduction or to remit the WHT deducted attracts a penalty equal to 10% of the amount of tax involved (subject to a maximum of KES 1 million) and accrues interest at 1% per month.

    (b) Instalment tax – taxpayers earning business income are required to pay an instalment tax on a quarterly basis during the year, based on the lower of 110% of the previous year’s liability or an estimate of the current year’s liability. 25% of this estimated annual tax is payable on or before the 20th day of the fourth, sixth, ninth and twelfth month of the accounting period. For companies operating in the agricultural sector, they are required to pay two instalments of 75% in the ninth month and 25% in the twelfth month.

    (c) With respect to employment income, Pay As You Earn (PAYE) deducted by the employer from emoluments paid to an employee on a monthly basis and should be remitted to the KRA before the 10th day following the end of every month.

    (d) A taxpayer registered for value added tax (VAT) is required to remit the VAT due on or before the twentieth day of the month following the month in which the supply, to which the VAT relates, was made.

    Amounts in dispute
    A taxpayer who has lodged a notice of objection to the decision of the Commissioner of Domestic Taxes or filed an appeal to the Tax Appeals Tribunal is only required to pay the taxes that are not in dispute. There is no requirement to pay taxes in dispute prior to lodging an appeal at the Tax Appeals Tribunal. The same case applies to an appeal to the High Court.

  6. Is taxpayer data recognised as highly confidential and adequately safeguarded against disclosure to third parties, including other parts of the Government?

    The Tax Procedures Act, 2015 guarantees the confidentiality of documents and information received by the KRA in the course of administering tax law. However, the documents and information received may be disclosed to other Government agencies such as the Auditor General and the Kenya National Bureau of Statistics to enable them carry out their duties but under certain prescribed circumstances. In addition, tax information can be disclosed to foreign tax authorities pursuant to tax information exchange agreements entered into by Kenya.

  7. Is it a signatory (or does it propose to become a signatory) to the Common Reporting Standard? And/or does it maintain (or intend to maintain) a public Register of beneficial ownership?

    Kenya signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (the Convention) on 8 February 2016. Kenya is in the process of ratifying the Convention in accordance with domestic law.

    Kenya does not currently maintain a public register of beneficial ownership. However, the Income Tax Act and the Tax Procedures Act require every person to notify the KRA of any changes in beneficial ownership of the shareholding in a Kenyan company.

  8. What are the tests for residence of the main business structures (including transparent entities)?

    An individual is resident in Kenya if: (a) he has a permanent home in Kenya and is present in Kenya for any time during the year; (b) he has no permanent home in Kenya but is present in Kenya for at least 183 days in the tax year; or (c) he has no permanent home in Kenya but has been in Kenya for an average of 122 days in the tax year and the previous two years of income.
    A body of persons is resident in Kenya if:

    (i) it is incorporated under the laws of Kenya;

    (ii) the management and control of the affairs of the body was exercised in Kenya in a particular year of income; or

    (iii) the body has been declared by the Minister, by notice in the Gazette, to be resident in Kenya for any year of income.

  9. Can the policing of cross border transactions within an international group to be a target of the tax authorities’ attention and in what ways?

    The KRA has been increasing its scrutiny of multinational enterprises operating in Kenya, primarily through the review of transfer pricing policies in relation to cross-border related party transactions. There have also been a number of high profile transfer pricing disputes relating to multinational enterprises which have demonstrated the increased focus on cross border transactions. In addition, the KRA has been continuously developing internal capacity on transfer pricing and it currently has very competent revenue officers who undertake transfer pricing audits and reviews.

    As noted under paragraph 7 above, an entity can be deemed to be resident in Kenya if the management and control of the entity is exercised in Kenya. The KRA has increased focus on foreign entities to determine whether their management and control is exercised in Kenya.

    On 8th February 2016, Kenya signed the Amended Convention on Mutual Administrative Assistance in Tax Matters (the Convention) but has not ratified it yet. Kenya is also a participating jurisdiction in the inclusive framework of the OECD BEPS project. As the Convention forms the basis of multilateral and bilateral competent authority agreements in tax administration, it is expected that once Kenya ratifies the Convention, cross-border transactions within an international group will be in even sharper focus.

  10. Is there a CFC or Thin Cap regime? Is there a transfer pricing regime and is it possible to obtain an advance pricing agreement?

    Kenya does not have a “controlled foreign companies” regime but has a thin capitalisation regime in place. The thin capitalisation rules limit the deductibility of loan interest payments to the extent that the highest amount of loans held by the company at any time during the year of income exceeds three times the sum of the revenue reserves and the issued and paid up capital of all classes of shares of the company (3:1 debt to equity ratio). The thin capitalisation rules only apply where the company is in control of a non-resident entity alone or together with four or fewer other persons and where the company is not a bank or a financial institution licensed under the Banking Act.

    Kenya has a transfer pricing regime based on the Income Tax Act and Transfer Pricing (Income Tax) Rules of 2006 which are modelled on the OECD Transfer Pricing Guidelines. The Commissioner can adjust prices in cross-border transactions involving related parties to reflect an arm’s-length price. However, even though Kenya has a transfer pricing regime, it is not currently possible under the law to obtain an advance pricing agreement with the Kenya Revenue Authority.

  11. Is there a general anti-avoidance rule (GAAR) and, if so, how is it applied by the tax authority? Eg is the enforcement of the GAAR commonly litigated, is it raised by tax authorities in negotiations only, etc?

    Section 23 of the Income Tax Act sets out the general anti-avoidance provision. The provision empowers the Commissioner to adjust the tax liability of a taxpayer where he is of the opinion that the main purpose for a which the taxpayer effected a transaction was tax avoidance, reduction of tax liability for the year of income or the main benefit which might have been expected to accrue from the transaction in three years immediately following the transaction is tax avoidance or reduction of tax liability.

    The Tax Procedures Act imposes a penalty for tax avoidance equal to double the amount of the tax that would have been avoided but for the application of the tax avoidance provision.

    It is not common for the KRA to apply the anti-avoidance provision but in instances where it is applied, this usually culminates in a tax dispute.

  12. Are there any plans for the implementation of the OECD BEPs recommendations and if so, which ones?

    Kenya is a participant in the inclusive framework of BEPS. Kenya has also signed the Amended Convention on Mutual Administrative Assistance in Tax Matters (the Convention) and is in the process of ratifying the Convention in accordance with the domestic law. Some of the OECD BEPS recommendations for example, the 2015 amendments to the definition of a permanent establishment to include “dependent agents” and the introduction of the limitation of benefit provisions.

    Kenya plans to implement the OECD BEPS recommendations through amendments to domestic legislation. Currently, the review of the Income Tax Act which has been in place since 1973 is underway. It is expected that by 2018, a new Income Tax Act will be in place and it will reflect some of the BEPS recommendations especially on anti-treaty abuse and deductibility of interest.

  13. How will BEPS impact on the government’s tax policies?

    BEPS is expected to increase the focus of the government’s tax policies to international trade and taxation. It is expected that the exchange of information with other jurisdictions under the CRS and country-by-country reporting will also lead to more focus on multinational companies operating in Kenya.

  14. Does the tax system broadly follow the recognised OECD Model?

    Does it have taxation of; a) business profits, b) employment income and pensions, c) VAT (or other indirect tax), d) savings income and royalties, e) income from land, f) capital gains, g) stamp and/or capital duties.

    If so, what are the current rates and are they flat or graduated?

    Kenya’s tax system follows the recognized OECD Model, as further described below.

    Business profits
    Income tax is chargeable on all income arising or accruing from Kenya which includes business profits (including royalties and interest).

    Resident corporate entities are taxed at the rate of 30% while non-resident entities are taxed at the rate of 37.5%.

    Employment income
    Resident individuals are taxed on their worldwide employment income while non-residents are only taxed on employment income from an employer who is resident in Kenya or has a permanent establishment in Kenya. Employment income is taxed on a graduated scale.

    The table below sets out the current graduated scale and the graduate scale with effect from 1 January 2018:

    Rate of tax

    Current monthly taxable pay

    (KES)

    Monthly taxable pay with effect from 1 January 2018 (KES)

    10%

    1-11,180

    1-12,298

    15%

    11,181-21,714

    12,2999-23,885

    20%

    21,715-32,248

    23,886-35,472

    25%

    32,249-42,781

    35,473-47,059

    30%

    Excess of 42,781

    Excess of 47,059

    Indirect taxes
    Value added tax (VAT) is charged pursuant to the provisions of the Value Added Tax Act (No. 35 of 2013) on taxable supplies made by a registered person at either the rate of 16% or 0% for zero rated supplies. Supplies which are exempted from VAT are set out under the Second Schedule.

    Excise duty is charged pursuant to the provisions of the Excise Duty Act, 2015. The Excise Duty Act sets out specific rates of excise duty for excisable goods, which mostly include luxury items such as alcohol and cigarettes. Excisable services include mobile cellular phone services, fees charged for money transfer services and other fees charged by financial institutions.

    Capital gains tax (CGT)
    CGT was reintroduced in 2015 after having been suspended in 1985. CGT is chargeable as a final tax at the rate of 5% on gains derived on the sale or transfer of property by an individual or company carried out on or after 1 January 2015. Gains arising from transfer of securities which are listed at the Nairobi Securities Exchange are not subject to CGT.

    Income from immovable property
    Residential income tax is chargeable on income accrued in or derived from the use or occupation of residential property at the rate of 10% on the gross turnover.

    Stamp duty
    Stamp duty is charged pursuant to the provisions of the Stamp Duty Act (Chapter 480, Laws of Kenya). Stamp Duty is chargeable on every instrument set specified in the Stamp Duty Act which relates to property situated in Kenya or to any matter or thing done or to be done in Kenya. The Schedule to the Stamp Duty Act sets out the specific rate on the various chargeable instruments. For example, stamp duty on an instrument transferring immovable property is 4% if the immovable property is within a municipal area or 2% if the immovable property is not within a municipal area. Stamp duty on transfer of shares is 1% of higher of the transfer value and the market value of the shares.

  15. Is the charge to business tax levied on, broadly, the revenue profits of a business as computed according to the principles of commercial accountancy?

    Taxable profits are based on adjusted accounting profits. Therefore, a company’s taxable profits comprise the excess of a company’s net accounting profit having added back non-deductible expenses and having deducted allowable expenses and capital allowances. Generally, expenses such as capital expenditure, restricted loan interest due to thin capitalisation, personal expenses, unrealized foreign exchange losses and depreciation would be disallowed for tax purposes. On the other hand, capital allowances ranging from 12.5% to 37.5% would be allowed against taxable income for equipment used in the production of income.

  16. Are different vehicles for carrying on business, such as companies, partnerships, trusts, etc, recognised as taxable entities? What entities are transparent for tax purposes and why are they used?

    The Income Tax Act recognises companies, branches of foreign companies and trusts as taxable entities. Based on current law, all forms of partnerships (limited liability partnerships and general partnerships) are transparent for tax purposes and their income is taxed at the hands of the partners.

  17. Is liability to business taxation based upon a concepts of fiscal residence or registration? Is so what are the tests?

    Tax liability is based upon the concept of fiscal residence in Kenya, as described in paragraph 7 above.

  18. Are there any special taxation regimes, such as enterprise zones or favourable tax regimes for financial services or co-ordination centres, etc?

    Kenya has special taxation regimes which include Special Economic Zones (SEZs) and Export Processing Zones (EPZs). The SEZs are a designated geographical area where business enabling policies are being implemented and sector-appropriate on-site and off-site infrastructure and utilities will be provided for by the Kenyan Government.

    EPZs have been in existence in Kenya since 1990 and are governed by the Export Processing Zones Act, 1990. SEZs were recently introduced under the Special Economic Zones Act, 2015 which came into force on 15 December 2015.

    One of the most significant tax incentives available to SEZs is the reduced corporate tax rate of 10% for the first 10 years of operation and thereafter 15% for another 10 years. The standard corporate tax rate in Kenya is 30%.

    An investment deduction allowance is granted on the construction of a building and on the purchase and installation therein of new machinery, and the owner of that machinery, being also the owner or lessee of that building, uses that machinery in that building for the purposes of manufacture. The investment deduction allowance is claimed in the year of income in which the building and equipment were first used at the rate 100%. Where an investment in excess of KES 200 million (USD 2 million) is made outside the Municipalities of Mombasa, Kisumu or the City of Nairobi, the applicable rate would be 150%.

  19. Are there any particular tax regimes applicable to intellectual property, such as patent box?

    Kenya does not have any particular tax regimes in relation to intellectual property such as patent box.

  20. Is fiscal consolidation employed or a recognition of groups of corporates for tax purposes and are there any jurisdictional limitations on what can constitute a group for tax purposes? Is a group contribution system employed or how can losses be relieved across group companies otherwise?

    For income tax purposes, fiscal consolidation is not recognized in Kenya. Every taxable person is required to file a separate tax return. Tax losses cannot be relieved across a corporate group and are only accessible to the person who has incurred the tax loss.

    Under the VAT Act, the Cabinet Secretary may enact regulations on registration of a group of companies as one registered entity for VAT purposes. We however note that no regulations have been enacted yet to bring this provision into effect.

  21. Are there any withholding taxes?

    The Income Tax Act imposes withholding tax on royalty, interest, dividends and management and professional fees as set out in the table below:

    Nature of income

    Resident rate

    Non-resident rate

    Dividends

    5%

    10%

    Royalties

    5%

    20%

    Management and professional fees

    5%

    20%

    Interest

    15%

    15%

  22. Are there any recognised environmental taxes payable by businesses?

    Kenya does not impose any environmental taxes on businesses.

  23. Is dividend income received from resident and/or non-resident companies exempt from tax? If not how is it taxed?

    Dividend income paid by a Kenyan company is subject to withholding tax at the rate of 5% if paid to a resident person or 10% if paid to a non-resident person in the absence of a double taxation agreement. However, dividend income paid to a resident company holding 12.5% or more of the share capital of the paying company is not subject to withholding tax in Kenya.

    Foreign dividends are not subject to tax in Kenya.

  24. From the perspective of an international group seeking to re-locate activities from the UK in anticipation of Brexit, what are the advantages and disadvantages offered by the jurisdiction?

    Whereas Kenya does not have a specific holding company regime, Kenya is considered to be a key hub for multinational entities seeking to expand their operations into Eastern Africa. Some of the key advantages of setting up operations in Kenya especially for multinational entities operating in the manufacturing sector include:

    Advantages
    The most significant benefit is that Kenya only taxes income derived or accrued from Kenya. In this respect, income earned outside of Kenya and subsequently repatriated to Kenya will not be subject to tax in Kenya, based on current law. This also applies to expatriate employees who may have global income as their global income will not be subject to tax in Kenya unless they are tax resident in Kenya.

    Kenya provides a host of incentives targeted at attracting and retaining investment, such as tax benefits for investors in Special Economic Zones (SEZs). Examples of these include:

    (a) the exemption from tax on dividends payable to non-residents by enterprises operating in SEZs;

    (b) a reduction of withholding tax on interest payable to non-residents by SEZ enterprises from 15% to 5%; and

    (c) allowing a capital deduction of 100 per cent of the cost of buildings and machinery owned by the SEZ enterprise.

    In addition, there are a number of tax incentives aimed at encouraging investment outside the key cities of Nairobi, Mombasa and Kisumu, which include capital allowances of up-to 150 % for entities engaged in manufacturing activities (including power generation companies).

    Disadvantages
    Kenya’s laws are still developing and growing by the day. Therefore, they may change from time to time creating some level of uncertainty. In addition, Kenya does not have a wide double tax treaty network and only 11 Double Tax Treaties are currently in force.