THE TAX LAW IN KENYA

TAX LAW IN KENYA

The month of June brings with it a lot of sensitization from the Government for citizens to file their taxes. This year specifically came with a flood of emails and reminders. One would ask why taxes, the simple answer is that, until someone comes up with a better idea, taxation is the only practical means of raising the revenue to finance government spending on the goods and services that most of us demand. After independence, various Strides have been made in relation to tax law in Kenya. Including, the income tax which was introduced through the Income Tax Management Act enacted in 1953 and subsequently repealed in 1958 and 1965. In 1975, the Income Taxes department was created by an Act of Parliament and was accorded the sole responsibility of charging, assessing and collecting Income Tax in Kenya. Additionally, in 1995, the Kenya Revenue Authority (KRA) was established.

General Types of Taxes in Kenya

Income Tax

Income tax is charged pursuant to Section 3 of the Income Tax Act Chapter 470 of the Laws of Kenya. It is a direct tax that is imposed on income derived from the conduct of Business, Employment, Rent, Dividends, Interests and Pensions, among others. The methods of collecting taxes in Kenya comprise:

Corporation tax – Section 3(2) of the Income Tax Act provides for this form of tax. It is obtained from income earned or accrued from or within Kenya. For resident companies, the income tax rate is 30% of the net profit generated by the company, while for non-resident companies, the rate applicable is 37.5% of the net profit generated. A company is considered resident if it is either incorporated in Kenya, has its place of effective management and control in Kenya or is declared to be resident by the Cabinet Secretary for the time overseeing matters relating to taxes.

Pay As You Earn (PAYE)PAYE is a method of collecting tax from individuals in gainful employment and earning a minimum Kes. 24,000 per month (previously Kes. 14,000 per month). Gains or Profits includes wages, salary, leave pay, sick pay, commission, bonus, gratuity, travelling allowances and entertainment or other allowances received in respect of employment or services rendered.

PAYE is calculated using a graduated scale, with the highest rate being 25% (previously 30%) for persons earning a minimum of Kes. 57,333 and above (previously Kes. 47,059).

Withholding Tax

Withholding taxes are advance taxes that are deducted in respect of certain incomes including management fees, professional fees, interest charged, dividends, constructions and royalties, among others. The person making the payment is responsible for deducting the tax at source from payments made and remitting the deducted tax to KRA. The tax is withheld by the party responsible for deducting and remitting the tax to KRA hence, the name withholding tax. The percentage deducted varies between incomes and is dependent on whether the payee is a resident or non-resident individual or company. The percentage deducted varies between incomes and is dependent on whether you are a resident or non- resident. Withholding tax, therefore, is not an additional tax. Rather, it is a payment of tax in advance on the income of the payee (the party receiving the payment).

Some of the sources of income which are exempted from the payment of Withholding Tax are:

Dividends received by a company resident in Kenya from a local subsidiary or associated company in which it controls (directly or indirectly) 12.5% or more of the voting power;
Marketing commissions and residue audit fees paid to foreign agents in respect of export of flowers, fruits and vegetables;
Interest payments to banks and insurance companies;
Payments made to tax exempt bodies;
Local management and professional fees whose aggregate is below Kshs 24,000 in a month; and
Air travel commissions paid by local air operators to overseas agents.

Value Added Tax (VAT)

Value Added Tax is regulated and governed by the Value Added Tax Act, No. 35 of 2013, Laws of Kenya. Value Added Tax (VAT) is due on the supply of taxable goods or services made or provided in Kenya and on importation of taxable goods or services into Kenya either at a standard rate of 16%, Zero rate or 8%. There are certain goods and services that are exempt from VAT and these a provided for under the 1^st schedule of the VAT Act.

VAT is due and payable the earliest of the date:

when the Goods or services are supplied to the purchaser;
an invoice is issued in respect of the supply;
payment is received for all or part of the supply; or
a certificate is issued by an architect, surveyor or any person acting as consultant or in a supervisory capacity in respect of the service.

There are instances where the Commissioner may appoint a taxpayer to be a withholding VAT Agent in which cases all payments made for supply of goods or services by such person will be less 6% VAT regardless of whether the supplier is registered for VAT or not.

Excise Duty

Excise Duty, popularly known as Sin Tax, was a tax that was targeted at certain products with an aim of discouraging their consumption. Its imposition has however gone beyond the likes of alcohol and tobacco, to bottled water and even some financial services.

The excise duty rate is specific and varies on a case-by-case basis as set out in the First Schedule of the Excise Duty Act, 2015, Laws of Kenya, which regulates and governs excise duty in Kenya.

Customs Duty

Customs Duty is levied upon importation of goods into Kenya. The rates vary between 0%, 10% and 25% as provided by the East Africa Community Common External Tariff (CET). However, Sensitive items Attract duty higher than 25%. The sensitive items are listed in the schedule 2 of the EAC Common External tariff.

Kenya being a part of the East African Community, Customs Duty is levied based on the East Africa Community Customs Management Act (EACCMA) which is uniform in all the EAC countries.

Tax Administration

The government in an effort to harmonise tax administration in Kenya, enacted the Tax Procedures Act, No. 29 of 2015, Laws of Kenya (‘TPA’). The TPA seeks to administer over numerous issues including:

Record Keeping.
Filing of returns.
Raising of Assessments.
Recovery of taxes.
Tax Objections, and
Tax Rulings.

It however does not apply where a statute has set out specific procedures to be followed, for instance, the EACCMA has set out the procedure to be followed in the administration of customs payable to the East African Community.

Tax Disputes

Tax disputes are governed by the Tax Procedures Act and the Tax Appeals Tribunal Act, No. 40 of 2013, Laws of Kenya. Section 51(1) of the Tax Procedures Act (TPA) provides that if a Taxpayer disputes a Tax Decision (defined in Section 2 of the Act), the Taxpayer is required to file a Notice of Objection of the tax decision within 30 days of receiving the said decision, with the Commissioner-General of the Kenya Revenue Authority. Section 51(11) of the TPA mandates the Commissioner-General to consider the Notice of objection and issue an Objection Decision within 60 days of its receipt or the date when he received any additional information, otherwise the Notice of Objection will be deemed to have been allowed.

The Tax Appeals Tribunal is the appropriate forum for a Taxpayer to appeal a Commissioner-General’s Objection Decision on a tax objection filed by the Taxpayer, as the Tribunal handles such appeals based on merit only. The appeal should be filed by the aggrieved Taxpayer within 30 days of receiving the Objection Decision, with a right of appeal to the High Court.

Alternative Dispute Resolution is also employed and encouraged in resolving tax disputes. KRA set up an Alternative Dispute Resolution department about 5 years ago to provide both the Taxpayer and KRA with a forum to discuss a tax dispute on a without-prejudice basis and hopefully reach an amicable settlement of the dispute. If a settlement of the dispute is arrived at, the settlement is only binding on the parties once it is adopted by the Tax Appeals Tribunal. The settlement is therefore subject to the approval of and adoption by, the Tribunal.

It is important to note that the tax reforms process is a continuous one and one that is guided not only by economic factors but by political and social issues as well.

For information on this subject, please do not hesitate to contact the lawyers whose details are set out below: