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Kenya: Tax regulations(EIU Viewswire Via Thomson Dialog NewsEdge) COUNTRY BRIEFING FROM THE ECONOMIST INTELLIGENCE UNIT Kenya has reduced its corporate tax rates in recent years, and these are now in line with its partners in the East African Community. In addition to direct taxes, the Kenya Revenue Authority (KRA) assesses taxes on corporations at the point of sale. The KRA is responsible for tax legislation as well as assessing and collecting taxes. The KRA also administers value-added tax, customs and excise duty, and road taxes. Tax incentives offered by the KRA include capital deductions on wear and tear, along with investment allowances. Tax morality has improved in recent years, a trend that is attributed to the strengthened efficiency of the KRA. According to estimates by the central bank, Kenyas tax revenue rose to about KSh260bn in 2005/06 from about KSh242bn in the previous year thanks to improvements in the tax administration. The tax rate for local companies, including subsidiaries of foreign firms, is 30%. Non-resident companies, including branch offices of foreign firms, are liable for tax at 37.5%. Branch offices pay no withholding tax on remitted profits. Royalties deriving from licence agreements are assessed at a tax rate of 20% of gross for non-residents and 5% for residents. Companies must pay a final 5% withholding tax on dividends. Corporations that pay dividends out of untaxed profits are liable for a compensation tax at the applicable corporate rate, since capital gains taxes have been suspended since 1985. Recently listed companies on the Nairobi Stock Exchange (NSE) pay corporate taxes at 25% for the first five years. The NSEs chief executive, Chris Mwebesa, said that the government cut the rate, starting in 2005, to 20% for a five-year period for newly listed companies that offer at least 40% of their shares to the Kenyan public. Withholding taxes on payments to non-residents are assessed on royalties (20%), management fees (20%), leasing of immovables (30%) and movables (15%), except aircraft (which are treated as immovables), according to the Kenya Revenue Authority (KRA). For residents, royalties are assessed at 5% and consultancy or agency fees at 2%. A full list of resident and non-resident withholding tax rates is available on the KRAs website. However, some categories are unclear, leaving a high-degree of discretion to the authorities. For amounts of KSh100,000 or more, the KRA requests that electronic transfers be made to its account at the Central Bank of Kenya because of problems with fraudulent cheques. A 1998 amendment to the income tax act (Section 12B) implemented a fringe-benefits tax on any employer that extends a loan at lower-than-market rates to an employee or an employees relative. The taxable value of such a loan will be the difference between the loans interest rate and the prevailing market rate. Kenya has neither an alternative minimum tax nor an excess profits tax. Corporate tax rates, 2007Company incorporated in KenyaTaxable incomeKSh1,000,000Basic corporate income tax (30%)300,000Net after-tax income700,000Withholding tax* on maximum dividend (no treaty, 10%)70,000Withholding tax* on interest from bearer instruments (25%)175,000Net dividend455,000Total taxes545,000Branch of a non-resident companyTaxable incomeKSh1,000,000Basic corporate income tax (37.5%)375,000Withholding on royalties remitted abroad (20%)200,000Withholding on maximum dividendnaNet after-tax income425,000Net profit remittance425,000Total taxes 575,000* Dividends paid to a non-resident shareholder. Source: Ministry of Finance.Income derived from Kenya is taxable income. Major forms of income that are taxable include business or employment earnings, rent, dividends, interest, pensions, management fees and commissions. Taxable income is levied either directly or at source; interest, dividends, royalties, management or professional fees, commissions, pensions and rent are taxed at source or withheld. For non-resident insurance companies (excluding life insurance), taxes are levied on gains, which consist of received or receivable gross premiums; non-investment income; and the amount judged by the tax commissioner as a fair representation of the companys reserves in Kenya, minus business expenses, admitted claims and unexpired reserves at year-end. The Large Taxpayers Office, formed in 1998, provides a convenient one-stop-shop for the countrys 400 largest taxpayers. These taxpayers account for around 68% of revenue collections, according to the Kenya Revenue Authority (KRA). Non-resident enterprises must reportedly pay taxes on loans in some instances: when total borrowing exceeds revenue reserves or when it exceeds three times paid-up capital. Branches pay taxes on royalties, management fees or interest payments to a head office; subsidiaries, however, are eligible for deductions. Foreign bank branches in Kenya pay taxes on property and other assets acquired outside Kenya. The Kenyan authorities allow the indefinite carry-forward of losses but do not permit the carrying back of losses. Revaluations of assets do not incur taxes. Interest payments are tax deductible if the loan is used to generate income. Depreciation of certain machinery and computers is deductible, as is capital expenditure on hotels and for other industrial uses. Where double-tax treaties exist, corporations are eligible for tax credits; otherwise, foreign taxes paid may be deducted. The Kenya Revenue Authority permits depreciation on both a straight-line and declining-balance basis. The declining-balance method applies to wear-and-tear allowances on farm machinery, aircraft, ships, computers and other office equipment. Straight-line investment allowances apply to capital expenditures on hotel buildings, industrial buildings or equipment and machinery. Based on recent practice, these have been set at 70% on hotel buildings, industrial buildings and machinery. Since 1993, all buildings and equipment functioning as part of a hotel complex have qualified for the deduction. Wear-and-tear allowances for farm equipment are set at 37.5%; computers, 30%; cars, 25%; and ships, 12.5%. Revaluation of assets is permitted, and depreciation is calculated from the new value. The tax-payment procedure changed in 2004 so that corporations paying taxes on an instalment basis must pay one instalment on or before the 30th day (instead of the 20th day) of the fourth, sixth, ninth and twelfth month of the accounting period in question. Instalment tax is the lower of an estimate of the current accounting periods tax or the tax of the previous year. Any final tax still outstanding must be paid off no more than four months after the relevant accounting period. The penalty for late payments is 20% of the outstanding amount, plus 2% each month charged on a compounded basis from the date it was due. Agricultural companies pay 75% prior to the 30th of the ninth month, and the remainder before the 30th of the 12th month. Tax payments for self-assessed returns (based on estimates of how much the company will make) must be made no more than six months after the end of the relevant accounting period. Self-assessed taxes paid beyond the due date are penalised at 5% of what is still owed, with a KSh5,000 minimum. Value-added tax and withholding taxes are due within 20 days of the month in which the goods or services were supplied or the tax was deducted, respectively. Import taxes are due at the same time as customs duty. There are no capital taxes. Kenya suspended the capital gains tax in June 1985. However, corporations that pay dividends out of untaxed profits must pay a compensation tax at the applicable corporate rate. Taxes are withheld on dividends at a rate of 5% for resident companies, except for those holding at least 12.5% of voting shares, which are exempt from withholding tax. For non-residents, taxes on dividends are withheld at 10%, but branches remitting profits to a foreign parent do not pay withholding tax. With the suspension of capital gains taxes, dividends may be disbursed from profits without any payment of corporate tax. However, a compensatory tax will apply on the dividends at the corporate rate. Dividends paid out of exempt income are subject to a compensating tax. Interest is deductible on loans made solely for the production of income. Payments to non-resident banks require tax to be withheld at 12.5%. The withholding tax on interest generated from bearer instruments of less than two years duration is 25%, irrespective of residency in Kenya. Withholding for interest on funds from banks and other financial institutions is 15%. Housing bonds are assessed at a 10% rate for resident and a 15% rate for non-resident entities. All withholding is at source. Where the receiver is not a corporation (that is, for individual recipients), the withholding constitutes full payment of tax. Royalties remitted abroad are subject to a 20% withholding of gross; equivalent payments to a resident entity are 5%. Branches must pay taxes on royalties and fees remitted to a parent; subsidiaries and resident enterprises are not required to do so. Withholding taxes on professional or management fees are assessed at a zero-rate for residents and 20% for non-residents. The same rates apply to appearance fees paid to resident and non-resident entertainers, respectively. Resident consultants or agents, however, are subject to 5% withholding tax, compared with 20% for their non-resident counterparts. Contractual fees are taxable at 3% (since July1st 2003) for resident entities and 20% for foreign ones. In order to support horticultural trade, however, the withholding tax was removed in July 2003 from the commissions paid to non-resident agents for flowers exported from Kenya. Rates may be reduced by tax treaty. Kenya has double-tax treaties in force with eight countries: Canada, Denmark, Germany, India, Norway, Sweden, the UK and Zambia. Kenya has not ratified its tax treaty with Italy; Uganda and Tanzania have not yet implemented treaties with Kenya. Negotiations are underway with France and Thailand and have been proposed with Nigeria, South Africa, Seychelles and Mauritius, among others, but it was not clear in early 2007 when these might be finalised. Tax treaties now in force do not affect withholding rates for remitted interest or dividends, butthey offer credit to offset foreign-sourced income already taxed abroad. Withholding-tax rates under Kenyas tax treaties (%)Country of recipient RoyaltiesManagement feesCanada1515Denmark2020Germany1515India2017Norway2020Sweden2020United Kingdom1512Zambia2020Source: Ministry of Finance.Resident firms may deduct direct purchases and management fees; branches paying management fees are subject to withholding tax. Company offices that do not earn income, and regional headquarters of humanitarian or religious organisations, qualify for zero-tax status. Nevertheless, any income generated is subject to corporate tax. Kenya has levied a value-added tax (VAT) on consumer spending since 1990, when VAT replaced the previous, more narrowly defined, sales taxes. Amendments in June 2003 reduced the VAT on most goods from 18% to 16%. The actual VAT rate on accommodation and restaurant services (including industry-specific catering, training and tourism-development levies, plus service charges) is only around 10%. The Kenya Revenue Authority (KRA) has eight schedules of goods and services, setting out the status of virtually all goods and services. VAT applies to goods and services manufactured, imported or provided in Kenya. The definition of service was broadened in June 2003 to encompass any act performed for a consideration, such as the granting of rights. Pharmaceuticals, agricultural inputs and all export products, among other items, are zero-rated for VAT purposes. Exemptions include live animals, most foodstuffs, building materials, financial services (subject to certain exceptions), insurance, passenger transport, entertainment (subject to certain exceptions), and the rental and lease of land and buildings. Businesses must register with the KRA for VAT if they have annual turnover exceeding KShs5m (raised from KSh3m in the 2006/07 budget), but registration is sometimes compulsory regardless of turnover. Businesses that trade in jewellery, timber, motor-vehicle parts, accounting services and other goods or services need not meet the turnover requirement to apply for a certificate of registration. The penalty for the late submission of a return for VAT is KSh10,000 or 5% of the total tax due, whichever is larger. Excise tax is due on both imported and local items. For imported items, excise tax is collected at the time of import, with applicable import duty or VAT; for locally produced items, excise tax is paid monthly. Entities failing to submit a return for excise tax are liable for a 10% penalty on excise tax owed and other penalties. Kenya levies excise taxes on beer (6065%); cider, wine and spirits (3565%); tobacco items (30130%); and soft drinks and mineral water (10%); among other items. Cigarettes must be affixed with an excise stamp. In 2004 the customs tariff on motor vehicles was reduced to 25%, and excise duty was set at 1060% (depending on engine capacity). The Kenya Revenue Authority in 2003 removed the 10% excise duty from unassembled vehicles, and it cut excise duty on juices to 10% (from 15%). Excise duty on mobile-phone airtime was raised to 10% (from 5%), as from July1st2003. Kenya levies stamp duties on transfers of immovable property (4% within a municipality and 2% outside such areas) and on transfers of non-quoted shares or marketable securities (1%). Local authorities are empowered to assess land rates or taxes on unimproved lots; the tax rate for land is 10% in Nairobi but lower elsewhere. Developed land also is subject to tax, as is land leased from the government. Copyright 2007 Economist Intelligence Unit |