Business Training of KCIC Clients

Taxation in Kenya

January 2014

Table of Content

Section Overview Sections:

1 Business registration 2 3 4 5 6 Pay As You Earn (PAYE) Value Added Tax (VAT) Corporate Tax Withholding Tax Excise duty Business Training of KCIC Clients

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6 10 15 20 29 34 28 January 2014 2

Introduction

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Introductions…….

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Your Expectations

Lets hear them…

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Business Registration

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Setting up in Kenya

Under the Kenyan Companies Act, there are two relevant legal forms of registration:  A branch of a foreign company; or  A Limited Liability Company (a subsidiary).

There are no statutory restrictions on operating either as branch or a subsidiary.

A branch for tax purposes is a company incorporated outside Kenya and has been registered under the Kenyan Companies Act and received a Certificate of Compliance A subsidiary is a locally incorporated company registered under the Kenyan Companies Act and received a Certificate of Incorporation.

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Illustrative incorporation process map

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Differences between a subsidiary and a branch

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Pay as You Earn

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Definition of terms

“employer” includes any resident person responsible for the

payment of, or on account of, emoluments to an employee.

Resident individual- A person is resident in Kenya where:

• they have a permanent home in Kenya and are in Kenya even for a single day in the tax year (calendar year) • they do not have a permanent home in Kenya but are in Kenya for: • 183 days or more in aggregate during the current tax year • an average of more than 122 days per year in the current tax year and the two preceding years

Payroll Management-Include all taxable remuneration, including

benefits and unaccounted for allowances and ensure that the correct tax treatment is applied .

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PAYE - what is an emolument?

Income Tax Act (Sec 5(2))

“gains or profits” include: wages, salary, leave pay, sick pay, payment in lieu of leave, fees, commission, bonus, gratuity, or subsistence, travelling, entertainment or other allowance received in respect of employment or services rendered.

PAYE guide (2009)

 Wages, salary, leave pay, sick pay, payment in lieu of leave, directors’ fees and other fees, overtime, commission, bonus, gratuity or pension.

 Cash allowances    The amount of any private expenditure of the employee paid by the employer otherwise than as a loan.

Non-cash benefits where the aggregate value exceeds KES 3,000 pm Value of housing where provided by the employer.

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Deadlines

Obligation Remit monthly PAYE and FBT File annual self assessment returns (SARs) Payment of monthly NHIF dues Deadline

9 th of the following month or last weekday before if 9 th on weekend or public holiday. NB- directors!

is Effective 1 July 2013, all individuals earning income in Kenya are required to file an individual Self Assessment Return as per the Finance Act 2012 gazetted in February 2013.

1 9 st th of the next month (by concession, can be paid by the ).

Payment of monthly NSSF dues

15 th of the following month.

Payment of monthly National Industrial Training Levy (NITA)

10 th of the following month 13

Accounting for PAYE

Case study.

In the month of September 2013, Mary Natasha received income from his employer as detailed below: o Basic salary- KES 120,000 o o House allowance KES 30,000 Overtime- KES 5,000 Calculate his taxable income

Mary Natasha Taxable income September 2013

Basic salary Add House allowance Overtime

Taxable income

120,000 30,000 5,000

155,000

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Value Added Tax

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Rates of Tax

• • • Two rates for VAT:  0% for zero rated supplies - such as export of goods and service, supply of natural water excluding bottled water by any political division approved by cabinet secretary for water.  16% for any other supply.

Exempt goods- medicaments, live animals, maize, fertilisers, unprocessed milk, plant and machinery of chapter 84 and 85, vegetables, aeroplanes.

Plant and Machinery- such as boilers, turbines, Agricultural, horticultural or forestry machinery for soil preparation or cultivation; lawn or sports-ground rollers, milking machines, machinery for animal feeds, Electrical capacitors, fixed, variable or adjustable.

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Accounting for VAT

“input tax” means tax paid or payable on the supply to a registered person of any goods or services to be used by him for the purpose of his business (“VAT on purchases”) “output tax” means tax which is due on taxable supplies (“VAT on sales”)

VAT registration

A person is required to register for VAT if he supplies taxable goods (16% and 0% VAT) in excess of KES 5M per annum.

• • • •

Time to account for VAT:

on which goods are delivered or services performed; a certificate is issued by an architect, surveyor, or consultant; on which the invoice is issued; or on which payment for is received, in whole or part.

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Accounting for VAT

• • VAT is payable to KRA by 20th day of the following month in which VAT was deducted.

Refund of VAT where input tax exceeds output tax as a result of making zero-rated supplies.

Case study.

• In the month of August 2013, James bought taxable goods (at 16%)worth KES 800,000. He sold all the goods in the same month at KES 1,000,000. Calculate the amount of VAT payable.

• In the month of September 2013, Alice bought taxable goods (at 16%)worth KES 800,000. She sold all the goods to Nigeria (export of goods)in the same month at KES 1,000,000. Calculate the amount of VAT payable/refundable.

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Accounting for VATAccounting for Corporate Tax- companies

Taxable sales at 16% VAT @ 16%

Sales Purchases

VAT Payable to KRA

1,000,000 800,000 160,000 128,000

32,000 Zero rated sales

Sales (exports) Purchases

VAT Refundable by KRA

1,000,000 800,000

VAT

0 128,000

(128,000)

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Corporate Tax

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Definition of terms

“Income tax” shall be charged for each year of income upon all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya.

“Income chargeable to tax” includes gains and profits from business and right granted to another person for use or occupation of property among others.

• • •

Resident to a body of persons, means:

That the body is a company incorporated under a law of Kenya; or That the management and control of the affairs of the body was exercised in Kenya in a particular year of income under consideration; or That the body has been declared by the Minister by notice in the Gazette, to be resident in Kenya for any year of income.

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Definition of terms

A branch is taxed at 37.5% on its adjusted net profit (Gross revenue less expenses incurred wholly and exclusively in production of income) A subsidiary is taxed at 30% on its adjusted net profit (Gross revenue less expenses incurred wholly and exclusively in production of income) Expenses must be “incurred wholly and exclusively in generating income” Incurred - income at a cost or borne by the business. Expenses incurred by another party for the benefit of the business will not qualify.

Wholly and exclusively - have a direct link to activities leading to earning the specific taxable income Disallowance of costs not related to business e.g. certain donations, personal expenditure, fines and penalties.

Allowable expenses include-Training costs, employees costs, prevention of soil erosion, capital expenditure for clearing and planting certain crops

Revenue- Allowable Expenses = Adjusted taxable profit which is taxed at 30%.

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Capital allowances

Investment allowance Wear and tear allowance Software allowance Farm work Industrial building allowance Details

Within Nairobi, Kisumu and Mombasa Outside Nairobi, Kisumu and Mombasa>200 M Building/ Machinery used for manufacture including electricity generation Class 1-Tractors, combined harvesters Class 2- computer and computer peripherals Class 3- motor vehicles- light Class 4- all other machinery including ships • • • • Capital expenditure on the purchase or acquisition of the right to the use of a computer software Farmhouses (cost restricted to 1/3) Labour quarters: Immovable buildings necessary for proper operation of farm: fences, dips, drains, water & electricity supply works other than machinery, windbreaks, other works necessary for proper operation of the farm: Buildings used as a factory, mill , storage

Rate p.a

100% 150% 37.5% 30% 25% 12.5% 20% 100% 10% 23

Deadlines, penalties & interest

Tax Deadline/Obligation Instalment tax payment companies other than agricultural companies Instalment tax payment agricultural companies Penalty

Four instalments of 25% each due by 20 th of the 4 th , 6 th , 9 th and 12 th month of the accounting month 20% of the amount due Two instalments of 75% and 25% due by 20 th of the, 9 th and 12 th month respectively of the accounting month 20% of the amount due

Balance of tax payment Filing of self assessment return

4 months after accounting period 6 months after accounting period

Interest

2% per month 2% per month 20% of the amount due 5% of the normal tax min. KES 10,000 2% per month - Should not exceed principal tax 24

Accounting for Corporate Tax- companies

Case study:

The following is the composition of profit and loss account for Mango Company Ltd for the year of income 2012.

• Sales- KES 2,000,000 • • • • • Purchases- KES 1,000,000 Administrative expenses- KES 400,000 Administrative expenses consisted of donation-KES 50,000 Depreciation-KES 30,000 Wear and tear allowance amounted to KES 20,000.

Calculate the amount of Corporate tax payable.

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Accounting for Corporate Tax- companies

Mango company Ltd Profit and loss account Year ended 31 December

Sales purchases

Gross profit

Admin expenses

Profit before tax 2012

KES 2,000,000 (1,000,000)

1,000,000

(400,000)

600,000 Mango company Ltd Tax computation Year ended 31 December 2012 Profit before tax KES

600,000

Add back-disallowed expenses

Donations Depreciation

Less

Wear and tear allowance

Taxable profit

50,000 30,000 80,000 (20,000)

660,000 Corporate Tax (30%) 198,000

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Accounting for Corporate Tax- agricultural companies

Case study:

The following is the composition of profit and loss account for SKL Company Ltd for the year of income 2012.

• Sales- KES 2,000,000 • • • • Purchases- KES 1,000,000 Administrative expenses- KES 400,000 Fair value gain of biological assets ( trees)- KES 100,000 Administrative expenses consisted of donation-KES 50,000 • • Depreciation- KES 30,000 Construction of labour quarters amounted to KES 30,000.

Calculate the amount of Corporate tax payable.

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Accounting for Corporate Tax- agricultural companies

SKL company Ltd Profit and loss account Year ended 31 December

Sales purchases

Gross profit

Other income (fair value gain) Admin expenses

Profit before tax 2012

KES 2,000,000 (1,000,000)

1,000,000

100,000 (400,000)

700,000 SKL company Ltd Tax computation Year ended 31 December 2012 Profit before tax Add back-disallowed expenses

Donations Depreciation

Less

Fair value gain on biological assets Labor Quarters

Taxable profit

50,000 30,000 100,000

KES

700,000 80,000 30,000 (130,000)

650,000 Corporate Tax (30%) 195,000

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Withholding Tax

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What is Withholding tax?

• • • • • WHT is a portion of payment withheld by the party making payment to another (payee) and paid to the Tax Authority.

The objective of the WHT system is that tax is withheld (retained) by the payer and given directly to the Tax Authority, at the time the payer makes payment to the payee.

The tax collected under this system belongs to the payee with respect to payments, while the payer is only an agent for the Tax Authority.

WHT is payable to KRA by 20th of the month following the month in which WHT was deducted.

The person who deducts WHT (Payer) furnishes the Payee with the WHT certificate showing the amount of WHT deducted.

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Payments subject to WHT

Section 35 of the ITA sets out the payments that are subject to withholding tax • • • • • • •

Payments to Residents:

Management or professional fees (if more than 24k a month) – technical, management, contractual, training.

Dividend Interest Pension in excess of tax exempt amounts Royalty-Right to use Commission/fee for provision of insurance cover Winnings - betting & gaming • • • • • • • •

Payments to Non-residents:

Management/professional fees Royalty Rent for use or occupation of property Dividend Interest and deemed interest Pension or retirement annuity Payment to sportsmen or artists Winnings - betting & gaming 31

WHT rates

Payment Resident Non- resident

Management and professional fees (management fees, technical fees, contractual, consultancy, training fees, agency fees) Contractual fees Dividend • >12.5%voting power • • <12.5%voting power Qualifying divided Qualifying Interest: • Housing bonds • Bearer Instruments • Other Royalties 5 3 Exempt 10 5 10 20 15 5 20 20 10 10 N/A N/A N/A 20 • • Rent: Immovable property Others N/A N/A 30 15 WHT rate on dividend paid to citizens of East Africa Community Partner States-5% 32

Accounting for WHT

Case study:

ABC Limited received accounting services from XYZ limited. The invoice amount was KES 100,000 as indicated in the table below. Calculate the withholding tax.

From To Tax Invoice XYZ Ltd ABC Ltd

Withholding tax calculation

Gross amount Withholding tax (5%)

Net amount paid to XYZ Description

Accounting services VAT Total Amount

Amount (KES)

100,000 16,000 116,000 100,000 (5,000)

95,000

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Excise Duty

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What is Excise Duty?

• • • An

excise

or

excise tax

(sometimes called a duty of excise or a special tax) is a tax on consumption levied on goods produced within a country.

It is generally an indirect tax i.e. the consumer bears the burden of tax as opposed to the producer/ manufacturer of the good(s).

Excise duties are distinguished generally from other indirect taxes in the following ways: a) b) Excise duties typically target a narrow range of products.

Excise duties are very ‘heavy’, accounting for higher fractions of the retail price of products.

c) Excise duties are mostly specific though in some cases a hybrid of specific and ad-valorem rates may be used.

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Legislation

▪ Governed under Cap. 472, Customs and Excise Act ▪ The Fifth Schedule of the Act provides a listing of all excisable goods and the rates of duty Section 90: Provides that all manufacturers of excisable goods must seek a license before commencement of such manufacture. It makes it an offence to manufacture excisable goods without a license Section 91: Provides that: • A separate application shall be required in respect of  each factory in which excisable goods are to be manufactured  each class of excisable goods to be manufactured.

A license shall be issued to a particular a person and shall be in respect of the factory and class of excisable goods specified in the license;

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Rates of Excise Duty

Category

Beer

Goods description

Beer Other alcoholic beverages Tobacco and tobacco products Soft drinks Excisable services Wines Spirits Cigarettes

Excise duty rate

KES 70 per litre or 50% whichever is higher KES 80 per litre or 50% whichever is higher) KES 120 per litre or 35% whichever is higher KES 1,200 per mile or 35% of RSP Carbonated drinks Water 0.07

KES 3 per liter or 5% of whichever is higher Mobile cellular phone services 0.1

Money transfer services and fees 0.1

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