Taxation is the major source of government revenue in Kenya. Over the past few years, the government through the Kenya Revenue Authority (KRA) – the body mandated to administer and collect taxes on behalf of the government – has stepped up efforts to widen the tax base. Kenya, like most African countries, operates a source- and partly residency-based taxation system. Under the source-based system, taxation is levied on all income derived or accrued in Kenya irrespective of the residence of the income earner. This applies to both corporates and individuals.
Resident corporate entities are taxed at the rate of 30% on their taxable income while non-residents with a permanent establishment are taxed at the rate of 37.5%. Individuals on the other hand are taxed on a graduated scale with the tax rates ranging from 10% to 30%.
Any person with a permanent home in Kenya is deemed to be a resident if he was present in the country during the year of income. A person without a permanent home in Kenya is deemed to be resident either when he is in the country for 183 days in any year of income, or an aggregate of 122 days in the current year and in each of the preceding two years. For a body corporate, residency arises in three scenarios: incorporation in Kenya, management and control is exercised in Kenya or the Cabinet secretary in-charge of the Treasury declares the person a resident.
Incentives
The Kenyan tax legislation has an array of incentives to attract investments including investment deductions which are mainly provided to manufacturers and hoteliers; industrial building deductions that are provided to qualifying industrial buildings; and wear-and-tear allowance that is provided on machinery. There also other sector-specific tax incentives such as the shipping allowance, farm works deductions and mining allowances. Special incentives are given to enterprises set up and operating in export-processing zones.
The government has initiated a raft of reforms in the tax system to simplify as well as align it with international best practice. An overhaul of the value-added tax (VAT) Act was undertaken in order to simplify, expand the tax base as well as modernise it. This has led to a reduction in the compliance cost for businesses. In an effort to streamline dispute resolution, a Tax Appeals Tribunal Act has been enacted into law. This is meant to make provision for the establishment of a tribunal for the management and administration of tax appeals. This will harmonise the processing of lodging appeals against tax decisions by the commissioner since any person who disputes the decisions on any matter arising under the provisions of any tax law will be required to appeal to the tribunal.
A New System
A new online return filing and payment system known as iTax has been introduced by KRA. This is meant to replace the manual filing system which was time-consuming and costly. Under the new system, all taxpayers are required to file all their returns as well as pay their taxes online. This was, however, initially rolled out to the large taxpayers only and then progressively all taxpayers were roped into the system.
With the discovery of oil and minerals in the country, a 5% capital gains tax for the extractive industries was signed into law, which is meant to align the taxation of this sector with international best practice.
In a bid to ensure that all taxpayers contribute their fair share of taxes, the government has been focusing on the accounting practices of multinational corporations. The expansion of the scope of activities undertaken in Kenya by a foreign entity that may lead to the creation of a permanent establishment, as well as monitoring possible transfer mispricing tendencies among multinationals have been major focus areas.
The government has intensified the signing of tax information exchange agreements (modelled on the OECD) as well as ratifying the Multilateral Convention on Mutual Administration Assistance in Tax Matters that will give KRA automatic access to tax information.
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