Taxation Regime in Kenya

Objective of training  Set up – Branch versus subsidiary  Corporation Tax;  Pay As You Earn (“PAYE”)  Withholding tax regime;  Value Added Tax (“VAT”);  New tax provisions;  Relief from double-taxation;  Kenya Revenue Authority (“KRA”) Audits; and  Cost of non-compliance.

Operations set-up Limited Liability Company (“LLC”)Branch Formation Under the Companies Act Obtains a certificate of compliance from the Registrar of Companies. Legal Separate legal personality (Corporate shield ) Resident Minimum 2 shareholders. Maximum 5 Minimum two member board of directors required No separate legal personality Non-resident Resident representative required Income & expenses Income & expenses separate from head office. Dividends, royalties & interests are allowable deductions Head office income relating to project should be taxed in Kenya. Dividends, royalties & interests non-allowable Taxation 30% corporate tax rate Thin capitalization & transfer pricing applies Parent company costs allowable where they assist in generation of taxable income 37.5% corporate tax rate Thin capitalization not applicable. Transfer Pricing implications Head office costs not allowed

Corporation Tax (Income Tax)  Income Tax is charged on all income of a resident/non- resident person which has accrued in or is derived in Kenya;  For companies this is covered by corporation tax;  Where a non-resident company has a permanent establishment (“PE”), it will be taxed on its income at the non-resident tax rate; and  The corporation rates in Kenya are 30% for resident companies & 37.5% for non-resident entities (branch or a permanent establishment (“PE”) presence.

Ascertainment of income & expenses  Split contract between head office machinery supply & local installation & service element;  Only possible if it’s a LLC (separate legal entity);  Expenses relates to costs incurred directly attributable to income generated;  Tax planning – Proper structuring of operations.

Pay As You Earn (“PAYE”)  Chargeable income is both for resident and non- residents accrued in or derived from the country;  Gains or profits from employment include, wages, salaries, overtime, leave pay, sick pay, commissions and fees, bonus, gratuity or subsistence, travelling, entertainment or other allowances and any other allowances received in the course of employment;  Employment income is taxed at different rates PAYE bands

Pay As You Earn (“PAYE”)  Watch out for residency risks. Kenyan residents taxed on their worldwide income i.e. permanent home in Kenya or was in Kenya for an aggregate of 183 days in an year or aggregate of 122 days in three years;  Employee versus consultant risks; and  Tax planning e.g. separate contracts for branch/Kenyan entity and head office.

Withholding tax (“WHT”)  WHT is tax deducted at source on payments for income arising from rendering of services i.e. management services and contractual services;  It is deducted on payments to both residents and non- residents;  Incomes subject to WHT include – interest, dividends, agency, management, professional, training, technical, consultancy, contractual fees among others;

Withholding tax (“WHT”) - Kenya  The WHT rates are 5% for management fees and 3% for contractual fees for resident payments;  For non-resident payments 20% for management fees for countries with no double-tax agreement with Kenya; and  The person/entity making the payment is required to deduct the WHT due and remit the amounts to the exchequer by the 20 th of the following month.

WHT Rates Nature of serviceKenya (%) United Kingdom (%) Germany & Canada (%) Denmark, Norway, Sweden & Zambia (%) India (%)Other countries including Spain Management fees Contractual Royalties15 20 Dividends10 Interest15

Value Added Tax (“VAT”)  VAT is a general consumption tax assessed on the value of goods and services. It applies to all commercial activities involving production/distribution of goods/services;  New VAT regime came into force on 2 September 2013 after 2 abortive attempts in 2011 and  Registration threshold still Kshs 5M/month.  Abolishing of VAT exemption regime. However projects in geothermal, oil & gas prospecting, mining & construction of power generating plants are exempted on their supplies upon the National Treasury recommendation.

Value Added Tax (“VAT”)  VAT ultimately borne by the final consumer. Charged as a % of price at 0% and 16%;  VAT is collected fractionally – input/output netting; and  Reverse VAT for persons entitled to full input VAT claim on imported services abolished. Thus for VAT registered projects with no partial exempt supplies, no reverse VAT charge.

New Tax Provisions - Kenya  The Kenya Finance Act 2013 introduced a Railway Development Levy of 1.5% on all imported goods in the country;  This is to cover all imported goods including machinery & equipment by official Aid funded projects;  Currently the National Treasury is working on revision of this provision not to include Aid funded projects.

Double tax relief  Spain Corporate Income Tax rules provides for relief of double taxation for income from foreign subsidiaries already taxed;  The Spanish domestic law grants unilateral tax credit to resident taxpayers for direct taxes incurred similar to Spanish income taxes; and  For various incomes e.g. dividends, double taxation relief is provided for using the exemption method.  To ensure receive the relief, ensure withholding certificates are maintained

KRA Audits  The KRA undertakes audits in practice every 3 years on companies operations;  Taxpayers arranged in 3 groups –Large, medium & small.  Different sections undertake different audits; 1.Domestic Tax Department (“DTD”); covering income tax & VAT; 2. Customs Services; undertaking customs & post clearance audits; 3. Transfer Pricing; and 4. International Tax.

Cost of non-compliance Corporation Tax Late payment of tax20% on tax due and simple 2% / month Underpayment of installment tax20% of difference between amount of tax payable and tax actually paid multiplied by 100% PAYE Non-deduction of PAYEPenalty 25% or 10,000, whichever is higher & simple interest of 2%/month WHT Non-deduction of WHT10% of tax due & simple interest of 2%/month VAT VAT Outstanding2% monthly compounded interest

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