business training of kcic clients taxation in kenya
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Business Training of KCIC Clients Taxation in Kenya. January 2014. Table of Content. Page. Overview. Section. Introduction. Introductions……. Your Expectations. Lets hear them…. Business Registration. 1. Setting up in Kenya. - PowerPoint PPT PresentationTRANSCRIPT
January 2014
Business Training of KCIC Clients
Taxation in Kenya
Business Training of KCIC Clients2
Table of Content
28 January 2014
Sections:
1 Business registration 6
2 Pay As You Earn (PAYE) 10
3 Value Added Tax (VAT) 15
4 Corporate Tax 20
5 Withholding Tax 29
6 Excise duty 34
PageSection Overview
Business Training of KCIC Clients3
Introduction
28 January 2014
Business Training of KCIC Clients4
Introductions…….
28 January 2014
Business Training of KCIC Clients5
Your Expectations
Lets hear them…
28 January 2014
Business Training of KCIC Clients6
Business Registration
28 January 2014
1
7
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 ComplianceA subsidiary is a locally incorporated company registered under the Kenyan Companies Act and received a Certificate of Incorporation.
8
Illustrative incorporation process map
9
Differences between a subsidiary and a branch
Business Training of KCIC Clients10
Pay as You Earn
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2
Business Training of KCIC Clients11
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.
13
Deadlines
Obligation Deadline
Remit monthly PAYE and FBT 9th of the following month or last weekday before if 9th is on weekend or public holiday. NB- directors!
File annual self assessment returns (SARs)
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.
Payment of monthly NHIF dues
1st of the next month (by concession, can be paid by the 9th).
Payment of monthly NSSF dues 15th of the following month.
Payment of monthly National Industrial Training Levy (NITA)
10th of the following month
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Accounting for PAYE
Case study.In the month of September 2013, Mary Natasha received income from hisemployer as detailed below:
o Basic salary- KES 120,000
o House allowance- KES 30,000
o Overtime- KES 5,000
Calculate his taxable income
Mary Natasha
Taxable income
September 2013
Basic salary 120,000
Add
House allowance 30,000
Overtime 5,000
Taxable income 155,000
Business Training of KCIC Clients15
Value Added Tax
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Business Training of KCIC Clients16
Rates of Tax
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• 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.
Business Training of KCIC Clients17
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 registrationA 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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• 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.
Accounting for VAT
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Taxable sales at 16%VAT @ 16%
Sales 1,000,000
160,000 Purchases 800,000 128,000
VAT Payable to KRA
32,000
Zero rated sales
VAT
Sales (exports) 1,000,000 0
Purchases 800,000 128,000
VAT Refundable by KRA (128,000)
Accounting for VATAccounting for Corporate Tax- companies
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Corporate Tax
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Business Training of KCIC Clients21
Definition of terms
28 January 2014
“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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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 incomeDisallowance 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 cropsRevenue- Allowable Expenses = Adjusted taxable profit which is taxed at 30%.
Definition of terms
23
Details Rate p.a
Investment allowance
Within Nairobi, Kisumu and MombasaOutside Nairobi, Kisumu and Mombasa>200 MBuilding/ Machinery used for manufacture including electricity generation
100%150%
Wear and tear allowance
Class 1-Tractors, combined harvestersClass 2- computer and computer peripheralsClass 3- motor vehicles- lightClass 4- all other machinery including ships
37.5%30%25%12.5%
Software allowance Capital expenditure on the purchase or acquisition of the right to the use of a computer software
20%
Farm work • 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:
100%
Industrial building allowance
Buildings used as a factory, mill , storage 10%
Capital allowances
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Tax Deadline/Obligation Penalty Interest
Instalment tax payment- companies other than agricultural companies
Four instalments of 25% each due by 20th of the 4th, 6th , 9th and 12th month of the accounting month
20% of the amount due
2% per month
Instalment tax payment- agricultural companies
Two instalments of 75% and 25% due by 20th of the, 9th and 12th month respectively of the accounting month
20% of the amount due
2% per month
Balance of tax payment
4 months after accounting period
20% of the amount due
2% per month- Should not exceed principal tax
Filing of self assessment return
6 months after accounting period
5% of the normal tax min. KES 10,000
Deadlines, penalties & interest
25
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.
Accounting for Corporate Tax- companies
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Mango company LtdProfit and loss account
Year ended 31 December 2012
KES
Sales 2,000,000
purchases(1,000,000
)
Gross profit1,000,00
0
Admin expenses (400,000)
Profit before tax 600,000
Mango company LtdTax computationYear ended 31 December 2012
KESProfit before tax 600,000
Add back-disallowed expenses
Donations50,00
0
Depreciation30,00
0 80,000
LessWear and tear allowance (20,000)Taxable profit 660,000
Corporate Tax (30%) 198,000
Accounting for Corporate Tax- companies
27
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.
Accounting for Corporate Tax- agricultural companies
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Accounting for Corporate Tax- agricultural companiesSKL company LtdProfit and loss accountYear ended 31 December 2012
KES
Sales 2,000,000
purchases(1,000,00
0)
Gross profit1,000,00
0Other income (fair value gain) 100,000
Admin expenses (400,000)
Profit before tax 700,000
SKL company LtdTax computationYear ended 31 December 2012
KESProfit before tax 700,000
Add back-disallowed expensesDonations 50,000Depreciation 30,000 80,000
Less
Fair value gain on biological assets
100,000
Labor Quarters 30,000(130,00
0)
Taxable profit650,00
0
Corporate Tax (30%)195,00
0
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Withholding Tax
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• 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.
What is Withholding tax?
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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
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
Section 35 of the ITA sets out the payments that are subject to withholding tax
Payments subject to WHT
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Payment Resident Non- residentManagement and professional fees (management fees, technical fees, contractual, consultancy, training fees, agency fees)
5 20
Contractual fees 3 20Dividend
• >12.5%voting power• <12.5%voting power• Qualifying divided
Exempt105
1010
Qualifying Interest: •Housing bonds •Bearer Instruments•Other
102015
N/AN/AN/A
Royalties 5 20
Rent: Immovable property Others
N/AN/A
3015
• WHT rate on dividend paid to citizens of East Africa Community Partner States-5%
• WHT rate on management/professional/training fees paid to citizens of East Africa Community Partner States-15%
WHT rates
33
Tax Invoice Withholding tax calculation
From XYZ Ltd
To ABC Ltd Gross amount 100,000
Withholding tax (5%) (5,000)
Description Amount (KES)Net amount paid to XYZ 95,000
Accounting services 100,000
VAT 16,000
Total Amount 116,000
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.
Accounting for WHT
Business Training of KCIC Clients34
Excise Duty
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• 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) Excise duties typically target a narrow range of products.
b) 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.
What is Excise Duty?
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▪ 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;
Legislation
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Category Goods description Excise duty rate
Beer Beer KES 70 per litre or 50% whichever is higher
Other alcoholic beverages
Wines KES 80 per litre or 50% whichever is higher)
Spirits KES 120 per litre or 35% whichever is higher
Tobacco and tobacco products
Cigarettes KES 1,200 per mile or 35% of RSP
Soft drinks Carbonated drinks 0.07
Water KES 3 per liter or 5% of whichever is higher
Excisable services Mobile cellular phone services
0.1
Money transfer services and fees
0.1
Rates of Excise Duty