Financial Reporting for Saccos Tax Planning

& Management

Financial Reporting for Saccos Tax Planning

& Management

Julius MwatuCFO – Indigo Telecom,

Member – Taxation Workgroup

Our Menu Today

TAX MANAGEMENT

Tax Planning

Tax Crimes

Tax Risks – Auditors

Rights & Obligations

TAX MANAGEMENT

Tax Planning

Tax Crimes

Tax Risks – Auditors

Rights & Obligations

TAX COMPLIANCE

Business tax

Withholding Tax

Personal Tax

VAT

EAC & Saccos

TAX COMPLIANCE

Business tax

Withholding Tax

Personal Tax

VAT

EAC & Saccos

Taxation in KenyaTax

Direct Taxes Indirect Taxes

Income Taxes

Personal Taxation

VAT

Customs & Excise Duties

Withholding Tax

Business Taxation

How does this structure How does this structure affect you?affect you?

How does this structure How does this structure affect you?affect you?

Do you understand the tax structure?

Tax…

Tax…

It’s a BIG risk!

Personal TaxationPersonal Taxation

Are Management

committee members

employees or consultants?

What is taxable?

All income of a person which accrued in or was derived from Kenya

Applies to both resident or non-resident persons

It could be cash or/and non-cash

The tax year for individuals runs from 1 January to 31 December

Withholding Tax

Withholding Tax

Withholding tax

Withholding tax is deductible upon payment of a taxable amount.

Tax point …“Payment” is deemed to include the date of accrual/ crediting of the amount payable.

Whose responsibility?

Dividends

Dividends could be cash, stock, redeemable preference shares, debentures, or payments during winding up

Classified as exempt, qualifying or non-qualifying

Qualifying – WHT is final, non-qualifying – WHT not final

Rates – 5% (Residents); 10% (Non-residents)

Exempt dividends – Paid to exempt persons listed on 1st Schedule or those received by a resident co. controlling >12.5% - S7(2)

Non-qualifying dividends – Paid by a designated co-op society (Taxed under section 19A) - S2

Qualifying dividends – All the others

Exemptions

Withholding tax is not deductible on payments to exempt persons who are in possession of a tax exemption certificate

Examples of exempt persons - POSB – Interest on savings accounts - Local Authority- Registered pension/provident schemes- EA Dev Bank- NSSF

Interest

Classified as:- Exempt - 1st Schedule- Qualifying – Interest received by individuals from

bank or fin inst., housing bonds [max: 300,000/-, CBK) or

- Non-qualifying - all the rest

Qualifying – WHT is final, non-qualifying – WHT not final

Rates – 15% (Bank interest and other sources); 25% (on bearer instruments)

WHT Rates

Nature of payment Resident Non

Resident

Management or professional fees:- consultancy, managerial, technical, agency

fees

5% 20%

Royalties- payment for use of or right to use a copyright patent,

trademark, design, formula……

5% 20%

Contractual fees - building, civil and engineering works

3% 20%

Lease rentals - equipment 0% 15%Lease rentals – Immovable property 0% 30%Pension & provident fund withdrawals 10-

30%5%

Double Tax Agreements

Nature of payment UK Germany &

Canada

Denmark Norway Sweden Zambia

India EAC

% % % % %

Management or professional fees

12 ½ 15 20 17 ½ 20

Royalties 15 15 20 20 20

Consultancy fees to individuals

12 ½ 15 20 17 ½ 15

Penalties

10% penalty (subject to a maximum of KShs 1 million) for failure to withhold or remit tax to KRA

Interest charged at 2% per month or part thereof, on the principal WHT

Employees or consultants

?

Business Tax

Business Tax

Gains or profits from business

“Business” is defined to include any - trade, - profession or vocation - manufacture, - adventure and - concern in the nature of trade

but does not include employment.

Pertinent issues

Turnover tax regime

Taxation of partnerships

Taxation of Individuals

Specified sources of income

Business income Employment income Investment income Farming income Rental income Any other

Taxation of Saccos

Interest income from members – Exempt Other non-mutual incomes – 30% of 50%

of income

Value Added TaxValue Added Tax

VAT is a general consumption tax assessed on the value added to goods and services.

The Kenya VAT Act was enacted in 1989,and commenced on 1 January 1990

Replaced Sales Tax It is a general tax that applies, in principle, to

all commercial activities involving the production and distribution of goods and the provision of services.

It is a consumption tax - Its borne ultimately by the final consumer

Value Added Tax (VAT)?

VAT Registration

Registration is now online – KRA online A taxpayer should register for VAT if

His business has supplied taxable goods or taxable services or expects to supply taxable goods or taxable services or both, the value of which is KShs. 5 Million or more in a period of 12 months (taxable person)

To register within 30 days

Deregistration – if turnover falls below KShs. 5 Million

Tax point for VAT

Once registered for VAT, a company should charge VAT at every point of sale

The tax point is the earlier of: date of supply; date of invoice/certificate; date of payment

VAT RatesVAT Rates

Status VAT rate

Examples

Exempt No VAT Journals and periodicalsUnprocessed agricultural produce

Zero-rated

0% Export of goods and services Newspapers

Standard rated

16% Advertising, printing services

VAT PenaltiesVAT Penalties

Failure to file return – Kshs. 10,000

Late payment of VAT shown on a VAT return – the higher of KShs 10,000 or 5% of the tax due

Additional penalties for late payment – 2% per month or part thereof

Failure to comply with ETR regulation – Kshs. 500,000 or 3 years’ imprisonment

General penalty - Kshs. 500,000 or 3 years’ imprisonment

Tax Planning & StrategyTax Planning & Strategy

Do you have a tax strategy…?

Strategy

Staffing

Coverage

AccountingCommunication

Processes

Planning

TaxManagement

Tax Strategy…

Tax Planning versus tax crimes

Tax Planning Paying the right amount

of tax at the right time in the right way.

Tax avoidance (planning) is the legal utilisation of the tax regime to one's own advantage, by means that are within the law.

Why? To reduce the tax burden; To defer tax payment; To avoid penalties; To manage tax risks;

• Tax Crimes• Tax evasion (tax crime) is

the general term for efforts to reduce taxes or pay no taxes by illegal means.

• Tax crimes are therefore acts or omissions that are in violation of tax laws and regulations.

• Its dependent upon the amount of admissible evidence against the taxpayer, not the amount involved.

How thin is the thin line…?

1

School fees Medical benefits Loans to employees Pensions/Provident Funds Mortgage Home Ownership Savings Scheme Benefits in kind Insurance relief

Personal Taxation

1

Staff training and development Staff party expenses Study leave Home leave passages Telephone benefit

Personal Taxation

Tax CrimesTax Crimes

Why do we commit tax crimes

Why do we commit tax crimes?

Lack of effective tax planning measures

Inadequate knowledge of taxation

Unrealistic tax regimes (perceived?)

Inefficient tax authorities

Self – discipline

Payback (perceived?)

When do you become a tax criminal?

Failure to file tax returns Filing false tax returns Conspiracy to impede/defeat the

collection of tax (Tax planning??) Keeping two sets of books

Rights & ObligationsRights & Obligations

The Balancing Act ... Your rights & Obligations

Obligations Rights

Taxpayers Charter

Balanced?? Yes/No The right (s) has

nothing right Perceptions

‘Substance over form

’

Tax Risks…Tax Risks…

Strategy

Staffing

Coverage

AccountingCommunication

Processes

Planning

TaxManagement

Tax Risk Management…

THE CEO…where the buck stops…

Introduction

The Auditors Risk…

Auditors’ exposure on “other taxes” The numerous forms?

VAT, PAYE, WHT, Customs, Business tax Auditors/ tax advisor seem to concentrate on business tax

only Are we doing tax health – checks, and, can we use the

findings to adjust accounts under audit?

The dual role of business? Saccos are both tax payers & tax collectors Tax penalties accrue in both

Is tax compliance a contingency or is it a riskIs tax compliance a contingency or is it a riskwe can arrest?we can arrest?

Is tax compliance a contingency or is it a riskIs tax compliance a contingency or is it a riskwe can arrest?we can arrest?

Tax on Investments…Tax on Investments…

Invest wisely…

Land

stamp duty - Collected by KRA

Rates - Leasehold

Buildings

Transfer - commercial or non-commercial

Shares & Unit trusts

Buildings cont...Tax Incentives

Use of Pension as collateral

You can assign up to 60% of the accrued benefits as security for mortgages

Investment Deduction

building used for manufacture (100%)

hotel certified as an industrial building (100%)

building outside Nairobi, Mombasa or Kisumu valued at more than KShs 200M (150%) Can you claim on construction of

rental property?

Investment deduction VAT VAT 5 claim

Tax on Buildings

East Africa & the EAC…East Africa & the EAC…

CUSTOMS UNION

COMMON MARKET

MONETARYUNION

POLITICALFEDERATION

2005 – 2010 July, 2010 2012 Ultimate

THE EAC JOURNEY...

EAC Customs Union Vs Common Market

Before EAC Jan 2005 to Dec 2009-Customs Union

Jan 2010- Full Customs Union

July 2010 – Common Market

Import Duty

35% to 25% 10% to 2% 0% 0%

Excise Duty

35% 35% 35% 0%

VAT 17% 17% - 18% 18% 0%

W/H Tax 18% 6% 0%

Work Permits fees

Payable Payable Payable Not payable

Warehouse Licence

Payable Payable Payable Not Payable

Rules of Origin

Not applicable

Applicable Applicable Applicable

Pertinent IssuesPertinent Issues

Is it a Change we can believe in?

Need to position ourselves!

SWOT Analysis! SWOT Analysis! SWOT Analysis!

Lets embrace the Common Market

Other barriers Our culture

Are we seeing the same “Animal”?

Do we understand the benefits the same way?

We need to anticipate challenges & be proactive?

Implementation National sovereignty Non-tariff barriers

Tax is a bitter pill

Subtle shift towards indirect taxes

Harmonisation likely to tilt the compass

Are we looking at more direct tax measures in future?

How does EAC affect our tax policy?

Lets not overload the system

Free movement of “Everything”?

Any anticipated reciprocation?

We know where we are!…

Let us exercise our rights for

change!

Vote wisely for your

Chairman

Vote wisely for your ICPAK

Representation

Accounting Profession is

broad…

TAXATION is BIG & Deep!

Presenter’s contact details:

Julius Mwatu – MBA, BSc., CPA(K), CPS(K), CFA(EA)

Chief Finance Officer – Indigo Telecom

Email: julius@indigo.co.ke

Telephone: 3876805-8 / 0728-888 555

Let us exercise our rights for

change!

KwaheriKwaheri