Tax principles workshop : The Building blocks of a sound tax system

Transcription

1 Tax principles workshop : The Building blocks of a sound tax system 27 January 2017 CPA Starlings Muchiri Partner East African Tax Consulting Mobile: starlings@taxeac.com

2 INCOME TAX ACT

3 Scope of presentation 1. Basic principles of Income Tax; 2. Compliance requirements under the Income Tax Act; 3. Income Tax Planning; 4. Questions and Answers;

4 Income chargeable to tax What is Income Tax? Section 3 of ITA Tax charged on all income of a person, whether resident or non resident, which has accrued in or is derived in Kenya; Tax is charged for each year of income;

5 Income chargeable to tax Business; Employment or service rendered; Rent; Dividends and interest; Capital gains from property; Net gains from sale of interest in petroleum and mineral interest; A pension, charge or annuity; and Deemed income under the ITA.

6 Computing taxable business income KShs Net profit per accounts/ ledger for a source Add: Non-allowable expenses for the source Expenses relating to exempt income Less: Capital allowances Other deductible expenses for the source Exempt income Adjusted profit/(loss) for tax xx xx xx (xx) (xx) (xx) xx ===

7 Deduct allowable expenses- Expenditure wholly and exclusively incurred in the production of income for that year of income; Bad debts written off; Capital allowances; Pre-commencement expenses; Legal expenses, Marketing, Repairs and maintenance; Sports sponsorship Interest expenses; among others

8 Add back disallowed expenses- Expenditure not wholly and exclusively incurred in the production of income; Capital costs and losses; Taxes - income tax, compensating tax etc; Personal expenses, other than those incurred specifically in the course of business; Pension contributions to unregistered pension schemes; Losses recoverable from insurance; Losses from business not run with a profit motive.

9 Rates of corporation tax Entity Rates % Resident company 30 Non-resident company Newly listed Company - 20% of issued capital listed (lower rate for 3 years) - 30% of issued capital listed (lower rate for 5 years) - 40% of issued capital listed (lower rate for 5 years) 37½

10 Rates of corporation tax Entity Rates % Export Processing Zones Special Economic Zones First 10 years Next 10 years First 10 years Next 10 years 0% 25% 10% 15% Developers of more than 400 residential units 15%

11 Tax payment dates- Instalment tax for commercial and manufacturing concerns - By the 20th day of the 4 th,6 th,9 th and 12 th months in a YOI; Instalment tax for agricultural companies: 75% by 20 th day of the 9 th month, 25% in the 12 th month in the YOI; Balance of tax - By the last day of the 4 th after the end of the YOI; month Motor vehicle advance tax - on or before 20th day of the first month of the year of income.

12 Filing of tax return Self assessment return (SAR) is due by the 6 th month after end of YOI; SAR should be accompanied by audited financial accounts for companies (not a requirement for individuals); From 1 June 2014, return should be filed on itax. Note: Tax estimated by Current Year or the Prior Year basis. Penalty if current year is used and underestimates tax payable by 10% or more.

13 Basis for charging PAYE - Employment income chargeable under S. 3 of ITA for residents and non-residents where income is accrued in or derived from Kenya; Detailed taxing provisions for employment income under Section 5 of the ITA; Income taxable in the year in respect of which it is received or accrued; Tax year for individuals runs from 1 January to 31 December;

14 Who is an employer? - Employer includes any resident person responsible for payment of, or on account of, emoluments to an employee; Employer also includes an agent, manager or other representative so responsible in Kenya on behalf of a nonresident employer.

15 Employed or self employed? - Contract of Service or Contract for Services; The key is Substance over form - the MICE test for independence: a) Mutual obligations b) Integration of operations c) Control d) Equipment

16 Tax residency for individuals - Taxation of employment income is both Residence based and source based; For Kenyan tax residents- Worldwide employment income is taxed in Kenya; For non-residents income is taxed if sourced from Kenya: Payments to a non-resident by a resident employer; Payments to a non-resident by a PE of an employer who is not resident in Kenya;

17 Taxable types of compensation- Employment compensation can take either of these forms: Cash emoluments; or Non-cash benefits. Taxable cash benefits: Wages, salaries, allowances, leave, termination, entertainment, travelling, subsistence, commission, bonus. Per diems - KShs2,000 is deemed to be reimbursement

18 Taxable benefits- Non-cash benefits: The value of all benefits, advantages or facilities of whatsoever nature are taxable on employee; Non-cash benefits that in aggregate do not exceed KShs 36,000 per annum are not taxable; The Commissioner s prescribed rates where cost/market value are unascertainable.

19 Taxable Non-cash benefits- Free housing : Director 15% of total income (or market rate); Whole time service director 15% employment income (or market rate) Car benefit, higher of- 2% original cost; Commissioner prescribed crates; Telephone-30% of bills;

20 Taxable Non-cash benefits- Furniture (1% of cost); Water (KShs 500), electricity (KShs 1500); Agricultural employees- accommodation (10%), water (KShs 200pm), electricity (KShs 900pm); Interest free loans and advances; Club subscriptions;

21 Tax free employment benefits- Home travel expenses provided by an employer to expatriates - leave passages; Employer contributions to registered pension and provident funds or schemes - KShs20,000 limit; Educational fees paid for an employee s dependants taxed on employer; Staff meals up to KShs 48,000 per annum;

22 Tax free employment benefits- Medical cover to employee and beneficiaries (spouse, 4 children aged 18 yrs or less). Subject to a KShs 1M limit for directors holding more than 5% of a company s shares; Non-cash benefits whose cumulative value does not exceed KShs3,000 per month; Mortgage interest deduction Kshs 300,000 pa Deposits into a HOSP- KShs 4,000 pm Insurance relief- Life insurance, Education, Health Insurance 15% (maximum KShs 60,000)

23 PAYE operating mechanism Employer computes and deducts tax from Employee pay; Employer records pay and tax particulars on employee s tax deduction card (P9); Employer remits tax to KRA by 9 th month; of next Nil returns filed if no tax was payable for the month

24 New PAYE Bands wef 1/1/ Old Bands (On KShs) New Bands (On KShs) Rate First 121,968 First 134,164 10% Next 114,912 Next 126,403 15% Next 114,912 Next 126,403 20% Next 114,912 Next 126,403 25% Over 466,704 Over 513,373 30% Relief KShs 13,944pa Relief KShs 15,360pa

25 Cost of No-compliance- Issue Penalty Failing to register for taxes KES 100,000 p.m. (Max KES 1 million) Failure to keep documents Higher of KES 100,000 or 10% of tax payable. Late submission PAYE return Higher of 25% of the tax due or KES 10,000 Late submission of tax return (individuals The higher of 5% of tax or KES and corporate) 20,000 Late submission ToT return KES 5,000 Failure to comply with electronic tax systems Tax Avoidance Tax refund fraud KES 100,000 x2 amount of tax X2 amount of the claim

26 Penalties Cont d- Issue Tax Shortfall Deliberate Other case Second time Subsequent repeats Failure to appear before commissioner Penalty 75% of tax shortfall 20% of tax shortfall 10% increase 25% increase Kshs 10,000 individual and KShs 100,000 corporate

27 Income Tax Planning- Active tax forecasting, planning and choosing the tax basis; Take all available deductions - Pensions, Mortgage interest deduction, Insurance relief; Non-cash payments are cheaper; Lower tax rates SEZs, EPZs, NSE listings; Apply for waiver of interest and penalties; Treaty shopping for WHT purposes;

28 CUSTOMS DUTY

29 Scope of presentation 1. Basic principles of Customs Duty; 2. Compliance requirements under the East African Community Customs Management Act, 2004; 3. Customs Planning; 4. Questions and Answers;

30 EAC Progression- Customs Union Common Market Monetary Union 2012? Political Federation 2023?

31 Duty Rates-

32 Duty Rates- Elimination of Internal Trade barriers between the partner states; Graduated Common External Barriers (Rates) generally classified as:- Finished goods 25% Semi-processed goods 10%; Raw Materials 0%; Full of goods list contained in the Common External Tariff (CET). Goods are described using the Harmonized Commodity Description and Coding System, aka Harmonised System (HS) of tariff nomenclature.

33 Rules of origin- Latest rules came into effect on 23 January 2015: Wholly produced in a partner state Rule 5; Goods produced from materials not wholly obtained from a partner state Rule 6 and first schedule; Processes not conferring origination rule 7; Requirement to obtain a certificate of origin for exports to a partner state rule 17 Certificate of origin is valid for 6 months and may be subject to verification.

34 Customs valuation- Customs value of imported goods should be determined using one of six methods of valuation (Section 122 and the 4 th Schedule to the EAC CMA, 2004) :- 1. The Transaction Value Method; 2. The Transaction Value of Identical Goods Method; 3. The Transaction Value of Similar Goods Method; 4. The Deductive Value; 5. The Computed Value; 6. The Fall-back Value;

35 Customs Duty planning- 1.Tax Remission for Exports Office - Encourages local manufacturers to export products by remitting duty on raw materials for use in manufacture for export. Remission is applicable for exports of KShs 1 million or more ; 2. Export processing Zones and Special Economic Zones - Exemptions from Customs Duty, VAT, Excise Income tax holidays. Exemptions from local regulatory frameworks. Local sales quotas 3. Manufacture under Bond Facility for manufacturers to import plant, machinery, equipment and raw materials tax free, exclusively for use in the manufacture of goods for export.

36 Customs Duty planning- 4. Customs Bonded warehouse Duty paid on goods upon entry into the local market. 5. Inward processing - Goods entered duty free for manufacture and re-export. 6. Temporary importations of machinery Machinery entered for temporary use then reexported. 7. Gold Card Scheme Preferred Import Operator scheme where there is fast tracked customs clearance for largely compliant importers;

37 EXCISE DUTY

38 Scope of presentation 1. Basic principles of Excise Duty; 2. Compliance requirements under the Excise Duty Act, 2015; 3. Excise Duty Planning; 4. Questions and Answers;

39 Basic Principles- "It has for some time past been the policy of Great Britain to discourage the consumption of spirituous liquors, on account of their supposed tendency to ruin the health and to corrupt the morals of the common people ~ Adam Smith

40 Basic Principles-

41 Basic Principles- An inland tax on sale or production for sale of specific goods or licences for specific activities ~ Wikipedia

42 Compliance requirements- 1. Charge to tax (Section 5) Tax on locally manufactured goods, Locally supplied services and imported goods for consumption in Kenya. 2. Tax point Services - Mirrors the tax point for VAT i.e. Earlier of performance, invoice, or payment. Imports Customs clearance; warehoused clearance for home use; EPZ/ SEZ removal for home use;

43 Compliance requirements- Excisable value Ad valorem Specific Imports: Customs Value + Customs Duty Manufactured goods: Exfactory (Wholesale price) Services: Price/ charge/ commission or Open Market Value The higher of the stated or actual qty; otherwise the gross weight

44 Rates 25,000 Petroleum Products 20,000 15,000 10,000 5,000 KShs/1,000 L -

45 Rates Series1

46 Rates Cigarettes KShs 2,500 per mille Cigars etc KShs 10,000 per kg Other tobacco products KShs 7,000 per kg Electronic cigarettes Cartridge KShs 2,000 per unit Electronic cigarettes KShs 3,000 per unit Plastic shopping bags Shs. KShs 120 per kg Motor cycles KShs 10,000 per unit Cosmetics and beauty products 10% Food supplements 10% Motor vehicles 20% Mobile and wireless telephone 10% Money Transfer and Financial services charges 10%

47 Safeguarding revenue- Licensing Powers Excise Control Excise Stamps Anti- Avoidance provisions Sanctions under Excise Duty Act and Tax Procedure Act

48 Excise duty planning- 1. Start with compliance Returns and payments by 20 th of the succeeding month, proper records, adhere to stamps, metering and measuring regulations; 2. Relief Set off Excise paid on raw materials against Excise payable on finished goods; 3. Refunds apply for the following goods: Damaged or stolen during transportation Destroyed while under Excise control Returned by the buyer Spirits used in the manufacture of un-excisable goods Bad debts

49 Presented By- Starlings Muchiri - CPA(K), Advocate, Director, East African Tax Consulting Partner, Muthomi & Karanja Advocates Address: Massionette A6, Branton Court Ndemi Lane (Off Ngong Road) P.O. Box GPO Nairobi, Kenya Mobile: starlings@taxeac.com