Newsletter MBAYA AND ASSOCIATES August 2017 Issue 026 Volume 3 Issue 013 Volume 2 Introduction Welcome to the eighth edition of our newsletter. It is our hope that our newsletters keep you informed and updated on recent news related to tax, the business industry and general information pertaining to your interests. At the end of the newsletter you will find contact details for the senior members of our team who can help answer any questions you may have about the issues highlighted in this newsletter or any other questions. We are interested in your feedback on the items covered and what topics In this issue From the Tax Desk Invalidation of KRA PIN no Migrated to itax» 1 Guidelines of Amnesty in Respect of Foreign Assets & Income» 1 Taxation of Service Gratuity» 3 Tax Due Dates» 5 you would like covered in the future, please contact using tax@mbaya.co.ke The taxpayers who are willing to repatriate voluntarily their foreign held investments to Kenya will enjoy a one-off amnesty as guided by Sec 35Bof the Tax Procedure Act, 2015. Contacts Head Office 3rd Floor, Western Heights Karuna Road, Westlands P. O. Box 45390 00100 Nairobi, Kenya Tel. +254(20)4443868 254 20 4448938 254 20 4446466 Fax: 254 20 4449819 Mike Mbaya Managing Partner Email: mike@mbaya.co.ke Muhungi Kanyoro Partner Email: mkanyoro@mbaya.co.ke Andrew Bulemi Partner Email: abulemi@mbaya.co.ke Leah Nganga Partner Email: lwambui@mbaya.co.ke Frank Ondeko Outsourcing Dept. Manager Email: fondeko@mbaya.co.ke John Ogutu Tax Manager Email: jogutu@mbaya.co.ke DISCLAIMER: This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining speci fic professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Mbaya & Associates, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
From the TaxDesk Invalidation of KRA PIN not migrated to itax The Kenya Revenue Authority through a public notice released on 1 st August 2017 cautioned the taxpayers who haven t migrated their Personal Identification Numbers (PINs) to itax platform, have a risk of having their PINs deactivated. The following salient issues were highlighted; i. Any PIN number that hasn t been migrated to itax platform will be deactivated. ii. Taxpayers whose PIN are on itax but they have not filed their returns in the last three months, they would be considered as not trading, hence their PINs will be rendered inactive. iii. The taxpayers, who fall under the above mentioned categories, have until 31 st August 2017 to comply. The public notice was based on to the Tax Procedure Act, 2015 (TPA 2015) which made it mandatory for all taxpayers to use the itax platform in PIN registration, filing of tax returns, payments and other tax related services. KRA insist that this latest move will not only ensure tax compliance as stated in the Tax Procedure Act 2015 but also enhances efficiency in service delivery. In the unfortunate event where a PIN has been deactivated, taxpayers will not be able to re- apply for new PINs since the supporting documents to be used when applying for a new PIN had already been used on the old PIN (deactivated PIN). For the PIN to be reactivated a taxpayer MUST comply with the following; iv. Clearing any outstanding tax debts v. Filing the tax returns It is also evident to note that all KRA transactions are done online, any deactivation PIN will not be recognized by itax as a result this will interfere with the VAT monthly returns, PAYE records and any other government related services e.g. ecitizen, NSSF and IFMIS. This is because all this other systems have been linked with itax. However, legal experts have challenged the move by the KRA on the grounds that it is a right of all citizens to have a PIN, and it cannot be taken away by fiat without following the due process. They also continue to say that KRA does not issue PINs to the citizens as a favour but as provided for in law. Despite the lawyers coming out and challenging the Taxman, they did not make it clear on which law they will be relying on. However it will be interesting to see how this will turn up when the matter is taken to the courts. Guidelines on Amnesty in Respect of Foreign Assets and Income It is recognized that there are Kenyan residents who own assets and business abroad and willing to reinvest back in Kenya. The taxpayers who are willing to voluntarily repatriate their foreign held investments to Kenya will enjoy a one-off amnesty as guided by Sec 35Bof the Tax Procedure Act, 2015. 1
In our seventh edition we mentioned that we will share the guidelines on Amnesty with our readers once they have been released by the taxman. KRA has however released guidelines on the amnesty under Sec 37B of the Tax Procedure Act, 2015 (TPA). TPA 2015 is meant to provide a one-off opportunity to declare such assets and the income earned to encourage voluntary repatriation of foreign held assets to Kenya. These guidelines provide guidance on the declaration of income submission of the tax returns and accounts provided under Sec 37B of the TPA2015; the guidelines include; 1. A person who makes an application for the amnesty under the provisions of Section 37B of the Tax procedure Act, 2015 shall complete and make full disclosure using a return in prescribed format on or before 30 th June, 2018. The return may be amended, provided such amendment is made on or before 30 th June 2018. 2. Where assets are held under trust, application for amnesty may be made by the Trustees or Settlor of the beneficiary. 3. Married couples, filing joint or separate returns, may file a joint declaration. 4. For purposes of declaration, assets held by an income earned by a minor can be declared by the parent or legal guardian. 5. The value of the assets shall be the cost or the best estimate of the market value as assessed by the applicant. 6. If a person was a resident in the year in which he earned taxable income outside Kenya, he may file the declaration, regardless of his residential status at the time. 7. If a person was non-resident in the year in which he earned taxable income outside Kenya and such income would have been taxable in Kenya under Kenyan tax laws, then such income would qualify for declaration. 8. A person who applies for amnesty shall not be required to provide any further details or supporting documents other than those set out in the prescribed return format. 9. The amnesty shall not extend to any person that has already been assessed or was under audit or investigation in respect to assets, liabilities and income declaration that qualify for the amnesty on the date the Finance Act, 2016 was assented to. 10. Persons applying for the amnesty shall transfer back to Kenya, all funds voluntarily declared under the amnesty on their maturity and in any case not later than 30 th June 2018. Where the funds have not been transferred by this date, there shall be a 5 year extension period up to 30 th June 2023, for remittance but a penalty of 10% shall be levied on that remittance. 11. All applications, declarations and filing of returns shall be made on itax and an acknowledgment shall be issued thereafter. A certificate shall be generated through the system where all the amnesty requirements are met. 12. The Commissioner undertakes to provide every necessary support in the spirit of trust through facilitation to all taxpayers who would wish to take advantage of this amnesty. 2
Taxation of Service Gratuity According to the gratuity law and practice in Kenya Gratuity can be defined as a lump sum amount that an employer pays the employee upon successful completion of an agreed contract term. Gratuity is usually paid under the following circumstances: i. When the employee retires, ii. Resignation iii. Death of an employee iv. Or in the event of disablement could be because of an accident or illness. The gratuity payable depends on the terms of contact of service. The prevalent practice is that the employer pays the employee a month s basic salary for every year of service. However the employer and the employee can agree on alternative amounts. Tax Computation Taxation of service gratuity follows the guidelines for the taxation of employment income which provides a general rule, that all types of remuneration and benefits received by an employee for services rendered constitute taxable income. All employment income is assessable under accrual basis; that is, over the period it has been earned and become due for payment.the time the income is received is therefore immaterial. However section 5(2) (a) of the income tax Act Cap 470, states that where the year of accrual is earlier than 4 years prior to the year of receipt, the income is to be treated as that of the year of income which expired 5 years prior to the year in which the income is received or prior to the year of income in which employment ceased. Therefore the gratuity amount is to be spread backwards up to 5years and taxed together with income earned in the relevant years. Example Mr. Rexon Wanyama left employment in September 2016 after 35 years of service and was paid severance pay/service gratuity of KES 700,000; three months notice pay KES 90, 000 and KES 25,000 for his 20 leave days not taken for the year 2015. For the purposes of calculation of tax payable, the lump sum amount is to be spread backwards and taxed together with income earned in the relevant years but notice pay is assessable in the period immediately after date of leaving employment and pay in lieu of leave should be taxed in the year to which it relates. The procedure on how tax should be calculated is outlined below:- His taxable pay is calculated and spread backwards as follows; i. Gratuity benefit for the first 4 years = KES 700,000/35 Years i.e. KES 20,000 ii. Gratuity pay is then spread backwards as follows; 3
Breakdown of Lump sum payment Year Taxable Amount (KES) 2016 Notice pay 90,000 2015 Service gratuity 20,000 Leave pay 25,000 2014 Service gratuity 20,000 2013 20,000 2012 20,000 2011 20,000 plus KES 600,000 for 2010 & prior years. * Calculation of Tax on Lump Sum i. Take total taxable pay for the year as per the Tax Deduction Card (P9A). ii. Add Lump Sum gratuity pay amount for that year iii. Calculate tax chargeable on the revised total taxable income (i) + (ii). Use annual individual rates of tax (graduated scale). iv. Deduct personal relief for the year v. Deduct total PAYE deducted and already paid (per P9A) vi. The balance is tax payable on the Lump Sum. Note: This method of calculating the tax should be followed for all the years involved so as to arrive at the total tax due and payable on the terminal dues. Further Information Gratuity is not a minimum requirement for employment in Kenya buy has developed as a good practice in employment and employees have come to expect it from their employers. It is important to note that while gratuity is optional in the Kenyan jurisdiction, payment of gratuity presents an opportunity for the benefit of both the employer and the employee. It also comes with its challenges hence the need for financial, taxation and legal consultation where it is called for. Not paying gratuity of service when it s due is a breach of contract in a court of law. That is why gratuity is not payable where an employee is given a summary dismissal as this is a failure on the employee to hold their part of the bargain as per the contract. In the event of death of an employee, gratuity is still to be paid to their personal representative. The terms of the contract must always stipulate the period for which the employee should have served in order to be entitled for gratuity for clarity in any case, that is death, resignation or ill health. 4
Tax Due Dates Withholding Tax 20th Day of the following month Pay as You Earn 9th Day of the following month VAT 20th Day of the following month Balance of Tax on Self-Assessment 4th Month after year end Monthly Rental Income 20 th Day of the following month Instalment Tax 1st Instalment 20th day of the 4th month after year end 2nd Instalment 20th day of the 6th month after year end 3rd Instalment 20th day of the 9th month after year end 4th Instalment 20th day of the 12th month after year end Kindly note that all the returns must be filed on I tax while the payments e-slips must be generated from the I-Tax platform. DISCLAIMER: This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Mbaya & Associates, its members, employees and agents do not accept or assu me any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. 5