Taxation of NGOs Presentation by: Caleb Mokaya CPA Thursday, 11 th May 2017 Upholding Public Interest
Table of contents 1. Background 2. Registration 3. Corporation Tax 4. Value Added Tax 5. Customs and Excise Duties 6. Q & A
Background
Background Charitable organizations are institutions established solely to: relieve poverty or distress of the public, or to advance religion or education A charitable organization must have exemption certificate by the Commissioner The income is expended either wholly within Kenya or in ways that benefit the residents of Kenya
BACKGROUND CONTD Charitable organizations are strictly non-profit making. They raise money through: donations of cash; securities, in-kind contributions, etc Accounting for business income?
REGISTRATION
REGISTRATION UNDER NGOs ACT All NGO s to register with the NGO Authority Be issued with a certificate of registration certificate of registration conclusive evidence of authority to operate throughout Kenya A registered NGO as a body corporate has perpetual succession capable of: Suing and/or being sued Owning Property Entering into contracts
REGISTRATION UNDER NGOs ACT- CONTD The NGO Board may refuse registration if satisfied that: the proposed activities/procedures are not in national interest; or That the applicant has given false information when registering; or On recommendation of the council that the applicant should not be registered.
Tax Exemption Certificate Exemption certificates validity period currently 5 years. Power to revoke exemption certificates rests with the Commissioner. The Finance Ministry may revoke an exemption on the basis of any just cause.
Legal provisions Legislation governing NFPs include: The NGO Act, 1990; The PBO Act, 2013; Societies Act; Companies Act, 2015 Limited by guarantee; Trustees Perpetual Succession Act; and Trustees Act NB: The PBO Act was assented into law but is yet to come into operation vide a gazette notice. Its provisions in this training are aspirational
Legal provisions Legislation governing taxation of NGOs: The Income Tax Act; The Tax Procedures Act, 2015; The Value Added Tax Act, 2013; The Miscellaneous, Fees and Levies Act, 2016; The East Africa Community Customs Management Act, 2004 (EACCMA); and The Stamp Duty Act. The NGO Act, 1990; The PBO Act, 2013
Tax management Finding ways to reduce your outgoings is not always easy, but keeping your organization as tax efficient as possible is one way you might be able to save money without having to make cutbacks elsewhere
INCOME TAX ACT
CORPORATION TAX Income Tax (Charitable Donations) Regulations came into force on 1 January 2007 and provides the interpretation below: approved project means a project approved by the Minister; cash donation includes a donation given in form of a cheque; charitable organization means a non-profit organization established in Kenya and which- (a) is of a public character; and (b) has been established for purposes of the relief of: poverty; distress of the public; or advancement of education.
ELIGIBILITY FOR THE DONATIONS The Regulations provides that donations made shall- be in cash and is non- repayable/non- refundable; not confer any direct or indirect benefit to the donor; and be irrevocable once conferred upon a charitable organization. NB: In the event that the donations are revoked, the tax arising shall become due and payable.
INCOME OF CHARITABLE TRUSTS The income NPO established solely for the relief of the poverty or advancement of religion or education is tax exempt. The NPO must be: established in Kenya; or Have regional headquarters in Kenya, the Commissioner must be satisfied that the income: is to be expended in Kenya; or the expenditure of that income will result to benefit of the residents of Kenya.
TAX BENEFITS TO THE DONOR Tax deductibility of cash donations to a charitable organization: A registered or exempt from registration under the Societies Act or the NGO Act 1990 Whose income is exempt from tax
TAX BENEFITS TO THE DONOR - CONTD The Charitable Donations Regulations require the donor to provide proof of donation to the Commissioner: The receipt issued and certified by the donee; a copy of the exemption certificate issued by the Commissioner to the charitable organization, or the Minister s approval of the project to which the donation is made; and a declaration from the donee that the donation shall be used exclusively for the objects of charity.
INCOME OF CHARITABLE TRUSTS CONTD Tax deductibility of expenditures incurred in the construction of: a public school; hospital; road; or any similar kind of social infrastructure NB: prior approval of the Cabinet Secretary is a requirement for this deduction
TAX BENEFITS TO THE DONOR - CONTD The receipt produced as proof of a donation shall have the following details- the full names and address of the donee; the Personal Identification Number (PIN) of the donee; date of donation; purpose for which the donation was made; and amount of donation.
OTHER TAX OBLIGATIONS UNDER ITA NGOs /PBOs should file their annual selfassessment return (SAR ) Failure or late SAR filing attracts a penalty of the higher of KES 20,000 or 5% of the tax payable
Capital Gains Tax-CGT Capital gains on sale of land and buildings is subject to CGT Gains on sale of listed shares is exempt from CGT However, PBO Act exempts capital gains from sale of assets/property from CGT The PBO regulations are expected to provide more guidance on this conflict
Pay As You Earn NGOs/PBOs are not exempted from PAYE NGOs/PBOs are required to: deduct, account and remit PAYE from their staff Failure to account for or late payment of PAYE attracts: a penalty of 25% or KES 10,000 whichever is higher of the PAYE due; and an interest of 1% per month on the outstanding PAYE Statutory payments and returns - NSSF, NHIF, NITA
Other PAYE considerations Medical benefits are exempt Loans to employees: FBT is paid by employer Benefits in kind not in excess of KES 36,000 p.a. Meals provided to staff in-house of KShs KES 48,000 pa Allowances versus disbursements Home leave passages School fees taxed on the employer
Withholding Tax NPOs are required to withhold and remit WHT by the 20 th on the following payments: Management or Professional fees Contractual fees Dividends Interest Commission Royalty
Withholding Tax Rents payable to non-residents and residents Any other income as provided for under the ITA Failure to withhold, or late payment of the tax deducted attracts: a penalty of 10% capped at KES 1,000,000; and Interest of 1% on the amount outstanding.
Value Added Tax Social services provided by NPOs/PBO s are exempt from VAT Goods and equipment imported by accredited NGOs/PBOs are vatable at 0% Registration with the regulatory body critical for eligibility VAT exempt revenue must as well be exempt from income tax Exemption shall not apply where services are rendered by way of business
Custom Duties
Import Duties Goods imported or purchased before clearance through customs by or on behalf of accredited NGOs/PBOs are exempt from duties NPOs/PBOs have to apply to the CS for National Treasury to enjoy the exemption Office equipment, stationery, office furniture and some motor vehicles are dutiable
Miscellaneous Provisions
Miscellaneous Provisions Stamp Duty NGOs/PBOs transfer of property is exempt from stamp duty Registration with relevant regulatory body critical for eligibility The Miscellaneous Fees and Levies Act Goods imported before clearance by or on behalf of accredited NGOs/PBOs are exempt from RDL and IDF
PUBLIC BENEFIT ORGANIZATION ACT
REGISTRATION UNDER THE PBO ACT NPOs should be registered under the PBO Act to enjoy the benefits accrued in the Act Registration under the PBO Act supersedes prior registration under any other law Certificate of registration shall be conclusive proof of existence and conferring the following: The charitable organization will be a body corporate; Capable of suing or being sued; Can own property; and Can enter into contracts
EXEMPTIONS UNDER THE PBO ACT The PBO Act provides that charitable Organizations are exempt from: income tax on income received from membership subscriptions and any donations or grants; income tax on income acquired from the active conduct of income producing activities; tax on interest and dividends on investments stamp duty; and court fees.
OTHER BENEFITS UNDER THE PBO ACT PBO Act provides for preferential treatment under VAT and customs duties for imported goods or services that are used to further an organization s public benefit purposes Incentive for donations by legal and natural persons; employment tax preferences; and special tax incentives for donations to form endowments, prudent investment policies
KRA Audits and Health Checks
KRA Audits and Health Checks What are KRA Audits? Key areas of non compliance for NFPs Forms of KRA Audits When to expect a KRA audit How to manage KRA Audits How to beef up tax compliance Tax health checks Internal tax controls
Q & A Session