Ace taxation services tax guide 2015 16

Kenya Tax Guide

2015/2016 Navigating the taxation landscape of any nation

is a daunting task. We have prepared this guide

to ease the road to tax compliance in Kenya

Ace Taxation Services Limited This guide has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice in your specific context

Corporate Taxation

At a glance Rate Note

Corporate Income Tax Resident Company 30 % Corporate Income Tax Non-Resident Company 37.5% Turnover Tax Rate 3 % (a) Capital Gains Tax Rate 5% Branch Tax Rate 37.5% Withholding Taxes Dividends 10% (b) Interest 15% (c) Royalties 20% (d) Commissions 20% (e) Management, Professional and Training Fees 20% (f) Sports and Entertainment Fees 20% (g) Telecommunication Service Fees 5% (g) Rent Real Estate (Immovable Property) 30% (g) Equipment 15% (h) Winnings from Betting and Gaming 20% (i) Sales of Property or Shares of Stock by Companies in the Oil and Mining Sector 10% (j) Natural Resource Income 20% (k) Branch Remittance Tax 0% Net Operating Losses Carry-forward 10 years Notes (a) Tax applies to taxpayers with annual gross turnover not exceeding KShs 5 million. (b) This rate applies to dividends paid to non-residents. A 5% rate applies to dividends paid to residents and citizens of other states in the East African Community. (c) This rate applies to payments to residents and non-residents. However, a 25% withholding tax rate applies to interest arising from bearer instruments. (d) This rate applies to payments to non-residents. A 5% withholding tax is imposed on royalties paid to residents.

(e) This rate applies to payments to non-residents. For insurance commissions paid to residents, a 5% withholding tax rate applies to payments to brokers and a 10% rate applies to payments to others. The following commissions are exempt from withholding tax: • Commissions paid to non-resident agents with respect to flower, fruit or vegetable auctions • Commissions paid by resident air transport operators to non-resident agents to secure tickets for international travel (f) This rate applies to management, professional and training fees paid to non-residents. However, for consultancy fees, payments to citizens of other East African Community countries are subject to a reduced withholding tax rate of 15%. For residents, management, professional and training fees are subject to a withholding tax rate of 5%. The resident withholding tax rate for contractual fee payments is 3%. (g) This withholding tax applies only to payments to non-residents. (h) This rate applies to rent paid to non-residents under leases of machinery and equipment. Rent paid to residents under leases of machinery and equipment is exempt from withholding tax. (i) This rate applies to payments to residents and non-residents. (j) This rate applies to payments made to residents. Effective from 1 January 2015, the tax is imposed on the net gain. Payments to non-residents were removed from the scope of the withholding tax, effective from 1 January 2014. However, the licensee or contractor is required to account for tax at 20% of the net gain realised. (k) This rate applies to payments to non-residents. A 5% withholding tax is imposed on natural resource royalties paid to residents. (l) See Section C. Taxes on corporate income and gains Corporate income tax. Kenya income tax is payable by companies and by unincorporated organizations and associations (excluding partnerships). Taxable trading income consists of income arising or deemed to arise in Kenya.

Rates of corporate tax. The corporate tax rate is 30% for resident companies and 37.5% for non-resident companies and branches of non-resident companies. The corporate tax rate for companies newly listed on a securities exchange approved under the Capital Markets Act is reduced to 20% for a five-year period beginning with the tax year following the year of the listing if the company’s listed capital is at least 40% of its paid-up share capital. Residential rental income tax at a rate of 10% of the Gross rent is the final tax for landlords earning a rental income of Kshs 10 million and below. Optional and Conditions apply.

Turnover tax. Turnover tax is imposed on taxpayers with annual gross turnover not exceeding Kshs 5 million. The tax rate is 3% of annual gross turnover. The tax is a final tax. Turnover tax does not apply to rental income, management or professional or training fees, income of incorporated companies or income subject to a final withholding tax.

Tax Administration. A company’s year of assessment (tax year) coincides with its financial accounting year. A change in a financial accounting year must be approved by the Commissioner of Income Tax.

Instalment tax (payable in advance) A company must make payments, each equal to 25% of its estimated tax for the year, by the 20th day of the 4th, 6th, 9th and 12th months of its financial accounting year. The estimated tax must equal either 110% of the previous year’s tax or 100% of the tax estimated to be due for the current year.

A company must file a self-assessment return within six months after the end of its financial year. It must also file financial statements within six months after the end of its financial year. Late filing of a return is subject to a penalty of 5% of the tax balance. The minimum Penalty is Kshs10,000. The tax on the self- assessment, is reduced by the instalment taxes paid, the balance is due within four months after a company’s financial year-end. Late payments are subject to a penalty of 20% plus 2% interest per month (or part of a month) of the tax balance. Capital gains. Effective from 1 January 2015, capital gains tax applies to gains realized by companies and individuals on the transfer of property located in Kenya, except for listed shares on the Nairobi Securities Exchange. The general tax rate is 5%.

The gain equals the amount by which the transfer value exceeds the adjusted cost of the property. The adjusted cost is the sum of the cost of acquisition of the property and other costs incurred subsequently to enhance or preserve the property, provided that such costs had not been previously allowed for tax purposes.

For listed company’s they shall pay a final tax based on 0.3 % of sale value, as a final withholding tax. This is to be withheld by stock brokers.

Dividends. Dividends paid by Kenya companies to resident companies are exempt if the recipient controls at least 12.5% of the distributing company’s voting power. Taxable dividend income is subject to a final withholding tax of 10% for non-residents and 5% for residents.

Compensating tax at the regular corporate rate is levied on dividends paid out of untaxed profits.

Foreign tax relief. Relief for foreign taxes paid is granted in accordance with tax treaties with other countries. Foreign tax paid to a country that does not have a tax treaty with Kenya does not qualify as a tax-deductible expense in Kenya.

Determination of trading income General. Taxable income is accounting income adjusted for non-taxable income, such as dividends and capital gains, and for non-deductible expenses such as depreciation. Expenses are deductible if incurred wholly and exclusively in the production of income. To encourage industrial growth and attract foreign investment, certain special deductions are allowed.

Inventories. The normal accounting basis of the lower of cost or net realizable value is generally accepted for tax purposes. In certain circumstances, obsolescence provisions may be challenged.

Provisions. Provisions included in computing financial accounting income are generally not deductible for tax purposes.

Tax depreciation. Depreciation charged in the financial statements is not deductible for tax purposes. It is replaced by the following tax depreciation allowances.

Asset class (%) Method applied Heavy machinery such as tractors and combines 37.5(a) Reducing balance Vehicles such as automobiles, trucks and airplanes 25 Reducing balance All other machinery including ships 12.5 Reducing balance Specified office equipment such as computers 30 Reducing balance Other office equipment 12.5 Reducing balance Telecommunication equipment 30 Reducing balance Computer software 20 Straight- line Irrevocable right to use fiber optic cable 5 Straight- line Industrial buildings 10 (b) Straight- line Hotel buildings 10 (b) Straight- line Hostel, educational and training buildings 50 (b) Straight- line Commercial and rental residential buildings 25 (b) Straight- line Farming operations 100 Straight- line (a) Effective from 1 January 2015, petroleum pipelines are subject to an allowance at a rate of 37.5%. (b) The rate for the buildings is applied to the capital cost, which is the lower of the construction cost or the purchase price, unless purchased from the business entity that constructed the building. To qualify for the above deduction, commercial and rental residential buildings must be provided with roads, power, water sewers and other social infrastructure. The rental residential buildings must be constructed in a planned developed area approved by the Cabinet Secretary responsible for matters relating to housing.

Deduction on capital expenditure incurred under concessionaire arrangements is claimed in equal proportions over the period of the concession.

100% investment allowance is granted for capital expenditure on industrial buildings and hotels and on machinery installed on such structures. This investment deduction may be claimed at a rate of 150% if the investment is made outside the cities of Nairobi, Mombasa or Kisumu and the investment value is over Kshs 200 million.

Licensed local film producers also qualify for a 100% investment allowance with respect to the purchase of film equipment.

Capital allowances are subject to recapture on the sale of an asset to the extent the sales proceeds exceed the tax value after wear & tear. Amounts recaptured are treated as ordinary income, subject to tax at the regular corporate income tax rate.

Relief for losses. Tax deficits (losses) are allowable deductions in the year in which they arise and in the following four years of income. However, companies operating in the extractive industry may carry forward losses indefinitely.

Profits and losses arising from specified sources (rental income, income from agriculture and similar activities, and other profits from business) are computed and taxed separately. If a company has a loss in a year from one of the specified sources, the loss may be offset only against subsequent profits derived from the same specified source.

Groups of companies. The income tax law does not permit consolidated returns combining the profits and losses of affiliated companies or the transfer of losses from loss companies to profitable members of the same group of companies. Other significant taxes The following summarizes other significant taxes.

Nature of tax Rate (%) Value-added tax, on the supply of goods and services in Kenya and on Imported goods and services 0/16

Railway Development Levy; imposed on the import value of all imported goods; import value is the Cost, Insurance and Freight value 1.5 Contributions to the National Social Security Fund (NSSF); (NB: expatriates who are members of social security schemes in their Home countries and those expected to be in Kenya for not more than three years are exempt) Contributions are payable monthly by : Employer (maximum contribution of Kshs 200) Employee (maximum contribution of Kshs 200)

NB: A new NSSF Act was enacted on 24 December 2013. Under the new act, both the employer and employee are required to contribute 6% of the employee’s monthly pensionable pay subject to an upper earnings limit based on the national average earnings provided by the Kenya Bureau of Statistics. The contributions are categorized into Tier I and Tier II contributions. Tier I contributions must be remitted to the NSSF, while Tier II contributions may be remitted to a contracted-out (private) scheme. However, these contributions are not yet operational because of an Industrial Court ruling blocking the implementation of the new act.

Miscellaneous matters Foreign-exchange controls. The Central Bank of Kenya imposes certain foreign-exchange regulations. Transfer pricing. The transfer-pricing rules include measures regarding the following matters:

• Entities and transactions to which the rules apply

Records regarding transactions that must be maintained. • Methods that may be used to determine arm’s-length prices. The methods for determining arm’s-length prices are consistent with those approved by the Organisation for Economic Co-operation and Development (OECD).

Debt-to-equity rules. The deductibility of interest on loans and foreign-exchange losses is restricted for a foreign-controlled company with a debt-to-equity ratio exceeding 3:1 (except for companies operating in the extractive industry for which the ratio is 2:1). For purposes of the ratio, debt includes any form of indebtedness for which the company is incurring interest, a financial charge, a discount or a premium.

Interest-free loans provided or secured by non-residents are deemed to accrue interest at a rate equal to the average 91-day Treasury Bill rate. F. Treaty withholding tax rates Payee resident in Country

Dividends % age

Interest % age

Royalties/management and professional fees % age

Canada 15 15 15

Denmark 20 20 (a) 20

France 10 12 0 (f) Germany 15 15 (a) 15

India 15 15 20 (d)

Mauritius (g) 5 (h) 10 0 (f) Norway 15 20 (a) 20

Sweden 15 15 20 United Kingdom 15 15 (a) 15 (b)

Zambia 0 (c) 15 20 Non-treaty countries 10 15 20 (e)

(a) Interest paid by the government and the Central Bank of Kenya is tax-exempt. (b) The rate is 12.5% for management and professional fees. (c) No Kenya tax is due if the dividend is subject to tax in Zambia. (d) The rate is 17.5% for management and professional fees. (e) The withholding tax rate is 15% for consultancy fees paid to residents of other East African Community countries. (f) The rate is 10% for royalties. (g) The Mauritius treaty is expected to enter into force on 1 January 2015. (h) This rate applies if the beneficial recipient of the dividend owns at least 10% of the share capital in the Kenyan company. The rate is 10% in all other cases.

Personal Tax and Individual Residency Rules Income tax Individuals are subject to income tax on employment earnings if they meet either of the following conditions: • They are resident during the time of employment, regardless of whether their duties are performed within or outside Kenya. • For non=residents, their employer is resident or has a permanent establishment in Kenya. Who is liable. An individual is considered resident in Kenya if he or she does not have a permanent home in Kenya but is present in Kenya for 183 days or more during a fiscal year or for an average of more than 122 days in that year and in the two preceding years. If an individual has a permanent home in Kenya and spends time in Kenya, he or she qualifies as resident. It is irrelevant for tax purposes where an employment contract is signed or remuneration is paid. Income subject to tax Employment income. Employment income includes directors’ fees and almost all cash and non-cash remuneration, allowances and benefits arising from employment. Taxable benefits arising from employment include the following:

Housing. The taxable benefit from employer-provided housing equals the higher of rent paid by the employer or 15% of employment income excluding the value of housing premises. If the premises are provided under an agreement with a third party that is not at arm’s length, the benefit is valued at the higher of the fair market rental value of the premises or the rent paid by the employer. If the employer owns the premises, the benefit is taxed at the fair market rental value of the premises. Education. Education fees paid by employers to their local or expatriate employees’ relatives are taxable for income tax purposes if the employer has claimed the fees as a tax deduction. • Motor vehicles. The value of the benefit of an employer provided motor vehicle is the higher of 2% per month of the initial capital expenditure by the employer on the car or the actual cost

to the employer. If an employee is provided with a leased or hired car, the taxable benefit is the cost of lease or hire of the vehicle. For employees who have restricted use of motor vehicles, the Commissioner of Income Tax determines a lower rate of the benefit depending on the usage of the motor vehicle, if the Commissioner is satisfied based on proof provided by the employer that use of the motor vehicle is restricted. Preferential Interest Rate Employee Loans. The benefit from employer loans is taxable to the employer as fringe benefit tax for loans granted after 11 June 1998 and for loans granted before that date if the terms or conditions of the loan have been changed since 11 June 1998. The tax is imposed on the benefit at the resident corporate tax rate of 30% and is payable by the 10th day of the month following the imposition of the tax. For loans granted on or before 11 June 1998, the benefit is taxable to the employee as a low interest rate benefit. The benefit is valued at the difference between the interest rate on the employer’s loan and the rate prescribed by the Commissioner of Income Tax. Employer-provided stock options. The value of the benefit from employer-provided stock options under a scheme that is registered with the Commissioner of Income Tax as a collective investment scheme, as defined by the Capital Markets Authority Act, is the difference between the market value per share and the offer price per share on the date on which the option is granted by the employer. The benefit is deemed to accrue to the employee at the end of the vesting period. If the equity scheme is not registered, the taxable benefit is the higher of the cost to the employer or the fair market value. Specific exemptions from Taxable Employee Benefits: • The cost of medical services or medical insurance borne by the employer on behalf of full-time employees or their beneficiaries. Medical insurance should be provided through an insurance company approved by the Commissioner of Insurance in Kenya. • Employer contributions to accredited pension or provident fund schemes if the employer is subject to tax in Kenya. • Withdrawal benefits from a pension or provident fund. The limit is Kshs 60,000 for each year worked, up to a maximum of Kshs 600,000.

• The first Kshs 300,000 of annual pension income.

• Refunds of National Social Security Fund contributions plus interest. The limit is Kshs 60,000 for each year worked, up to a maximum of Kshs 600,000.

• For non-citizens recruited outside Kenya and their families, the cost of passage on joining the company, for annual leave and for departure.

• The first Kshs 2,000 paid to an employee per day as an allowance while on official duty. This amount is deemed to be a reimbursement and, consequently, not taxable.

• Non-cash benefits, up to a maximum of Kshs 36,000 per year.

• Employee Meals served in canteens and cafeterias operated by an employer or provided by a third party that is a registered taxpayer (regardless of whether the meals are in the employer’s or the third party’s premises) if the value of the meals does not exceed Kshs 48,000 per employee per year.

Persons with Disabilities

Up to Kshs 50,000 per month of costs relating to health care services and facilities for persons with disabilities are not taxable benefits.

The minimum taxable income for persons with disabilities is Kshs 150,000 per month

Self-employment and business income. All income accrued in or derived from Kenya is subject to income tax. For a resident, this includes profits from a business carried on both inside and outside Kenya.

Business income includes income derived from any trade, profession or vocation, as well as from manufacturing or related operations. A partnership is transparent for tax purposes, with the individual partners taxed on their shares of partnership profits.

Business profits and losses are determined using normal commercial methods, matching expenses with income from similar activities and using the accrual method of accounting. Initially, a business may select any accounting period, but generally must continue using the same accounting date thereafter. The Domestic Taxes Department must be notified of a change in the accounting date.

All individuals and unincorporated businesses must have a 31 December year-end. Investment income. Dividends and interest income from investments in Kenya are subject to a withholding tax in the year received. For residents, the tax rates are 5% on dividends and 15% on interest.

The principal sources of exempt investment income are the following: • Interest derived from savings accounts held with the Post Office Savings Bank

• For each individual, up to Kshs 300,000 of gross interest derived from investments in housing bonds, except for a 10% withholding tax deducted at source • Interest and dividend income accruing to a resident from investments outside Kenya • Interest that is earned on deposits of up to Kshs 3 million with a registered Home Ownership Savings Plan (HOSP)

Rental profits are aggregated with profits from other sources and taxed at the rates set forth in Rates (below).

Capital gains. Effective from 1 January 2015, Capital Gains Tax applies to gains realized by companies and individuals on the transfer of property located in Kenya, except for listed company shares on the Nairobi Securities Exchange. The general tax rate is 5%. For listed company’s they shall pay a final tax based on 0.3 % of sale value, as a final withholding tax

The gain equals the amount by which the transfer value exceeds the adjusted cost of the property. The adjusted cost equals the sum of the acquisition cost of the property and other costs incurred subsequently to enhance or preserve the property, if such costs had not been previously allowed for tax purposes.

Property transfers are subject to stamp duties at a rate of 4% on urban property and a rate of 2% on rural property.

Residential rental income tax at a rate of 10% of the Gross rent is the final tax for landlords earning a rental income of Kshs 10 million and below. This is optional and certain criteria has to be met. Deductions and reliefs. An individual not resident in Kenya for tax purposes is not entitled to any tax relief. Expatriate employees of accredited regional offices of foreign corporations who spend at least 120 days during the fiscal year working outside Kenya may deduct one-third of their total income.

Deductible expenses. Individuals may deduct the following expenses in computing taxable income: • Contributions to a registered pension/provident fund, up to Kshs 240,000 per year • Interest, up to Kshs 150,000, on borrowings to finance the purchase of owner-occupied residential property. • Contributions to home ownership savings plan, up to of Kshs 48,000 p.a. Reliefs.

Resident taxpayers are granted the following reliefs against tax payable: • Personal relief in the amount of Kshs 13,944 per year • Insurance relief (including education and health insurance) in the amount of 15% of premiums paid, up to a maximum relief of Kshs 60,000 per year Business deductions. In general, expenses and losses are not deductible unless incurred wholly and exclusively to produce taxable income.

Accounting depreciation is not deductible, but capital allowances are available. A first-year investment deduction of 100% of qualifying expenditure on the following is allowed: • Manufacturing premises • Plant • Electric power generating projects with capacity to supply the national grid or to transform and distribute electricity through the national grid • Hotel buildings • Farm works

The investment deduction is increased to a rate of 150% for an investment for manufacturing purposes that is made outside the city of Nairobi, Kisumu and Mombasa and that has an investment value of Kshs 200 million or more.

Capital Allowance on a straight-line basis for other industrial buildings and hotels, on the amount remaining after the investment deductions, at a rate of 10%, Commercial Buildings and Rental Residential Buildings constructed in a planned developed area approved by the minister responsible for housing, 25%

Hotel buildings - 10% Hostels and buildings used for educational and training purposes - 50% A first-year deduction of 100% applies to capital expenditure on farm works.

The rates for plant and machinery are 12.5%, 25%, 30% or 37.5%, according to the type, using the reducing balance method.

The qualifying cost of a non-commercial vehicle is restricted to Kshs 2 million.

The rate for software and telecommunication equipment is 20%.

The rate for the irrevocable right to use fiber optic cable is 5%.

A deduction may be claimed with respect to concessionary arrangements on a straight-line basis over the period of the concession. Other deductible capital expenditure includes expenses incurred for scientific research and development, the prevention of soil erosion by a farmer, the development of agricultural land and structural alterations to rental premises. Realized foreign-exchange losses on capital borrowings are also deductible. Deductions are allowed for employer and employee contributions to registered pension and provident funds, with certain restrictions. Following tax rates apply to employment, self-employment and business income Taxable income Tax rate Tax due Cumulative tax due Kshs % Kshs Kshs (cumulative) First 121,968 10 12,196 12,196 Next 114,912 15 17,236 29,432 Next 114,912 20 22,982 52,414 Next 114,912 25 28,728 81,142 Above 466,704 30 — — Tax is withheld from payments to non-residents at the following rates. Income category Rate (%) Management & professional fees, training fees, royalties & performance fees 20 Use of immovable property 30 Use of other property 15 Interest 15 Dividends 10 Pensions and retirement annuities 5 Telecommunication service fees 5 Disposal of interest in a person derived from immovable property 20 * Natural resource income 20 * This ordinarily refers to the sale of equity in companies operating in the extractive (mining or petroleum) industry. The amount of taxable gain is usually based on the value of immovable property held by the company. These rates normally constitute the final liability for Kenyan income tax.

Relief for losses. Tax-adjusted profits and losses from the following specified sources must be categorized separately: • Agricultural activities • Rental or other use of immovable property • Services rendered (including employment) • A wife’s employment and professional income (including self-employment, rent, dividend and interest income) • Other business activities Profits are aggregated. Losses may be carried forward to offset future profits from the same specified source without monetary limits. They may be used in the income year in which they arise and in the following four years. Losses may not be carried back. Other taxes The national government in Kenya does not levy property tax, however these are levied by County governments. These rates vary from County to County. Social Security Payroll deduction The only social security payroll deduction levied in Kenya is the National Social Security Fund (NSSF). The NSSF is a statutory savings scheme to provide for retirement. The rate of contribution is 5% of an employee’s salary, with employers and employees each required to pay up to a maximum monthly amount of Kshs 200. A New NSSF legislation (the NSSF Act 2013) was enacted on 24 December 2013 to replace the NSSF Act Cap 258. The new legislation was scheduled to take effect on 31 May 2014, but the effective date for the legislation was delayed. The employer and the employee will each be required to contribute 6% of the employee’s monthly pensionable earnings, subject to defined limits. Contributions into the scheme are divided into Tier I and Tier II categories. All Tier I contributions will be remitted to NSSF while Tier II contributions will be made to either the NSSF or a registered private pension scheme of which the employee is a valid member. A transitional arrangement will be in place in the lead-up to the full implementation of the Tier 1 contributions. Before 1 April 2015, individuals earning more than Kshs1,000 per month were required to contribute to the National Hospital Insurance Fund (NHIF). Monthly contributions depended on the level of income and ranged from Kshs 30 per month to Kshs 320. Effective from 1 April 2015, individuals are required to contribute NHIF at rates on a graduated scale with the lowest contribution being Kshs 150 and the highest contribution being Kshs 1,700.

Tax filing and payment procedures Employee withholding. For employees, tax is withheld at source under the Pay-As-You-Earn (PAYE) system. Instalment tax. Individuals must pay estimated tax in four equal instalments during the financial year. The payments are due on the 20th day of the fourth, sixth, ninth and twelfth months. Individuals with no income other than employment income that is taxed at source are not required to pay instalment tax. Individuals whose total annual tax payable does not exceed Kshs 40,000 are also exempt from paying instalment tax, but are required pay the tax balance. Final returns. Individuals subject to employment tax in Kenya are required to file a self-assessment return by 30 June following the end of the preceding calendar year. Assessment. A taxpayer may be assessed further after a self-assessment return is filed. However, for most taxpayers, the self-assessment is final. Married couples. Married women have an option to file self-assessment returns with respect to their income from all sources or to aggregate their income with the income of their husbands. Double tax relief and tax treaties Foreign taxes are deductible from taxable income as an expense. Kenyan citizens working outside Kenya are allowed a tax credit for foreign tax paid on the following types of income earned outside Kenya: • Income from employment • Income earned by artists and sportsmen Kenya has entered into double tax treaties with the following countries. Canada, Germany, Sweden, Denmark, India, United Kingdom, France, Norway, Zambia. Mauritius, In general, the treaties above provide that foreign income taxes may be offset against equivalent Kenyan taxes payable on the same income. Temporary visas and passes All visitors other than East African citizens must have visas to enter Kenya, unless they are from a country for which visa requirements have been eliminated. These countries include most of the British Commonwealth countries, Eritrea, Ethiopia, Ghana, Guyana, India, Namibia, New Zealand, Nigeria, Pakistan, San Marino, Sri Lanka, Turkey and Uruguay. Visitors from these countries are issued visitors’ passes at the point of entry.

In addition, visas are not required for holders of a re-entry pass to Kenya as well as transit passengers continuing their journey by the same or first connecting aircraft if they hold valid onward or return documentation and do not leave the airport. Visas are obtained at the point of entry into Kenya. Foreign nationals wishing to visit Kenya are advised to confirm the entry requirements before departing from their home countries. Visas are usually granted without delay. They are issued for a maximum period of three months and may be extended for an additional three months on application. A foreign national wishing to stay in Kenya for longer than six months must have an entry permit (see Section G). The types of temporary visas and passes issued by the government of Kenya are described below. Visas. The following types of visas are issued: • Transit visa, which is issued to individuals in transit whose nationalities require visas to enter Kenya. It is valid for a maximum of three days. A fee of USD20 is payable on application. • Ordinary visa, which is issued for single or multiple entries to persons whose nationalities require visas to enter Kenya for visits or residence. A fee of USD50 is payable for a single journey visa and USD100 for a multiple journey visa. • Diplomatic visa, which is issued free of charge to holders of diplomatic passports on official business. • Courtesy/Official visa, which is issued free of charge to holders of official or service passports on official visits. • East Africa Tourist visa, which is a joint tourist visa entitling holders multiple entries to and between Kenya, Rwanda and Uganda for the purpose of tourism. It is valid for 90 days. A fee of USD100 is payable on application. Passes. The following types of passes are issued: • Visitors’ pass, which is issued to foreign nationals who wish to enter Kenya for the purpose of holiday, visit or other temporary purpose as may be approved by the immigration officer. • Dependents’ pass, which is issued to family members of foreign nationals with entry permits. • Students’ pass, which is issued to foreign students who wish to study in Kenya. • Internship or research pass, which is issued to individuals seeking to enter or remain in Kenya for the purposes of internship or academic research.

• Prohibited immigrants’ pass, which is issued to foreign nationals who do not have valid entry documents or to foreign nationals who have contravened certain immigration rules. These individuals must make an application before arriving at the point of entry. • Transit pass, which is issued to individuals who enter Kenya for the purpose of traveling to a destination outside Kenya. • Re-entry pass, which is issued to dependent pass holders to allow them multiple entries into the country. • Special pass, which is issued to foreign nationals wishing to work in Kenya on a short-term assignment. A special pass is valid for three months and may be extended once. Work permits and self-employment Certain classes of entry permits allow foreign nationals to work in Kenya and are usually referred to as work permits. An entry permit that allows a foreign national to work in Kenya is obtained by an employer on behalf of a foreign national. Employers are required to justify employment of a foreign national instead of a Kenyan. If the foreign national changes employment, his or her new employer is responsible for obtaining a new work permit.

Individuals requiring entry permits may enter Kenya on visas or visitors’ passes while their applications for the permits are being processed. Foreign nationals who are over 18 years of age and stay in the country for more than 90 days must register as aliens. Different classes of entry permits are issued in Kenya including permits for the following categories of expatriates:

• Class A, which is issued to a person engaged in prospecting for minerals and mining in Kenya. • Class B, which is issued to a person who intends to engage, alone or in partnership, in the business of agriculture or animal husbandry in Kenya. • Class C, which is issued to a member of a prescribed profession who intends to practice that profession in Kenya, alone or in partnership. • Class D, which is issued to a person who is offered specific employment by a specific employer. • Class F, which is issued to a person who intends to engage, alone or in partnership, in specific manufacturing in Kenya. • Class G, which is issued to a person who intends to engage, alone or in partnership, in a specific trade, business or profession (other than a prescribed profession) • Class I, which is issued to a person who intends to engage, alone or in partnership, in approved religious and charitable activities. • Class K, which is issued to a person satisfying all of the following

conditions: — He or she is at least 21 years of age. — He or she has in his or her own right an assured annual income. — He or she will not accept paid employment of any kind if he or she is granted an entry permit of this class. • Class M, which is issued to a refugee recognized by the government of Kenya.

These permits are issued only to persons whose employment, business or presence will benefit the country. A foreign national wishing to carry out business in Kenya must obtain the necessary licenses and registrations required and must have sufficient capital or resources for investment. Residence permits Foreign nationals wishing to reside permanently in Kenya must have permanent residence permits. To obtain permanent residence, foreign nationals must satisfy the requirements contained in the Kenya Citizenship and Immigration Act. The Permanent Residence section of the Kenya Department of Immigration issues residence permits. Family and personal considerations Vaccinations. Individuals entering Kenya must have International Immunization Certificates. Family members. Family members of entry permit holders are entitled to dependents’ passes. Any dependent wishing to take up employment must obtain a separate work or entry permit. Marital property regime. Kenyan law does not provide for a community property or a similar marital property regime. Driver’s permits. Foreign nationals with international driver’s licenses or driver’s licenses issued in a British Commonwealth country may drive in Kenya for a maximum period of 90 days. Foreign nationals living in Kenya for longer than 90 days must obtain Kenyan driver’s licenses.

Holders of international driver’s licenses or licenses issued in British Commonwealth countries may obtain Kenyan driver’s licenses on application. These foreign nationals must take a driving test that includes both verbal and physical examinations.

Value Added Tax (VAT) in Kenya Since the enactment of a new VAT Act, which took effect 2 September 2013, VAT applies to the following transactions: • The supply of goods and services in Kenya by a taxable person • Taxable imported services received by a taxable person in Kenya to the extent that they relate to exempt supplies • The importation of goods from outside Kenya, regardless of the status of the importer (unless the importer is listed as zero-rated in Part B of the Second Schedule to the VAT Act) The exportation of goods and taxable services is zero-rated if, subject to the satisfaction of the Commissioner of Domestic Taxes, the supply takes place in the course of a registered person’s business. Who is liable VAT is paid by consumers of taxable goods and services. It is collected by registered taxpayers (traders) that act as the agents of the government. VAT on imported goods is collected by the Commissioner of Customs Services Department, while the Commissioner of Domestic Taxes collects local VAT and VAT on imported services. VAT registration is dependent on the attainment of a turnover threshold of Kshs 5 million with respect to all taxable supplies. Businesses that do not attain this turnover threshold are subject to turnover tax at a rate of 3% of their turnover up to a maximum turnover of Kshs 5 million. After reaching this threshold, they must register for VAT. Within 30 days after becoming a taxable person, a person should apply to the Commissioner of Domestic Taxes to be registered in the prescribed manner. Businesses whose turnover is less than the registration threshold can voluntarily apply to the commissioner for registration. Registration procedures. The registration process involves a person making an online application for a Personal Identification Number (PIN). During this process, an entity is required to state its tax obligations including VAT. Registration for all taxes is currently done online via the Kenya Revenue Authority (KRA) i-Tax portal (https://itax.kra.go.ke/KRA-Portal/). On average, tax registration can take one to five days depending on the availability of information required for registration.

Group registration. The Kenyan VAT Act allows group registration. However, in practice, group registration is allowed only under special circumstances. Non-established businesses. A “non-established business” is a business that has no fixed establishment in Kenya. A foreign business that meets the registration requirements in Kenya and does not have a fixed place of business in Kenya is required to appoint a tax representative. A permanent establishment of a foreign business must register for VAT if it makes taxable supplies of goods or services. Other non-established businesses are not required to register for VAT. Instead, the person importing goods or services from a non-resident must pay Kenyan VAT due. Tax representatives. A person who is required to apply for VAT registration but who does not have a fixed place of business in Kenya should appoint a tax representative. The registration of the tax representative shall be in the name of the non-resident person being represented. The tax representative of a non-resident person shall: • Be a person normally residing in Kenya • Have the responsibility for doing all things required of the non-resident and • With the non-resident person, be jointly and severally liable for the payment of all taxes, fines, penalties and interest imposed. Reverse charge. Reverse-charge VAT is applicable on imported services. Registered persons are only required to account for reverse-charge VAT to the extent it relates to exempt supplies. Digital economy. Taxation of electronic services is provided for in the VAT Act of 2013. “Electronic services” means any of the following services, when provided or delivered on or through a telecommunications network: • Websites, web-hosting or remote maintenance of programs and equipment • Software and the updating of software • Images, text, and information • Access to databases • Self-education packages • Music, films and games, including games of chance • Political, cultural, artistic, sporting, scientific and other broadcasts and events, including broadcast television

A supply of electronic services is made in Kenya if the place of business of the supplier from which the services are supplied is in Kenya. If the place of business of the supplier is not in Kenya, the supply of the services shall be deemed to be made in Kenya if the recipient of the supply is not a registered person and the electronic services are delivered to a person in Kenya at the time of supply. Late-registration penalties. A penalty of Kshs 200,000 or imprisonment for a period not exceeding two years (or both) is imposed in the event of late registration by traders who meet the turnover threshold. Penalties apply to a range of other VAT offenses (see Section I). Deregistration. A registered person may apply to the commissioner for deregistration under the following circumstances: • If the registered person ceases to make taxable supplies • If the registered person’s annual value of taxable supplies no longer exceeds the registration threshold The commissioner shall, by notice in writing, cancel the registration of a person in the following circumstances: • The person has applied for cancellation and the commissioner is satisfied that the person has ceased to make taxable supplies. • The person has not applied for cancellation but the commissioner is satisfied that the person has ceased to make taxable supplies and is not otherwise required to be registered. The commissioner may cancel the registration of a person who is no longer required to be registered under the following circumstances: • If the commissioner is satisfied that the person has failed to keep proper tax records • If the commissioner is satisfied that the person has failed to furnish regular and reliable returns • If the commissioner is satisfied that the person has failed to comply with obligations under other revenue laws • If there are reasonable grounds to believe that the person will not keep proper records or furnish regular and reliable returns

VAT rates The term “taxable supplies” refers to supplies of goods and services that are not included in the First Schedule to the VAT Act, which specifies exempt supplies.

The following are the VAT rates in Kenya: • Standard rate: 16% • Zero rate: 0% Supplies listed in the Second Schedule to the VAT Act are zero-rated, which means no VAT is charged on the sale, but input tax incurred in making the sale is deducted against output tax. All other goods and services are subject to VAT at the standard rate of 16%.

Examples of zero-rated supplies • Exportation of taxable goods and services • Goods and services supplied to export-processing zones • International transportation of passengers

Zero-rated supplies to specific persons • Supplies to the Commonwealth • Supplies to other governments • Supplies to diplomats • Passenger baggage

The term “exempt supplies” refers to supplies of goods and services that are not liable to tax. Persons that make exempt supplies are not entitled to input tax deduction (see below).

Examples of exempt goods • Unprocessed agricultural products • Airplanes and other aircraft Examples of exempt goods in transition • Motor fuel (regular and premium gasoline) • Aviation fuel • Gas oil • Natural gas Examples of exempt services • Financial services • Insurance • Medical services • Agricultural and horticultural services and animal husbandry • Transportation of passengers (excluding transportation for hire)

Time of supply The time when VAT becomes due is called the “time of supply” or “tax point.” In Kenya, the tax point is the earliest of the following events: • The goods or services are supplied. • A certificate is issued by an architect, Imports. The time of the supply for imported goods is either the date of importation, or the date on which the goods leave a duty suspension regime. Recovery of VAT by taxable persons A taxable person may recover input tax, which is VAT charged on goods and services supplied to it for business purposes. Input tax is claimed by deducting it from output tax, which is VAT charged on supplies made. Taxable persons must claim input tax within six months after incurring the expense. Input tax includes VAT charged on goods and services purchased in Kenya and VAT paid on imports of goods. Examples of items for which input tax is deductible (if related to a taxable business use) • Professional fees • Utility costs Non-deductible input tax. VAT may not be recovered on purchases of goods and services that are not used for business purposes (for example, goods acquired for private use by an entrepreneur). In addition, input tax may not be recovered on certain business expenses. Input tax is restricted with respect to business expenses incurred on the following items: • Passenger cars or minibuses and the repair and maintenance thereof, including spare parts, unless the passenger cars and minibuses are acquired by the registered person exclusively for the purpose of making a taxable supply in the ordinary course of a continuous and regular business of selling and dealing in or hiring of passenger cars and minibuses • Entertainment, restaurant and accommodation services unless: — The services are provided in the ordinary course of the business carried on by the person to provide the services, and the services are not supplied to an associate or employee — The services are provided while the recipient is away from home for the purposes of the business of the recipient or the recipient’s employer

Partial exemption. VAT directly related to making exempt supplies is not recoverable. A registered person who makes both exempt and taxable supplies cannot recover VAT tax in full. This situation is referred to as “partial exemption.” Under the VAT Act, if a taxable person supplies both taxable and exempt goods and services, only input tax attributable to taxable supplies may be recovered. The following are the attribution rules: • Input tax directly attributable to taxable goods purchased and sold in the same condition is deductible in full. • Input tax directly attributable to exempt outputs may not be deducted. • Attributable to both taxable and exempt supplies is partially deductible. The recoverable amount is calculated using a simple pro-rata method based on the value of taxable and exempt supplies made. If the exempt supplies are less than 10% of the total supplies, the input tax may be claimed in full. Where the exempt supplies constitute more than 90%, the registered person shall not be allowed any input tax attributable to taxable supplies. Refunds. A taxable person may claim a refund of input tax in excess of output tax if the Commissioner General is satisfied that the excess arises from making zero-rated supplies. Claims in excess of Kshs 1 million must be accompanied by an auditors’ certificate. However, in practice, the VAT Department requires an auditors’ certificate for refunds in excess of Kshs 200,000 to facilitate speedy processing. The commissioner may refund tax where the tax has been paid in error. A claim for tax paid in error must be filed within a period of one year after the date on which the tax was paid. VAT on bad debts accounted for and paid by a registered person can be claimed after a period of three years from the date of such supply or it can be claimed if the person liable to pay the tax has become legally insolvent. However, it must be claimed no later than five years after the date of the supply. If legal insolvency does not apply, evidence of the effort to recover the tax is required to support such claims. Preregistration costs. On the date a person is registered, and for the next three months, the taxable person may recover preregistration input VAT paid on taxable supplies intended for use in making taxable supplies, provided that those purchases of taxable supplies were completed no more than 24 months before the date of registration.

Recovery of VAT by non-residents Kenya does not refund VAT incurred by a foreign business, unless the foreign business has a permanent establishment and it is registered for VAT in Kenya. Invoicing VAT invoices and credit notes. A supplier of taxable goods and services must issue a tax invoice to the purchaser at the time of supply. Simplified tax invoices may be used if the sales to any one person in a day do not exceed Kshs 500. A credit note may be used to reduce the VAT charged on a supply of goods or services. Credit notes must show the same information as a tax invoice. Proof of exports. Goods and taxable services exported from Kenya are zero-rated. However, to qualify for zero rating, exports of goods must be supported by evidence that proves the goods left Kenya. Suitable evidence includes the following documents: • A sales invoice • A bill of lading, road manifest or airway bill • A certified (endorsed) export entry (Form C17) • For sugar and other excisable goods, a certificate of exportation signed by the Commissioner of Customs and Excise. A service exported out of Kenya means a service provided for use or consumption outside Kenya. However, to qualify for zero rating, exports of services must be supported by a copy of the invoice showing the sale of the services to the purchaser. Foreign-currency invoices. Foreign-currency invoices are dealt with in the same way as invoices in local currency. The tax authorities do not require a standard exchange rate to be used to convert the value of foreign invoices into Kenyan shillings (Kshs). In practice, they accept the rate used by the taxable person, if the rate used is within the prevailing market exchange rates. Electronic invoices. Registered persons must keep records, including copies of tax invoices in an electronic manner or otherwise. Invoices may be generated manually or electronically, provided it meets the prescribed conditions of a valid tax invoice.

VAT returns and payment VAT returns. VAT tax period is one month. Returns must be filed by the 20th day after the end of the tax period. Payment is due in full by the same date. A “nil” return must be filed if no VAT is payable (either because the taxable person has made no supplies or because input tax exceeds output tax in the period). If the normal filing date falls on a public holiday or on a weekend, the VAT return must be submitted on the last working day before that day. VAT returns are now being submitted online. A person may apply to the commissioner before the due date for submission of return for an extension of time to submit a return.

Electronic filing and archiving. VAT returns can be filed electronically via the Kenya Revenue Authority (KRA) i-Tax portal. Every registered person is required to keep records either electronically or otherwise for a period of five years.

Annual returns. VAT returns are filed monthly. There is no annual VAT returns.

Penalties The late submission of a return is subject to a penalty of Kshs 10,000 or 5% of tax due, whichever is higher, plus late payment interest charged at a rate of 2% per month, compounded. Other penalties for VAT offenses include the following: • Failure to comply with a notice to pay money owed to a taxable person: penalty of Kshs100,000 or a maximum sentence of six months’ imprisonment, or both, and payment to the commissioner of any liability so discharged. • Failure to produce books or information required by an authorized agent: penalty of Kshs 100,000 or a maximum sentence of three years’ imprisonment, or both • Failure to display registration certificate: a fine of up to Kshs 200,000 or a maximum sentence of two years’ imprisonment, or both • Failure to apply for registration or deregistration: penalty of Kshs 200,000 or a maximum sentence of two years’ imprisonment, or both • Making a fraudulent claim for a refund of tax: two times the amount of claim • Unauthorized access to or improper use of tax computerized system: maximum of Kshs 400,000 or a maximum sentence of two years’ imprisonment, or both • Interference with tax computerized system: maximum of Kshs 800,000 or a maximum sentence of three years’ imprisonment, or both • Other offenses: maximum fine of Kshs 1,000,000 or a maximum sentence of three years’ imprisonment.

EXCISE DUTY Excise duty in Kenya is governed by The Excise Duty Act No. 23 of 2015 Open market value The open market value of excisable goods or services Is the price that the goods or services would reasonably be expected to fetch in an arm’s length transaction at that time at the wholesale level. If the open market value of excisable goods or services at a particular time cannot be determined, the open market value shall be the price which is an objective approximation of the price of the goods or services according to the Fourth Schedule of the East African Community Customs Management Act.

Imposition of excise duty Excise duty, shall be charged in accordance with the provisions of this Act on – (a) excisable goods manufactured in Kenya by a licensed manufacturer; (b) excisable services supplied in Kenya by a licensed person; or (c) excisable goods imported into Kenya.

Excise duty shall be charged at the rate specified in the First Schedule for the excisable goods or services in force at the time the liability arises for excise duty

EXCISABLE GOODS The specific rates of excise duty on excisable goods specified in this Schedule shall be adjusted for inflation at the beginning of every financial year in accordance with this paragraph. Each rate of excise duty specified in column 3 of the table shall be replaced by the rate of excise duty computed by reference to the following formula – A x B where – A is the rate of excise duty on the day immediately before the adjustment day; and B is the adjustment factor for the adjustment day, calculated as the average rate of monthly inflation of the preceding financial year.

EXCISABLE SERVICES 1. Mobile cellular phone services shall be charged excise duty at the rate of ten percent of their excisable value. 2. Other wireless telephone services shall be charged excise duty at the rate of ten percent of their excisable value. 3. Excise duty on fees charged for money transfer services by cellular phone service providers, banks, money transfers agencies and other financial service providers shall be ten percent of their excisable value. 4. Excise duty on other fees charged by financial institutions shall be ten percent of their excisable value

FIRST SCHEDULE - RATES OF EXCISE DUTY Tariff Code Description Rate or Kshs 2709.00.10 Condensates per 1000l @ 20degC 6,225.00 2710.12.10 Motor Spirit (gasoline) regular per 1000l @ 20degC 19,505.00

2710.12.20 Motor Spirit (gasoline) premium per 1000l @ 20degC 19,895.00 2710.12.30 Aviation Spirit per 1000l @ 20degC 19,895.00 2710.12.40 Spirit type Jet Fuel per 1000l @ 20degC 19,895.00 2710.12.50 Special boiling point spirit and white spirit per 1000l @ 20degC 8,500.00 2710.12.90 Other light oils and preparations Per 1000l @ 20degC 8,500.00 2710.19.10 Partly refined (including topped crude) per 1000l @ 20degC 1,450.00 2710.19.21 Kerosene type Jet Fuel Per 1000l @ 20degC 5,755.00 2710.19.29 Other medium oils and preparations per 1000l @ 20degC 5,300.00 2710.19.31 Gas oil (automotive, light, amber for high speed engines) per 1000l @ 20degC 10,305.00 2710.19.32 Diesel oil (industrial heavy, black, for low speed marine and stationery

engines) per 1000l @ 20degC 3,700.00

2710.19.39 Other gas oils per 1000l @ 20degC 6,300.00 2710.19.41 Residual fuel oils(marine, furnace and similar fuel oils) of a Kinematic viscosity

of 125 centistokes per 1000l @ 20degC 300.00

2710.19.42 Residual fuel oils (marine, furnace and similar fuel oils) of a Kinematic viscosity of 180 centistokes Per 1000l @ 20degC

600.00

2710.19.43 Residual fuel oils (marine, furnace and similar fuel oils) of a Kinematic viscosity of 280 centistokes per 1000l @ 20degC

600.00

2710.19.49 Other residual fuels oils per 1000l @ 20degC 600.00 Fruit juices (including grape must), and vegetable juices, unfermented and not

containing added spirit, whether or not containing added sugar or other sweetening matter

10 per litre

Food supplements 10%

Waters and other non-alcoholic beverages not including fruit or vegetable juices.

5 per litre

Beer, Cider, Perry, Mead, Opaque beer and mixtures of fermented beverages with non-alcoholic beverages and spirituous beverages of alcoholic strength not exceeding 10%

100 per litre

Powdered beer 100 per kg

Wines including fortified wines, and other alcoholic beverages obtained by fermentation of fruits

150 per litre

Spirits of undenatured ethyl alcohol; spirits liqueurs and other spirituous beverages of alcoholic strength exceeding 10%

175 per litre

Cigars, cheroots, cigarillos, containing tobacco or tobacco substitutes 10,000 per kg

Electronic cigarettes 3,000 per unit

Cartridge for use in electronic cigarettes 2,000 per unit

Cigarettes containing tobacco or tobacco substitutes 2,500 per mille

Other manufactured tobacco and manufactured tobacco substitutes; “homogenous” and “reconstituted tobacco”; tobacco extracts and Essences

7,000 per kg

Tariff Code Description Rate or Kshs 87.02, 87.03 and 87.04

Motor vehicles of tariff heading 87.02, 87.03 and 87.04 Less than three years old from the date of first registration Kshs 150,000 per unit

Over three years old from the date of first registration Shs. 200,000 per unit

87.11 Motor cycles of tariff 87.11 other than motor cycle ambulances

10,000 per unit

Plastic shopping bags 120 per kg

Our Office Contacts

Ace Associates – Certified Public Accountants

A Member firm of McMillan Woods Global

Mombasa Office

Rashid Ahmed Lootah Road,

Off Jomo Kenyatta Avenue

P. O. Box 16916-80100

Mombasa

Tel: 041-24191515 / 0727 399199

Nairobi Office

High Park Building,

2nd Floor, Unit No. 6C,

1st Parklands Avenue, Limuru Road,

Nairobi.

Tel: 0721 524680 or 0707 688699

Our Team

Managing Partner

CPA Ahmed M Y Salyani

[email protected]

Partner

CPA Mohamed Ebrahim

[email protected]

National Director Tax

Bilal Musani

[email protected]

Director - Nairobi Office

Muzzamil Kaderdina

[email protected]

Accounting & Tax Supervisor - Nairobi

Afzal Mamdani

[email protected]

Director Accounting - Mombasa

Muhammad Salyani

[email protected]