TAXATION OF CROSS BORDER ACTIVITIES

Cross border activities are income generating activities carried by citizens of Kenya in other countries or
by non-citizens in Kenya.

TERMS USED IN TAXATION OF CROSS BORDER ACTIVITIES

1. Trading with a country: This is where citizens of one country enter into business transaction
with citizens of other countries.
 The income generated in the process is usually subjected to double tax.
2. Trading in a country: This is where citizens of a country carry out business transaction within
country boundaries.
 The income generated is not subjected to double taxation.
3. Double taxation: This where the income generated is subjected to different forms of taxes in
different countries.
4. Double taxation relief agreement: This is an agreement between two or more countries to
grant double taxation relief to their citizens affected by double taxation.

Individuals affected by double taxation.

a) Citizens of a country working abroad.

b) Expatriate employee working in the country.

c) Professionals offering services abroad.

d) Sportsmen women and entertainers earning income from abroad.

e) Business carried out partly in Kenya is partly outside Kenya.

objectives of double taxation agreement

1. To attract investments.
2. To attract skilled man power.
3. To protect citizens of a country from double taxation.
4. To facilitate free movement of labour.
5. It encourages citizens of a country to look for jobs abroad.

Countries which Kenya has double taxation agreement with

1. United kingdom
2. Germany
3. Denmark
4. Norway
5. Sweden
6. Zambia
7. India
8. East Africa community countries (UG, TZ, Rwanda, Burundi, Southern Sudan)
 9. China
10. Malaysia

Conditions to be met inorder to qualify for double tax relief

1. Tax must have been paid in that other country on income subject to double taxation.
2. Double tax relief should not exceed tax payable in the home country on income subject to
double taxation.
3. There must be double tax relief policies in the country.
4. Time limit for making a claim for a relief is usually 6 years since tax was paid in that other
country in relation to income subject to double taxation.

Areas covered by double taxation agreements

1. Persons covered by the agreements.

2. Taxes covered by the agreements.
3. Incomes affected by the agreements.
4. Termination of the agreements.
5. Aspects of determining residency of a tax payer.

FORMS OF DOUBLE TAX RELIEF AGREEMENTS

1. Unilateral relief: This is where the government decide to grant relief to its citizens working
abroad and who are subjected to double taxation without considering whether other
governments grants their citizens working in the country double tax relief.
2. Bilateral relief: This where two or more government negotiates and conclude double tax relief
agreements where their citizens working in these countries are granted double taxation relief.

METHODS OF DETERMINING DOUBLE TAXATION RELIEF

There are two major methods;

1. Exemption method
2. Credit method

1) Exemption method

In this income earned abroad and affected by double taxation is not subjected to tax in the home
country as long as tax was paid in the source country (country where income was generated)

2) Credit method

In this, the tax paid in that other country/source country on incomes subjected to double taxation is
granted as a relief in relation to tax payable in the home country on incomes subject to double
taxation.

DETERMINATION OF DOUBLE TAX RELIEF IN KENYA AND DETERMINATION OF ACTUAL TAX

PAYABLE BY A PERSON AFFECTED BY DOUBLE TAXATION.

-In Kenya, credit method is used to grant double tax relief.

- Double tax relief is taken to be the lower of;

 Tax payable in Kenya on incomes subject to double taxation

Or
 Tax paid in the source country on income subject to double taxation

-The following steps are used to determine double tax relief and actual tax payable by a tax payer.

1. Determine the taxable employment income earned in Kenya.

2. Determine total taxable income earned in Kenya (employment and investment).
3. Determination of total taxable income earned in Kenya and outside Kenya.
4. Determination of total tax on total income earned in Kenya and outside Kenya. Determination of
total tax on total income
5. Determination of tax income earned in Kenya.
6. Determination of tax on income earned outside Kenya. Done as follows;

Tax on income earn from outside Kenya = tax on total income earned in Kenya and outside
Kenya - tax on income earned in Kenya

7. Determination of double tax relief which is taken to be the lower of;

a. Tax paid at the source country on income subject to double taxation
Or
b. Tax payable in Kenya on income subject to double taxation.
8. Determination of actual tax payable by a tax payable in Kenya which is determined as follows:

Actual tax payable in Kenya = tax on total income (from Kenya and outside Kenya) – tax set offs
(P.A.Y.E, insurance relief, personal reliefs, double tax reliefs etc.)

EXAMPLES: