ATP 108: COMMERCIAL

TRANSACTIONS
TAX PROCEDURES IN
COMMERCIAL TRANSACTIONS
OUTLINE:

LECTURE 1 LECTURE 2
Introduction Taxation of Income
Canons of Taxation Capital Gains Tax
Classification of Tax Avoidance & Tax
Taxes Evasion
Types of Income Tax Planning

2
1
INTRODUCTION

3
BASIC CONCEPTS OF TAXATION

Social
State of State
Contract Taxation Democracy
Nature Capacity
Theory

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 BASIC CONCEPTS OF TAXATION

• Pre-government. Law of nature applied.

State of Nature • Life was solitary, poor, nasty & short.

• Governments are instituted among men, deriving their just powers from the
Social Contract Theory consent of the governed.
• Requires a social contract and a body to enforce said contract.
• Ability of a government to accomplish policy goals.
State Capacity • A state that lacks capacity is defined as a fragile state or in a more
extreme case, a failed state.

Taxation • Core feature of state capacity.

• Legitimizes government’s tax powers.

Democracy • No taxation without representation.

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PURPOSE OF TAXATION

Raising Public
Revenue
Higher Fair
Employment Distribution of
Level Income

Optimum
Economic
Allocation of
Stability
Resources

Protection
Social Welfare 6
Policy
SOURCES OF PUBLIC REVENUE
• compulsory contribution from taxpayers to the government to defray the
Tax expenses incurred in the common interest of all.

• Amounts received for any direct services rendered by the government e.g.,
Fees driving license fee, import license fees etc

• amounts received by the government for commercial services e.g., railway

Prices fare, postage etc.

Fines & Penalties •paid by those found guilty of committing legal offenses e.g. Traffice, tax offence.

• income that arises from government property e.g.royalties, or sale of produce.

State Property
• Internal Borrowings: e.g., issue of treasury bills & treasury bonds in local market
Borrowings • External Borrowings: e.g., loans from World Bank & IMF

Special Assessments • amounts charged for specific purposes

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 BUDGETARY PROCESS & THE FINANCE
BILL THAT IMPLEMENTS IT ANNUALLY.

 The budget process has become more consultative as provided for in 2010
Constitution, Fiscal Management Act 2009 and Parliamentary Standing Order.

 Parliament’s involvement is through the Parliamentary Budget Committee and

better consultations with stakeholders and the public through Sector Working
Groups (SWGs).

 The budget process involves three main stages:

a. Stage 1: Budget Planning and Preparation
b. Stage 2: Presentation to Parliament and the approval stage
c. Stage 3: Budget Execution
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 Stage 1: Budget Planning and
Preparation
• The counties’ aspirations are collated into a five-year National
County Planning Development plan.

• The Budgetary System, medium-term expenditure framework (MTEF), is

Budgetary System set up linking policymaking with planning and implementation of
budgeted projects in a three-year rolling framework.

• Defines the broad parameters of the budget, sets expenditure ceilings

Treasury Circular and defines the budget finalization calendar.

• At this stage, citizens have an opportunity to generate and contribute

Public Hearings issues of interest in the budget.

• Proposals from counties are consolidated with those line ministries and
Consolidation of County and thereafter sector negotiations for allocation of resources commences
National proposals happen.

• Finance CS receives presentations on expenditure and tax proposals

Private Sector Engagement from professionals and private sector representatives.
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 Stage 2: Presentation to Parliament and the
Approval Stage
• Treasury prepares and submits the Budget Policy Statement (BPS) to parliament.
Mandatory • Parliamentary Budget Committee scrutinizes the BPS and provides recommendations.
events before • Treasury submits the estimates of revenue and expenditure to Parliament.
the budget • Parliamentary Budget Committee scrutinizes the estimates, conducts consultation meetings and
presentation issues a report thereon to Parliament and Treasury.
and approval • Treasury incorporates the recommendations and submits revised estimates to Parliament.

• Treasury CS presents the Budget Speech to Parliament.

Presentation of • Budget is presented as a motion to Parliament, debated and approved (with or without
amendments).
the budget &
• Upon approval and the passing of the Finance and Appropriations Bills, the government is
Approval effectively authorized to raise revenue through taxes and to spend them in accordance with the
Process approved estimates.

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 Stage 3: Budget Execution

Budget approval and the passing of the Finance and

Appropriations Bills
l

Disbursement of funds to Ministries, Department &

Agencies through Exchequer Issues
Permanent Secretaries Grant Authority to Incur
Expenditure (AIE) to Ministries, Department &
Agencies.

Expenditure Tracking Surveys

Internal Audit
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SOURCES OF TAX LAW

Constitution Supreme Law of the Land

International Instruments Eg. Double Taxation Agreement (DATs)

Statutes Acts of Parliament

Administrative Regulations

Case Law

Secondary e.g. Report, Journals, Books, Circulars,

Sources Rulings, Guidelines, International Standards

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 Tax Statutes in Kenya
 Income Tax Act, Chapter 470 of the Laws of Kenya
 Value Added Tax Act No. 35 of 2013
 Excise Duty Act No. 23 of 2015
 Customs & Excise Act, Chapter 472 of the Laws of Kenya
 East African Customs Community Management Act, 2004
 Stamp Duty Act, Chapter 480 of the Laws of Kenya
 Tax Procedures Act No. 29 of 2015
 Kenya Revenue Authority Act No. 2 of 1995
 Tax Appeals Tribunal Act No. 40 of 2013
 Road Maintenance Levy Fund Act 1993 (Np.9 of 1993)
 Air Passenger Service Charge Act (Cap. 475)
 Traffic Act (Cap. 403)
 Transport Licensing Act (Cap. 404)
 Second-hand Motor Vehicles Purchase Tax Act (Cap. 484) 13
 National Government’s Tax Powers

 Only the national government may impose:

a) Income tax
b) Value Added Tax
c) Custom duties and other duties on import and export goods
d) Excise tax
e) Any other tax or duty authorized by an act of parliament except property
rates or entertainment taxes.
f) Any additional charges for services provided.

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 County Governments’ Tax Powers

 County governments may impose:

a) Property taxes
b) Entertainment taxes
c) Charges for services provided
d) Any other tax that it is authorized to impose by an Act of Parliament

 Taxation and other revenue-raising powers of a county must not prejudice:

a) national economic policies,
b) economic activities across county boundaries or
c) the national mobility of goods, services, capital or labour.

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2
CANONS OF TAXATION
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OBJECTIVES OF AN OPTIMAL TAX
SYSTEM

Equalize the Increase the rate

Maintain economic
distribution of of economic
stability.
income. growth.

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CANONS OF TAXATION

Equality/
Equity

Diversity Certainty

Simplicit
Convenience
y

Flexibilit
Economy
y

Elasticity Productivity 18
Canons of Taxation (Cont.)
• Refers to equality of sacrifice or ability to pay the tax in proportion to
Equality the income of the taxpayer.
•Tax ought to be certain and not arbitrary. The time of payment, manner of
Certainty payment and quantity to be paid ought to be clear and plain.
• Both the time and manner of payment should be convenient to the
Convenience taxpayer.
• Tax system should have the least compliance and administrative cost to
Economy the taxpayer and authority respectively.
• Only the taxes that produce larger returns should be imposed.
Productivity • Fewer taxes with large revenues are preferable.
• Tax system should comprise adjustable taxes that can be increased or
Elasticity decreased, according to the demand of the revenue.
• There should be no rigidity in taxation. The entire tax system should
Flexibility be able to be changed to meet the revenue requirements of the state.
• The tax system should be simple, plain and intelligible to the common
Simplicity taxpayer.
• Refers to diversity or variety in taxation. Being heavily dependent on a
Diversity single tax source can be detrimental. 19
 Ability to Pay Principle Under the Canon of
Equality

 The concept of horizontal equity: those who are equal, that is, similarly
situated persons ought to be treated equally. Ergo, those who have same
income should pay the same amount of tax. There should be no
discrimination between them.
 The concept of vertical equity: Concerned with how people with different
abilities to pay should be treated for the purposes of division of tax burden.
In other words, what various tax rates should be levied on people with
different levels of income.
 A good tax system must ensure horizontal as well as vertical equity.

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 Objections to the canon of equality/equity:

 Benefit principle (Quid pro quo theory): weak and poorer people receive
great benefits from the government and yet are least able to bear the burden of
taxation. Where is the justice?
 Theory of equal sacrifice: introduction of progressive taxes discourages
saving and enterprise. Should the tax burden fall on the broadest shoulders?
 Ability to pay principle: The difficulty is in determining how this ability can
best be measured. Should it be in respect to property, income or expenditure?
 Cost of service or purchase theory: Specific payment for public services
doesn’t result in justice in the distribution of the services.

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 Concept of Taxable Capacity

 Taxable capacity is the ability of individuals and businesses to pay taxes.

 The taxable capacity of a country is the proportion of the national income that is
above the ‘subsistence’ level, which is the minimum required to sustain its
population and to maintain the productive capacity of an economy intact.
• Absolute taxable capacity:
a) refers to the maximum amount of tax that can be collected from a country/region.
b) determined by deducting the minimum amounts needed to keep individuals alive
from their total incomes.
c) measured in relation to the general economic conditions and individual position.
• Relative taxable capacity:
a) refers to the comparison of the absolute taxable capacity of two different
taxpayers. 22
 Factors Governing Taxable Capacity

• the larger the number, the greater the taxable

Number of Inhabitants capacity.
• equal distribution of wealth reduces taxable
Distribution of Wealth capacity.

Method of Taxation • diversified taxes increases taxable capacity.

• popular causes increases taxpayers' willingness to

Purpose of Taxation stretch their taxable capacity.
• popular governments stimulate taxpayers to
Psychology of Taxpayers
sacrifice more.
Stability of Income • uncertain income reduces scope for further taxation.

• lowers purchasing power and has adverse effect on

Inflation taxable capacity. 23
ESSENTIALS OF AN OPTIMAL TAX
SYSTEM

Equitable Diversity Efficient

Harmony
Economical Elastic

Convenienc
Certainty Progressive
e

Financially
Simplicity Neutrality
Adequate
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3
A. CLASSIFICATION OF
TAXES
B. TYPES OF TAXES

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Tax Classifications

• Classification based on whom a tax is imposed (tax impact) and

Tax Impact who has to bear the burden of the tax (tax incidence).
• In this case, the taxes may be direct taxes or indirect taxes.

• Classification based on the percentage (%) of tax applicable to

different bases.
Tax Rate • Includes:(i) progressive (ii) proportional (iii) regressive or (iv)
degressive.

• object upon which the tax is levied and to which tax rate is applied.
Tax Base • E.g. income tax, tax base is income; property tax, tax base is the
property.

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Classification of taxes based on
impact:

• A direct tax is one which is paid (incidence) by the person on

whom it is legally imposed (impact).
Direct Taxes • Examples: personal income tax, corporation tax, inheritance
tax (estate duty), capital gains and capital transfer (stamp
duty) tax etc.

• Indirect tax is one whose impact is on one person but paid

partly or wholly by another.
Indirect Taxes • Examples: VAT, import and export duty, excise tax,
entertainment tax.

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Classification of taxes based on tax
rates:
• A tax is proportional when the same rate of tax is applied to all taxpayers.
Proportional • Examples: corporation tax which currently stands at 30%, VAT at 16% on sale
price of goods or services and ad valorem duty on imports.
Taxes • It largely applies in indirect taxes (in taxing commodities).

• A tax is progressive when the marginal rate of tax rises with income, i.e. the
Progressive rate of tax rises as the taxable income increases; the higher the income, the
higher the tax rate.
Taxes • Examples: income tax, estate duty, wealth tax, etc.

• A tax is regressive when the burden of tax falls more heavily on the poor than
Regressive on the rich, as the poor sacrifice more heavily than the rich.
• Have a greater impact on lower income individuals than on the wealthy.
Taxes • e.g., VAT, excise duty on consumables, property tax, tariffs.

• A tax is degressive when the rate of tax increases up to a certain limit,

Degressive afterwhich a uniform rate is charged and becomes constant.
Taxes • The rate of progression in taxation is disproportionate to payment ability. 28
TYPES OF TAXES

Income
Tax

Excise
VAT
Tax

Taxes
Custom
Duties; Stamp
Import & Duty
Export Duty
Digital
Services
Tax
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 INCOME TAX

 imposed on gains or profits earned by individuals, limited companies, businesses and

other organisations.
 Types of income tax include:
o individual income tax,
o corporation tax,
o withholding tax,
o residential income tax, etc.
 In Kenya, income tax is regulated by the Income Tax Act, Chapter 470 of the
Laws of Kenya.
 The rates and due dates of different types of income tax are set out in the Third
Schedule to the Income Tax Act.
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 VALUE ADDED TAX (VAT)

 Value Added Tax (VAT) is a consumer tax charged on the supply and importation of
taxable goods or services made in Kenya.
 The incidence of VAT is on the person who consumes taxable goods and taxable
services supplied in Kenya and/or imported into Kenya.
 VAT is collected at designated points by VAT registered persons who act as
Government Agents.
 VAT replaced sales tax as the former was deemed to be more efficient. VAT is collected
throughout the supply chain while sales tax was levied at the final point of sale.
 In Kenya, VAT is calculated on the basis of invoices issued at the point of sale.

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Important Terms in VAT

• one calendar month.

VAT Tax Period • VAT is accounted for on a monthly basis.

•VAT is due on or before the 20th of the following month. Includes both the return and
VAT Due Date payment. Returns are submitted online via iTax.

Input VAT • VAT charged on a taxable person when s/he acquires taxable supplies for use in the
furtherance of his business.

Output VAT • VAT charged by a registered person when s/he makes a supply of taxable supplies
in the course of his business.
• The difference between input and output tax where input tax is higher than output
VAT Refundable tax the difference is the VAT refundable.
• The difference between input and output tax where output tax is more than the
VAT Payable input tax the difference is the VAT payable.

Tax Point • point in time when tax becomes due and payable.

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 Tax Point

 Refers to the point in time when tax becomes due and payable.
 For VAT to become due and payable a supply must have taken place.
 The tax point in VAT is generally regarded to have occurred when:
a. when the goods are supplied or the services provided, or;
b. an Invoice is issued in respect of the supply, or;
c. whole of part of the payment is received for the supply, or
d. when a certificate is issued, by an architect, surveyor or any person acting as a consultant or
in a supervisory capacity, in respect of the service, whichever of the four occurs earliest. This
applies to contracts for service such as construction, surveying etc.
 Although VAT becomes due and payable at the tax point, registered traders have an allowance of
up to the 20th of the following month to remit the tax. For example, the VAT charged in the
month of January 2021 is payable by 20th February 2021.

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 VAT Tax Rates

 VAT is imposed at the following rates:

o 0% - for Zero rated supplies.
• Goods listed in the 2nd Schedule to the VAT Act
• Examples: exportation of goods/services, goods supplied to EPZ, privileged persons
and public bodies etc.
o 8% - Petroleum oils obtained from bituminous, Motor Spirits (Diesel, Super, Aviation spirit
etc.)
o 16% - General rate for other Goods and Services
 Exempt supplies, i.e. supplies of goods and services that are not subject to VAT are set out in the
First Schedule to the VAT Act.
o Examples of exempt supplies: specified raw/unprocessed agricultural produce, financial and
medical services, insurance, passenger baggage, etc.
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 VAT Registration & Deregistration

 VAT Registration:
o Registration for VAT is a statutory requirement for persons who have supplied or intend to supply
goods or services worth Kshs. 5,000,000 or more within any period of 12 months.
o The law provides for voluntary registration where the turnover is below the stipulated amount.
o No VAT number is issued as taxpayers are identified using their Personal Identification Number
(PIN); Taxpayers have VAT as an obligation under their PIN.
o Every VAT registered taxpayer should install and use an ETR machine to account for ALL sale
transactions and issue ETR Generated receipts to every customer.
 Deregistration:
o It is the process of removing a registered trader from the VAT register.
o Any trader wishing to be de-registered for any reason may apply to the Commissioner.
o Grounds for de-registration: insolvency, death of trader, turnover falls below prescribed limits.
o Before de-registration, any outstanding tax must be paid.
o Once the trader is de-registered, he’s notified of the effective date of deregistration;
from that date he should not charge VAT. 35
Obligations of a VAT Registered Tax-Payer

1. Notify the commissioner in writing in case of any change of name,

including business name, address, place of business or nature of
business. Notification should be made within 21 days of the change.
2. File tax returns on time
3. Pay tax due on time.
4. Pay penalties and interest (where applicable).

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 VAT – Important documents to maintain
(section 43 of the VAT Act)

 VAT registered persons are required to maintain proper records to support all transactions.
 The records should be kept either in English or Kiswahili for a period of 5 years.
 Some of the records to be kept include:
a) Copies of all tax invoices and simplified tax invoices issued in chronological order
according to serial number or certified copies of the original invoice,
b) Copies of all credit and debit notes issued in chronological order,
c) Purchase Invoices, Copies of customs entries, receipts for the payment of customs duty or
tax, credit and debit notes received filed chronologically, under each supplier’s name.
d) Details of the amount of tax charged on supply made or received.
e) A record of all the taxable goods and services received or supplied by the firms,
businesses, including zero rated supplies.
f) A separate record of any exempt supplies made.
g) VAT Account: A summary of the total of input tax and output tax for each calendar month.
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 WITHHOLDING TAX (WHT)

 WHT is deductible from certain classes of income at the point payment, to non-employees.
 WHT is deducted at source from the following sources of income:
a) Interest
b) Dividends
c) Royalties
d) Management or professional fees (including consultancy, agency or contractual fees)
e) Commissions
f) Pensions
g) Winnings
h) Appearance at or performance to entertain
i) Rent received by non-residents
j) Other payments specified
 Companies and partnerships making the payment, are responsible for deducting and remitting the
tax to the Commissioner of Domestic Taxes. 38
 EXCISE DUTY

 This is a duty of excise imposed on goods and services manufactured in or imported into Kenya.
 The rate varies depending on the goods and services.
 Types of Excise Duty:
o Specific Duty Rate: where a specific amount of tax is charged per unit of measure on an excisable
product e.g. Kshs. 120 per litre of spirit.
o Advalorem Duty Rate: where a percentage rate of duty charged on the value of an excisable
product.
• Imports tax is charged on the total Cost, Insurance and Freight (CIF) and;
• Locally manufactured goods advalorem rate is charged on the Ex-factory selling price.
 Excise Duty on import is paid at the port of entry.
 Domestic Excise Duty should be paid by 20th day of the following month.
 What is an excise stamp? An excise stamp is a type of revenue stamp affixed to some excisable goods to
indicate that the required excise has been paid by the manufacturer.
 Excise stamps are issued by KRA to licensed persons only.
 Excisable goods and services include: Mineral water; Juices, soft drinks; Cosmetics; beer; SIM cards;
 cellular phones; Fees charged by digital lenders etc. 39
 CUSTOMS DUTIES

 Customs duty is tax paid on the importation or exportation of goods.

 In Kenya, customs duty is regulated by the Customs & Excise Act, CAP 472 and the East African
Community Customs Management Act 2004 (EACCMA, 2004).
 The rates of custom duty vary depending on the classification of the goods. E.g., luxury or substitutable goods
attract a higher rate of duty than essential goods.
 Some goods may be exempted from duty.
 Import tax rates vary between 0%, 10% and 25% as provided by the East Africa Community Common
External Tariff (CET). However, sensitive items attract duty higher than 25% as provided in the Tariff.
 The EAC Common External Tariff is expected to be in conformity with the World Customs Organization
(WCO) Nomenclature (HS Code).
 WCO has a Harmonized Commodity Description and Coding System which is a harmonized system
nomenclature.
 The Harmonized System is a standardized numerical method of classifying traded products and it’s used by
customs authorities globally to identify products when assessing duties and taxes and for gathering statistics.
 The WCO HS Code is reviewed every 5 years to be in keeping with the present realities, e.g. by
accommodating new products. 40
 RENTAL INCOME TAX
 Monthly rental income tax is payable by resident persons (individual or company) on
rental income earned for the use or occupation of a residential property where the rent
income is between Kshs. 24,000 and Kshs. 1.5 million per month.
 Note: Landlords with rental income below Kshs. 288,000 or above Kshs. 15 million
per year shall be required to file annual income tax returns and declare this rental
income together with income from other sources.
 Residential rental income is charged at a flat rate of 10% on gross rent received per
month
 It is payable when landlords receive rent from their tenants either monthly, quarterly,
semi-annually or annually. However, returns must be filed monthly.
 No expenses, losses or capital deduction allowances shall be allowed for deduction from
the gross rent.
 Rental Income is filed on or before the 20th of the following month. For example, rent
41
received in January is declared and tax paid on or before 20th February.
 Rental Income Tax

 Complete a monthly tax return online via iTax by declaring the gross rent and tax
payable will be computed automatically at a rate of 10%.
 For any month that the landlord does not receive any rent he/she shall file a NIL return.
 Residential rental income is final tax therefore, persons are not required to declare the
same in their annual income tax returns.
 Landlords who wish to continue being taxed under the old tax regime can elect in writing
to the Commissioner to be taxed under the normal tax rates, i.e. pay instalment taxes and
file returns in the normal way.
 Commercial Rental Income Tax is taxed at the respective annual income tax rates and
filed through the annual Income Tax Returns, on or before the last day of the 6th month
after the end of the accounting period (irrespective of the amount).
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 TURNOVER TAX

 Turnover Tax(TOT) is a tax charged on gross sales of a business.

 Imposed on resident persons where the income for the business is accrued in or
derived from Kenya and does not exceed Shs. 5,000,000 (five million) during any
year of income.
 The rate is 3% of gross receipts of the business.
 Turnover tax shall not apply to:
1. Any person whose annual turnover is less than Kshs. 500,000.
2. Rental income and management, professional or training fees.
3. The income of incorporated companies.
4. Any income which is subject to a final withholding tax under the Income Tax
Act.
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 INSTALLMENT TAX
 Installment tax is estimated income tax paid periodically, in anticipation of the tax payable for a
year of income.
 Installment tax is paid in advance at four equal installments by persons including individuals and
corporations who have tax liability, not fully covered under PAYE, that amounts to Kshs. 40,000
and above.
 It is paid before the year of income is over and before the accounts of the business are prepared to
establish actual tax payable.
 It involves all incomes except employment incomes which are subject to P.A.Y.E. or income from
business which is subject to Turnover Tax (TOT).
 Through the P.A.Y.E. system, employees are already paying tax within the current year of income.
 Installment tax may be calculated in one of two ways:
o Prior year basis – prior year tax payments are multiplied by one hundred and ten per cent.
o Current Year Basis – For new businesses or those who were in losses and turned to
profitability, installment tax is determined by estimating the current year profit and tax payable
thereon. 44
 Schedule of Installment Tax Payments

 Schedule of Installment Tax payments for all companies except those in the Agricultural Sector:
25% by the 20th day of the 4th month.
25% by the 20th day of 6th month.
25% by the 20th day of 9th month.
25% by the 20th day of 12th month.

 Installment Tax for companies in the Agricultural Sector:

75% which is the first 3 installments, combined and paid by the 20th day of 9th month.
25% is paid by the 20th day of 12th month.

 After payment, any balance of tax payable should be paid on, or before, the last day of the 4th
month following the end of year of income or the accounting period.

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 DIGITAL SERVICE ACT

 Digital Service Tax (DST) is payable on income derived or accrued in Kenya from services offered through a digital
marketplace.
 A digital marketplace is a platform that enables direct interaction between buyers and sellers of goods and services through
electronic means.
 Digital Service Tax was introduced in the Finance Act 2020 and becomes effective from 1st January 2021.
 What is the rate of DST? 1.5% of the gross transaction value:
a) In the case of the provision of digital services, the payment received as consideration for the services; and
b) In the case of a digital marketplace, the commission or fee paid to the digital marketplace provider for the use of the
platform.
Note: The gross transaction value is exclusive of VAT.
 Digital service providers operating in the digital market-place in Kenya will be required to file a DST return and make
payment for the tax due, on or before the 20th day of the following month that the digital service was offered.
 DST is due on a monthly basis, on or before the 20th day of the following month that the digital service was offered.
For resident digital service providers, DST can be considered to be an advance tax, which means that at the point of filing
the annual income tax return, you will be able to offset/deduct the DST paid during the year from the total tax due at the end
of the year.
 For non-resident digital service providers without a permanent establishment in Kenya, DST will be a final tax. 46
 Agency Revenue

 Refers to payments collected by KRA on behalf of various revenue collection agencies in Kenya.
 The two types of Agency Revenue include: Stamp Duty & Betting and Pool Tax
a. Stamp Duty:
o Stamp duty is a tax charged on transfer of properties, shares and stock.
o It is collected by the Ministry of Lands, which has seconded the function to KRA.
o Stamp duty is levied on instruments including Partnership deeds, Hire purchase agreements, Lease agreements, Bills
of exchange and promissory notes, Mortgages, bonds, debentures or covenants etc.
o Non-payment of Stamp Duty results in:
• Invalidity of the relevant transaction.
• Agreement signed between the parties become null and void.
• Transaction becomes inadmissible evidence in a Court of Law.
b. Betting & Pool Tax:
o It is collected by the Betting Control & Licensing Board (BCLB), a department under the Ministry of Interior and
Coordination, which has seconded the function to KRA.
o Betting Tax is chargeable on the gross gaming revenue (GGR) of a bookmaker at the rate of 15%.
o Betting, gaming and Lottery businesses are required to withold as tax and remit to KRA 20% of the winnings being
paid out to winners and remit the same by the 20th day of the month following the month of collection.
o Excise Duty on Betting is chargeable at the rate of 20% of the amount wagered or staked. 47
 4
TYPES OF INCOME

48
 INTRODUCTION TO INCOME TAX
 Income tax is charged for each year of income upon all the income of a person, whether resident or non-
resident, which accrued in or was derived from Kenya in respect of:
1) gains or profits from business, employment, services or a right granted for use or occupation of property,
2) dividends or interest, and
3) a pension, charge or annuity; and
a) any withdrawals/payments out of registered pension funds, provident funds or individual retirement
fund; &
b) any withdrawals from a registered home ownership savings plan.
4) Income from foreign exchange gain
5) income accruing from a digital platform or through a digital marketplace;
6) Natural resource income.
 Year of Income - period of twelve months with reference to which the income of individuals and/or business
units is assessed for tax purposes.
 Taxation year – 1st January to 31st December of any particular year.
 A year of income ending on a day other than 31st December is possible for companies, partnerships and
individuals in respect of income earned during a specific period of twelve months except for employment
income which is assessed for tax purposes from 1 st January to 31st December. 49
 PERSONS LIABLE TO TAX

 The term ‘person’ embraces natural persons and artificial legal persons created by
law.
 Artificial legal persons are incorporated and unincorporated entities, with the latter
including clubs, trusts and estates.
 Partnerships are separate legal entities but are not considered persons. Ergo, the
partnership is not taxed. Individual partner’s income is taxed on him as an individual.
 Persons liable to tax are the following:
1. All persons resident in Kenya whether or not they are Kenyan citizens.
2. All persons not resident in Kenya but derive income from any property, trade,
profession, vocation or employment in Kenya.

50
 RESIDENCE

 Residence is a matter of physical presence.

 A person can have only one domicile, but he may be resident in several countries at the same time.
 An individual is considered resident in Kenya if:
• He had a permanent home in Kenya and was present in Kenya in any particular year.
• He has no permanent home in Kenya but he was present in Kenya:
o 183 days in the year of income; or
o An average of 122 days or more in the year of income and the two preceding years of income.
 Individuals' resident in Kenya are liable to income tax on their total income from Kenya and their employment income tax
abroad.
 Non-residents in Kenya are liable to income tax on their income from Kenya. In this case, withholding tax is deducted at
source in case of incomes of non-residents.
 A company is considered resident for any year of income if:
• It is incorporated in Kenya; or
• The management and control was exercised in Kenya; or
• It has been declared resident by notice in the Gazette by the Cabinet Secretary for the National Treasury.
• Permanent Establishment: A non-resident person with a fixed place of business in Kenya which has existed for a
period of 6 months or more or as determined under the Double Tax Agreement (DTA).
51
 INCOME CHARGEABLE TO TAX
 A taxpayer is taxed on his chargeable or taxable income.
 Resident employees are taxed on worldwide earned income, in respect of any
employment or services rendered in Kenya or outside Kenya.
 Residents are also taxed on any other income that has accrued in or is derived from
Kenya.
 Non-resident employees are taxable only on their income earned from within Kenya or
derived from Kenya.
 Income chargeable to tax includes:
1. Business profits
2. Employment income or services rendered
3. Rental income
4. Dividends or interest
5. Pension income
6. Digital services income
52
7. Natural resources income
 TAXATION OF FOREIGN INCOME

 Foreign income is income earned outside Kenya which would have been taxable in Kenya under Kenyan tax laws
if it had been accrued or derived in Kenya or deemed to have accrued in or derived in Kenya.
 Kenya operates a source-based tax system: income is only subject to tax in Kenya if it’s sourced in or from
Kenya.
 However, there are a few exceptions to this rule such that income earned outside Kenya is taxable in Kenya,
a) In the case of employment income earned outside Kenya by a Kenyan resident individual
b) In the case of business income where a Kenyan person carried on their business partly in Kenya and
partly outside Kenya.
o In these two scenarios, the person is required to declare the income earned outside Kenya together with any
income earned in Kenya and file their return via iTax, on or before last of the 6th month following the end of
the accounting period.
 Kenyan citizens who are chargeable to tax in Kenya are entitled to a set-off of tax paid on employment income
accrued in a foreign country against tax payable in Kenya on the same income.
o Section 16(2)(c) of the Income Tax Act allows for the deduction of income tax or tax of a similar nature paid
on income which is charged to tax in a country outside Kenya, to a certain extent.
 Where there is a Double Tax Agreement (DTA) the provision of the DTA shall apply.
 KRA takes into account prevailing exchange rates when determining the taxable income. 53
 INCOME EXEMPTED FROM INCOME TAX

1. President’s income derived from salary, duty allowances and entertainment allowances paid from public funds.
2. Income of parastatal bodies and any local authorities.
3. Income, other than income from investment, of a sporting association.
4. Income of agricultural societies.
5. Interest on any tax reserve certificates issued by the government.
6. Income of any registered pension scheme and income from any registered provident fund.
7. Income from the investment of any annuity fund.
8. Pensions or gratuities granted in respect of wounds or disabilities.
9. Interest on a savings account held with the Kenya Post Office Savings Bank.
10. Interest paid on loans granted by the Local Government Loans Authority,
11. Income of a non-resident person who carries on the business of air transport provided there is reciprocity.
12. Income of a registered individual retirement fund.
13. Income of a registered home ownership savings plan.
14. Allowances to the speaker, deputy speaker and MPs.
15. Interest up to a maximum of Shs. 300,000 on housing bonds account.
16. Monthly or lump-sum pension granted to a person who is 65 years of age or more. 54
 ALLOWABLE DEDUCTIONS

a) bad debts incurred in the production of such gains or profits;

b) any expenditure of a capital nature incurred by the owner or occupier of farmland for the prevention of soil
erosion;
c) any expenditure of a capital nature incurred on legal costs and stamp duties in connection with the acquisition
of a lease, for a period not in excess of ninety-nine years, of business premises;
d) any sums expended for structural alterations to the premises by the owner where such expenditure is necessary
to maintain the existing rent. No deduction allowed for cost of an extension to, or replacement of such
premises ;
e) any expenditure incurred in connection with any business before the date of commencement of that
business where such expenditure would have been deductible under the Income Tax Act;
f) just and reasonable amounts representing the diminution in value of any implement, utensil or similar article,
not being machinery or plant employed in the production of gains or profits;
g) any expenditure of a capital nature incurred by the owner or tenant of any agricultural land, on clearing such
land, or on clearing and planting thereon permanent or semi-permanent crops;
h) Employer’s contribution to a national provident fund or other retirement benefits scheme for employees;
i) Any just and reasonable advertising expenditure;
j) any donation in that year of income to a charitable organization whose income is exempt from tax. 55
 DEDUCTIONS NOT ALLOWED

For the purposes of ascertaining the total income of a person for any year of income, no deduction shall be allowed in respect of:
a) any expenditure or loss which is not wholly and exclusively incurred by him in the production of the income;
b) any capital expenditure, or any loss, diminution or exhaustion of capital.
c) expenditure incurred by a person in the maintenance of himself, his family or establishment or for any other personal or
domestic purpose including
• entertainment expenses for personal purposes; or
• Hotel accommodation, restaurant or catering expenses other than for expenses incurred on business trips or during
training or work-related conventions/conferences, or meals provided to employees on the employer’s premises;
• vacation trip expenses except those customarily made on home leave;
• educational fees of employee’s dependents or relatives; or
• club fees including entrance and subscription fees;
d) any expenditure or loss which is recoverable under any insurance, contract, or indemnity;
e) any income tax or tax of a similar nature paid on income:
f) Contributions to a registered or unregistered pension, saving, or provident scheme or fund, except as provided in section
15(2)(o), or any sum paid to another person as a pension;
g) a premium paid under an annuity contract;
h) any expenditure incurred by a non-resident not having a permanent establishment within Kenya in the production of income
or dividend deemed to have accrued in or derived from Kenya; 56
 5
TAXATION OF
INCOME

57
 TAXATION OF INDIVIDUALS

 Individuals are liable to pay tax on their total income from various sources during the year of income.
 The main sources of income of an individual are summarized as under:
a) Employment income
b) Rental income
c) Business income
d) Farm income
e) Dividend income
f) Interest income
g) Wife’s income
h) Digital Services Income
i) Pension income
j) Natural Resources Income
 The computation of tax liability of individuals in respect of their total income from all sources during any particular year
of income would take into account any personal relief, determination of income and graduated scale rates of income.
 Individuals exempt from Individual Income Tax are still required to file returns and enter a valid Exemption Certificate
Number.
58
 PAY AS YOU EARN (P.A.Y.E)

 PAYE is a method of collecting tax at source from individuals, both Resident and Non-Resident, in
gainful employment.
 Examples of Gains or profits:
o wages, casual wages,
o salary, leave pay, sick pay, payment in lieu of leave,
o fees, commission, bonus, gratuity, subsistence,
o travelling, entertainment or allowance received in respect of employment/services rendered.
 Any person who makes emoluments to an employee(s) is required to register for the PAYE obligation
upon which the person is required to:
o Deduct tax from the employee(s) emoluments at the prevailing rates; and
o Remit the tax deducted to the KRA on or before the 9 th of the following month.
 PAYE is chargeable to persons of employment income of KES. 24,000 and above per month.

59
 TAX RELIEF

 What is Tax Relief?

o A tax relief is an incentive that reduces the amount of tax that a person has to pay.Meant to
lighten the tax burden on the taxpayer.
 Personal Relief:
o Every resident individual is entitled to a personal relief of Ksh. 28,800 per annum (Kshs.2,400
per month) with effect from 25th April, 2020.
 Insurance Relief:
o Every resident individual is entitled to an insurance relief of 15% of the amount of premiums
paid for self, spouse or child. However, it shall not exceed Kshs. 60,000 per annum.
o Insurance relief applies to the following policies;
a) Life Insurance
b) Education Policy with a maturity period of at least ten years
c) Health Insurance
60
 DOUBLE TAXATION RELIEF

 Tax is charged on all income accruing in Kenya for a non-resident person and on world income
for a resident person.
 Double taxation relief is for the purpose of avoiding taxation of the same income twice.
 Kenya has double taxation relief agreements with certain countries.
 If a person resident in Kenya derives an income from a country with which Kenya has a Double
Taxation Relief Agreement on which tax has been deducted in that country, he will be given
credit for the tax so deducted provided:
a. He can prove that the tax was actually deducted in that country.
b. The tax deducted in that country is not more than the tax he would have paid in
Kenya if he had been wholly charged in Kenya.
c. The time limit for making claims on double taxation is 6 years since the incurrence of
the tax liability.
61
 NON-CASH BENEFITS CHARGEABLE TO
TAX

a) car benefit;
b) housing;
c) Loans at interest rates that are lower than the prevailing market rate;
d) Household utilities, including telephone, electricity, water, security, domestic
expenses in excess of the allowable limit of KES 3,000 per month;
e) Pension contribution paid by tax exempt employer to an unregistered
scheme;
f) Pension contribution paid by an employer to a registered or unregistered
scheme in excess of the allowable amount of KES 20,000 or KES 240,000
per year.
62
 INCOMES NOT CHARGEABLE TO PAYE

a) Meals provided by employer up to a maximum of Kshs. 4,000 per month;

b) Night-out of Kshs. 2,000 per day;
c) reimbursement of expenses e.g., per diems or mileage allowances;
d) Medical cover by employer;
e) expenditure on passages between Kenya and any place outside Kenya for Non-Kenyans borne
employer;
f) Pension contribution made by an employer to a registered or unregistered scheme that is within the
allowable limit of Kshs. 20,000 per month;
g) Gratuity paid by an employer to a registered benefits scheme subject to a limit of Kshs. 240,000
per annum.
o This exemption is not available to individuals who are already enjoying deductions in respect
of contributions to a registered retirement benefits scheme.
h) Education fees for employee’s dependents or relatives paid from income which has already been
taxed in the hands of the employer.
63
 HOW IS PAYE CALCULATED

 The following tax rates apply to individual employment income with effect from 1
January 2021:
Annual taxable income (KES*) Tax rate (%
On the first 288,000 10
On the next 100,000 25
On all income over 388,000 30
 Allowable deductions are the amounts deducted from an employee’s emoluments in
order to arrive at the amount which will be subjected to tax and they include:
 Mortgage interest deduction up to a maximum of Kshs 300,000/- per annum.
 Pension contributions by an employee to a registered pension fund to a maximum
of Kshs. 20,000 per month.
 Personal relief and insurance relief.
 PAYE returns are submitted online via iTax.
64
 TAXATION OF PARTNERSHIPS

 Income of partnerships is assessed on partners.

 Partners pay tax on their share of their profit.
 Each partner’s tax liability is therefore computed separately.
 Any sums paid to partners as salary, interest on capital, etc. should be added back
to net profit.
 The adjusted profit is divided between partners after allowing for interest on
capital, salary etc. as stipulated in the partnership deed.
 The total income of a partner is taken to be the total of all sums credited to his
capital or current accounts from the profit and loss appropriation account.
 Any interest payable by a partner to partnership must be deducted from his total
income from partnership.
65
 TAXATION OF PARTNERSHIPS (Cont)

 Income from other sources will be added to his/her share of partnership

profit in assessing his total taxable income.
 Partnerships claim capital allowances before arriving at taxable profits.
 If a partner’s adjusted share is a ‘loss’ this loss can be offset against any
other income that he may have in that year or can be carried forward
and offset against any income in future years without any limit.
 This is because in partnership the owners (partners) are also managers.
In other words, there is no distinction in partnership between ownership
and management.

66
 TAXATION OF CORPORATIONS

 This is a form of Income Tax that is levied on corporate bodies such as Limited companies, Trusts, and Co-
operatives, on their annual income.
 Companies based outside Kenya but operating in Kenya or have a branch in Kenya pay Corporation Tax on
income accrued within Kenya only.
 There is double taxation of corporation profits; first at corporation flat rate and then taxation of dividends in the
hands of the taxpayer.
 Corporation tax is charged at a standard rate of 30% for all companies.
 Allowable deductions:
o Director’s fees paid out wholly and exclusively for purposes of the business.
o The payments made between two associated companies.
o Director’s salaries are also allowable.
 Deductions Not-allowable:
a. Loans made to directors which become bad debts.
b. Formation expenses.
c. Dividends and other distributions from profits.
d. Payment of corporation tax and interest on arrears of corporation tax. 67
 TAXATION OF CORPORATIONS (Cont)

 Income from Dividends Received:

o Investment income refers to dividends and other distributions a company
receives from another company.
o Investment income is taxable.
o There is a withholding tax of 15% on dividends received.
o This is the final tax on dividend income. Ergo, dividend income is not added to
trading income and withholding tax is not set-off against tax liability.
o If a resident company received dividends from another resident company where
the recipient company controls directly or indirectly 12.5% or more of the
voting power of the paying company, then these dividends are not taxable.

68
 TAXATION OF CORPORATIONS (Cont)

 A company is required to distribute every year a certain fixed proportion of its profits as dividends to
shareholders.
 If the company fails to distribute dividends, then the Government would lose income tax revenue from the
shareholders. To avoid this loss, all companies are required to distribute adequately their profits within twelve
months of the end of the accounting year.
 KRA is empowered to determine the amount of distribution that could be made without prejudice to the
company’s financial needs.
 Shortfall is the difference between the amount of dividends determined by the Commissioner and the actual
distribution made by the company.
 Commissioner expects companies to pay the following amounts as dividends to their shareholders:
a. 40% of the Net Adjusted Trading Profit after Corporation Tax.
b. 100% of all other non-trading types of incomes e.g. interest, dividends, rent etc. of the company after
corporation tax.
 Companies excluded from the shortfall regulations include:
a. Companies that are subsidiaries of others.
b. Companies that are subsidiaries of foreign companies and have no resident shareholders.
69
c. Companies which have 51% or more of the shares held by non-residents.
 TAXATION OF CORPORATIONS (Cont)
 Circumstances under which companies will be entitled to more than 60% permissible
retention:
a. authorized capital is fully issued and therefore the company cannot obtain further funds
from shareholders and can only rely on its internal reserves to finance its investment
plans.
b. Company does not have any liquid funds.
c. Company has liquid funds but is reserving them to clear maturing obligations e.g. loans,
mortgages or plans to purchase plant and machinery, buildings, etc.
d. company is expanding its business and trading operations and requires additional
commitment in inventory.
e. The company has committed itself to purchase another business on condition that the
company to be purchased is not a company that is a source of raw material or a
distribution company for its products.
f. Any company controlled directly or indirectly by the Government of Kenya. 70
 TAXATION OF NOT FOR PROFITS

1. Pay As You Earn (PAYE)

o Kenyans working for NPOs are not exempt from PAYE.
o Foreigners working for NPOs may get exemptions on their PAYE but this applies on a
case-by-case basis.
o PAYE is deducted monthly at the prevailing individual income tax rates, on or before
9th of the following month.
2. Withholding Tax and Excise Duty
o There no exemptions associated with Withholding Tax and Excise Duty Tax.
3. VAT & Customs Duty
o To get an exemption on Customs Duty and VAT, NPOs must apply to the Cabinet
Secretary for National Treasury through the NGO Board.

71
 TAXATION OF CO-OPERATIVE SOCIETIES
& OTHER BUSINESS UNITS

 Cooperative societies registered under the Co-operative Societies Act are required to pay tax on their incomes.
 Primary co-operative societies are societies whose members are individuals, and their chargeable income is
computed as follows:
• Compute the adjusted net profits i.e. income less allowable deductions.
• Deduct from the above figure, dividends and bonuses distributable to the members. But such dividends and
bonuses should not exceed 80% of adjusted net profits.
 Secondary co-operative societies are societies whose members are other co-operative societies, mainly the primary
co-operative societies and their chargeable income is arrived at as follows:
• Compute the adjusted net profits (i.e. income less allowable deductions).
• Deduct from the above figure, dividends and bonuses distributable to the members, which must not exceed
adjusted net profits above.
 Savings & Credit co-operative societies carry on the business of credit and savings of its members and their
income that is liable to tax is calculated as follows:
1. income from dividends, interest (other than interest from its members), and royalties.
2. rental income that it receives from letting its properties.
• Credit and savings co-operatives are required to charge withholding tax on the bonuses paid. 72
 TAXATION OF CO-OPERATIVE SOCIETIES
& OTHER BUSINESS UNITS (Cont)

• Societies are taxable on their investment income separate from their rental income and
separate from the income from their other trading activities including interest from
loans of the members. As a result, losses of one activity cannot be off-set against the
gains from the other activity.
 Mutuality in law recognizes that a person cannot make profit from himself. Hence
interest earned from members of societies will be purely mutual and may not be taxed.
 Every designated co-operative society must submit annual returns of income. However,
where a society is exempt from tax or will not attract any tax, it’s not necessary to submit
the return.

73
 TAXATION OF SOCIETIES

1. Pay As You Earn (PAYE) - PAYE is deducted monthly at the prevailing individual income tax
rates, on or before 9th of the following month.
2. Corporation Tax - The total income of a SACCO is subject to a 30% corporate tax rate.
3. Installment Tax - Installment Tax is paid in advance at four equal installments. It is paid
before the year of income is over and before the accounts of the business are prepared to
establish the actual tax payable.
4. Withholding Tax - Withholding Tax rates vary depending on the income, and whether the
recipient of the income is resident or non-resident.
5. Rental Income Tax and Commercial Rental Income

74
 6
CAPITAL GAINS TAX

75
 CAPITAL GAINS TAX

 Capital Gain can be ordinarily defined as the difference between the purchase price and the selling price of
certain assets. Consequently, ‘Capital Gains Tax’ (CGT) is the income tax payable on the gain/profit made on the
sale (disposal) of a capital asset.
 CGT is levied on transfer of property situated in Kenya whether acquired on or before January 2015.
 Property is defined by law and includes land, buildings and marketable securities.
 Consequently, there are three CGT types:
a) CGT 1 is meant for land and buildings,
b) CGT 2 is for shares (CGT applies to the transfer of unlisted securities. Listed securities have been excluded
from the application of CGT under the Finance Act 2015.
c) CGT 3 is for the exemptions which are all listed on itax.
 The rate of CGT is 5% of the gain and is paid by the seller or the transferor of the property.
 It is a final tax and therefore not subjected to further taxation after payment.
 Prerequisites of capital gains tax;
a) The disposal of an asset;
b) The accrual from that disposal of a chargeable gain; and
c) The accrual of that gain to a person chargeable to Capital gains tax. 76
 CGT is due on or before transfer of property but not later than the 20th day after the transfer.
 What constitutes a transfer?

a. If property is sold, exchanged, conveyed or otherwise disposed of in any manner

(including by way of gift), whether or not for consideration;
b. On the occasion of the loss, destruction or extinction of property whether or not
a sum by way of compensation is received in respect of the loss, destruction or
extinction unless that sum is utilized to reinstate the property in essentially the
same form and in the same place within one year or within a longer period of the
time approved by the Commissioner.
c. the abandonment, surrender, cancellation or forfeiture of, or the expiration of
substantially all rights to property, including the surrender of shares or
debentures on the dissolution of a company.
77
 How To Determine the Net Transfer Value/Selling
Prices for the purpose of CGT

 Amount received for transferring the property

 Sums received in return for the abandonment, forfeiture or surrender of the
property.
 Amount received for the use of exploitation of the property eg rent
 Compensation received for damage , injury to the property or for the loss of
the property
 Insurance policy reimbursement in respect of injury, or loss or damage to the
property.

78
 Calculating the adjusted cost of property

 The adjusted cost of property is the sum of:

a. the cost of acquisition or construction of the property;
b. expenditure for the enhancement and preservation of the property;
c. the cost of establishing, preserving or defending the title to or a
right over the property;
d. any incidental costs to the transferor for acquiring the property.”
 The adjusted cost shall also be reduced by any amounts that have been
previously allowed as deductions under Section 15(2) of the Income Tax
Act

79
 How to Compute Capital Gains Tax
 When computing CGT, three terms are used:
a) Net transfer value: which is the transfer value less incidental expenses to the transfer.
b) adjusted cost of the property: which is the cost of acquisition, expenditure for enhancement of
preservation of the property; cost of defending title over property and incidental costs of acquiring
property.
c) Capital Gain or Loss: which is Net transfer value less the adjusted cost of the property.
Net Transfer Value – Adjusted Cost of the property= Capital Gain or Loss
Capital Gains Tax = 5% of Capital Gain
When these details are captured in system during the payment process, then the amount payable will be 5% of
the gain made.
 Some allowable expenses for the purposes of CGT include;
a. Loan/Mortgage interest
b. Cost of advertising to find a buyer
c. Costs incurred in valuation of the property
d. Legal fees
e. Costs of enhancements.
 A loss made in the process of disposal of a property leads to a deduction of any income tax payable or due from 80
a tax-payer.
 Exemptions on Capital Gains Tax

 Income that is taxed elsewhere as in the case of property dealers;

 Issuance by a company of its own shares and debentures;
 Transfer of property for the purpose only of securing a debt or a loan;
 Transfer by a creditor for the purpose only of returning property used as security for a debt or a loan;
 Transfer by a personal representative of any property to a person as beneficiary in the course of the
administration of the estate of a deceased person.
 Transfer of assets between spouses;
 Transfer of assets between former spouses as part of a divorce settlement or a bona fide separation
agreement;
 Transfer of assets to immediate family;
 To a company where spouses or a spouse and immediate family hold 100% shareholding;
 A private residence if the individual owner has occupied the residence continuously for the three-year
period immediately prior to the transfer concerned.

81
Discussion Question:

Kenya Revenue Authority (KRA), discontinued the manual payment of both Stamp Duty
and Capital Gains Tax and required the simultaneous payment of both taxes online. The
effect of this was that the I-Tax system would not permit the payment of Stamp Duty on a
transfer unless and until the Capital Gains Tax was also paid.
An Association of forty-two (42) licensed commercial banks, one mortgage finance bank
and two microfinance banks was aggrieved by KRA’s action to twin the payment of Capital
Gains Tax and Stamp Duty as it contended that this would be an infringement on the right
to property of both the bank as a chargee and the purchaser and would place the burden of
paying the chargor’s liability on either the bank or the purchaser.
Consequently, the Association filed a Judicial Review application challenging the action by
the appellant.
How is the court likely to decide this matter?
82
 KRA v Kenya Bankers Associations [2020]
eKLR
:
• Holding:
a. A charge is an instrument that facilitates the transfer upon a chargor’s failure to repay the sum
secured by the charge. This power is given to a chargee by virtue of its statutory power of sale.
A chargee does not become the owner or the proprietor of the land but of the charge.

b. The interest of a chargee is confined to the sum borrowed and a chargee’s statutory power of
sale is invoked upon the chargor’s default to repay the loan. Indeed, in executing the transfer
(after exercising its statutory power of sale), a chargee does so in its capacity as a nominee. It
does not become a proprietor of the land.

c. For one to be obliged to pay Capital Gains Tax, it must be shown that the person has in fact
made a gain in income arising from the disposal of the property. The mere disposal of a property
does not give rise to liability to pay the tax.
83
 7
TAX EVASION & TAX AVOIDANCE

84
TAX EVASION

 Definition: Where the taxpayer deliberately tries to avoid paying tax

by not declaring his true income or by claiming higher expenses to
offset against his income, by making claims for allowances and/or
relief to which he is not entitled.
 Tax evasion is illegal and when the person evading the tax is caught
he will be required to pay penalties and fines and may also end up in
prison.
 Tax evasion liability now on individual shoulders.

85
 Examples of Tax Evasion:

 Tax Fraud
 dishonest tax reporting,
 Falsifying income records
 Under declaration or non-declaration of income,
 Failure to withhold and remit taxes as required by law
 Willfully underpaying taxes e.g., under declaring imports in order to pay less import duty and VAT
 Inflating or overstating your expenses and deductions e.g., Missing Trader Scheme
 Smuggling goods: Failure to pay the correct import taxes through concealment of goods, mis-declarations
and undervaluation among other schemes
 Hiding money and/or interest in an offshore account(s)
 Mis-statement of expenses to reduce the taxable income and therefore evade taxes.
 Forging books of accounts
 Using cooked statements
 Failing to register as a tax entity
 Failure to furnish tax returns
 Failure to keep records, 86
 Obstructing, bribing and, or impersonating a tax official
‘Missing Trader’ Tax Evasion Scheme

 The ‘Missing Trader’ scheme is a VAT racket involving the

generation of fictitious tax invoices from ghost traders, thus
resulting in a huge drop in VAT liability of implicated taxpayers
despite the increase in trading activities without any particular
variation in outputs.
 Scheme is established to reduce tax liability without incurring costs
on the taxable inputs as required of them to qualify for deduction
of input VAT and costs for income tax computation.

87
INFORMER REWARD SCHEME

 KRA has a reward scheme for informants that successfully

report a case of tax fraud/tax evasion cases.

 The reward includes whichever is less of, 5% of the taxes or

duties so recovered or KES 5 million per case.

88
 TAX AVOIDANCE

 Tax avoidance is commonly defined as an action taken to minimize the amount of tax owed
by a taxpayer hence maximizing after-tax income often through tax planning and utilization
of loopholes in tax laws and practices.
 Known instances of tax avoidance often used by taxpayers include: tax planning, profit shifting,
use of branches in jurisdictions with lower tax rates and utilization of tax incentives.
 In general, tax can be avoided or reduced either by claiming:
1. An income as totally exempt from tax i.e.
2. An income which is subjected to withholding tax only
3. Reliefs and allowances i.e., personal relief, interest on mortgage on owner occupied house,
investment allowances etc.
 The Tax Procedures Act defines tax avoidance as “a transaction or a scheme designed to avoid
liability to pay tax under any tax law”. The Act further allows the Commissioner to impose a
penalty equivalent to double the amount of tax that would have been avoided were a taxpayer
found to have engaged in any tax avoidance scheme. This makes engaging in any tax avoidance
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scheme in Kenya, an offence and therefore illegal.
 Tax Avoidance (Cont.)

 Transactions designed to avoid liability to tax (Section 23, Income Tax Act)
o Where the Commissioner is of the opinion that the main purpose or one of the main
purposes for which a transaction was effected was the avoidance or reduction of liability to
tax for any year of income, or that the main benefit accruing from the transaction in the
three years immediately following the completion thereof was the avoidance or reduction
of liability to tax, he may direct that such adjustments shall be made as respects liability to tax
as he considers appropriate to counteract the avoidance or reduction of liability to tax
which could otherwise be effected by the transaction.
o Any direction of the Commissioner under this section shall specify the transaction or
transactions giving rise to the direction and the adjustments as respects liability to tax which
the Commissioner considers appropriate .

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 Avoidance of tax liability by non-distribution of
dividends:

o Where the KRA is of the opinion that a private company has not distributed to its shareholders
as dividends within a reasonable period (not exceeding 12 months after the end of its accounting
period) it may direct that the corporation distribution a portion of its income for that period that
would not prejudice the company’s business.

o A private company may at any time before making a distribution of a dividend to its shareholders
inquire whether the distribution would be regarded by the Commissioner as sufficient, and the
Commissioner, after calling on the company for such information that he may reasonably require,
shall advise the company whether or not he proposes to take action.

o Where another company receives a dividend based on such a directive, then the dividend shall be
deemed to be part of such income of the other company available for distribution by such other
company to its shareholders as dividends.
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 Transfer Pricing

 Transfer pricing refers to the setting of prices for transactions occurring between associated entities.
 Utilized by companies to minimize their tax liabilities by underpricing or overpricing
transactions or allocating profits to low tax jurisdictions.
 Transfer pricing manipulation increases the risk of capital flight and shifting of profits by
multinational enterprises.
 Kenya has put up measures to protect her tax base from transfer pricing risks posed by cross-border
transactions between related entities, through enactment and enhancement of tax legislation and
administration which include the Income Tax Transfer Pricing Rules 2006, which heavily borrow
from the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing
Guidelines.
 Under the rules companies are required to price transactions as if they occur between third parties
and provide tax authorities with accurate evidence of how the price was determined.
 Currently, taxpayers in Kenya having any transaction with its non-resident related parties are
required to document and maintain a Transfer Pricing Policy governing the business dealings with
the non-resident related party in accordance with the arm’s length principle. 92
 Liability for tax payable by a company

 Where an arrangement has been entered into by any director, general manager,
company secretary or other senior officer or controlling member of a company
with the intention or effect of rendering a company unable to satisfy a current or
future tax liability under a tax law, every person who was a director or controlling
member of the company when the arrangement was entered into shall be jointly
and severally liable for tax liability of the company. Section 18, Tax Procedures
Act No. 29 of 2015.

 Remedy? Safeguard?

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8
TAX PLANNING

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 INTRODUCTION TO TAX PLANNING

 What is tax planning:

o Refers to financial planning for tax efficiency.
o Enables individuals and business to legitimately avail the maximum benefit by using all
beneficial provisions under tax laws i.e. reducing tax liabilities by optimally utilizing tax
exemptions, tax rebates, concessions, tax refunds and benefits as much as possible.
o Entails making financial and business decisions to minimize the incidence of tax.
o Proactive and timely tax planning can produce savings for many businesses.

 Tax planning considerations :

o timing of income,
o size and timing of purchases
o planning for other expenditures.
o selection of investments
o types of retirement plans. 95
 Top Tax Planning Strategies For Individuals

 Areas where both employed and unemployed individuals can exploit existing tax incentives:
a. Contribution to Registered Pension/Provident Scheme
b. Mortgage Interest Deduction
c. Insurance Relief
d. Double Taxation Relief
e. Utilizing pass-through entities
f. Investment Choices should take into account capital gains liability
g. Charitable contributions
h. Income from employment paid in the form of bonuses or overtime:
o Income for employees below the lowest tax band(Ksh 12,298 per month) is tax exempt
and so are the bonuses and overtime allowances.
o Condition: applies to employees whose taxable employment income before
bonuses and overtime allowances does not exceed the lowest tax band.
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 Top Tax Planning Strategies for Businesses
1. Utilize pass through entities
2. Structure of Transaction: e.g. Installment Sale, Tax free M&A (eg reorganization, stock swap)
3. Depreciation: allows businesses to recover, as an expense, capital expenditures.
4. Capital Investment Allowances: Companies can charge their income with certain allowances on capital
expenditure.
5. Charitable contributions
6. Write Off Bad debts: Bad and doubtful debts incurred in the production of gains or profits are deductible.
7. Procuring business goods & services in the company name: VAT exemption on inputs to encourage
investment.
8. Special Economic Zones: Companies located in Special economic zones enjoy a tax holiday for the first 20
years.
9. Timing the recognition of income and expenses can help businesses manage their tax liabilities.
o For some businesses, it may mean accelerating income and deferring expenses. For others, it may mean
deferring income and accelerating expenses. Deciding on the optimum strategy for your business often
requires multi-year projections using varying alternatives.
10. Accounting Method Planning by moving income or expense items into different periods:
o generally does not result in permanent tax savings but it generates a timing benefit that will reverse in
future years. However, in an environment with possible rate changes, permanent tax savings can be
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obtained.
THANK YOU FOR YOUR TIME &
ATTENTION!
Any questions?

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