2016/17 Kenya Budget: Consolidating Gains for a Prosperous Kenya

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2016/17 Kenya Budget
Consolidating Gains for a Prosperous Kenya

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Economic Performance

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Global Growth
• Global growth rates for the years 2014 to 2017 are
shown in the table below:
Source : Economic Survey 2016, * forecast
• Down side risks have risen particularly for emerging and
developing markets because of:
‒ Declining commodity prices
‒ Depreciating currencies in emerging markets
‒ Increasing volatility in financial markets
Year 2014 2015 2016* 2017*
Growth Rate (%) 3.4 3.1 3.4 3.6

Sub - Saharan Growth
• Sub Saharan growth rates for the years 2014 to 2017 are
• This is mainly due to:
‒ Declining commodity prices, mainly oil
‒ Declining demand from China
‒ Tightening of global financial conditions
Year 2014 2015 2016* 2017*
Growth Rate (%) 5.0 3.5 4.0 4.7
Source : Economic Survey 2016, * forecast

Kenya Growth
• Kenyan growth rates for the years 2014 to 2017 are
• This is supported by:
– Continued investment in infrastructure and construction
– Mining
– Lower energy prices
– Improved agricultural productivity
• Inflation to remain within target < 5% (+/- 2.5%)
• Interest rate and exchange rate to remain stable
Year 2014 2015 2016 2017
Growth Rate (%) 5.3 5.6 6.0 6.5
Source : Economic Survey 2016

33.8
41.8 43.7 44.2
0
500
1000
1500
2000
2500
0
10
20
30
40
50
60
70
80
1963 1973 1983 1993 2003 2013 2014 2015
GDPActualinUSBn
PopulationinMn,Inflation%,GDPPer
CapitainUSBn
Population (m) Inflation, GDP Deflator (Annual %)
GDP Actual (Current US$ billion) GDP Per Capita (Current US$ billion)
Kenya’s Growth Since Independence

Global & East African Community Growth
-8
-6
-4
-2
0
2
4
6
8
10
12
Tanzania Rwanda Kenya Uganda Burundi Sub Saharan
Africa
Global
2008 2009 2010 2011 2012 2013 2014 2015 2016*

Key Sector Analysis
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
2011 2012 2013 2014 2015
Percentage Contribution to GDP
Agriculture, forestry and fishing Manufacturing
Real estate Transport and storage
Financial Intermediation Education

Economic Developments
Inflation Rate
Source: Data from Various National Banks

Economic Developments
Commercial banks lending and
deposit rates
Source: Central Bank of Kenya
Foreign exchange reserves
Source: Central Bank of Kenya

Depreciation of African Currencies
10%
17%
19%
27%
30%
31%
40%
40%
55%
71%
0% 10% 20% 30% 40% 50% 60% 70% 80%
Rwanda
Kenya
Mauritius
Ghana
Uganda
Tanzania
South Africa
Namibia
Nigera
Zambia
Percentage Depreciation
Source: Data from Various National Banks

Economic Transformation Agenda
Creating a job
conducive
business
environment by
job creation
Investing in
sectoral
transformation
to ensure broad
based and
sustainable
economic
growth
Investing in
infrastructure
in areas such
as transport,
logistics, energy
and water
Investing in quality
and accessible
health care
services and
quality education
as well as
strengthening the
social safety net to
reduce the burden
on the households
and promote
shared and
equitable growth.
Consolidate
gains made in
devolution in
order to provide
better service
delivery and
enhanced
economic
development.

Budget Outturn
Source: Budget Statement for FY 2016/2017, *estimate
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
(1,000.00)
(500.00)
-
500.00
1,000.00
1,500.00
2,000.00
2,500.00
%ofGDPCurrentMarketPriceinFY
KShsBillions
Revenue Expenditure Deficit
Revenue (%) Expenditure (%) Deficit (%)

Allocations to Government
Source: Budget Policy Statement 2016
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2015/16 2016/17 2017/18 2018/19
KenyanShillingsBillions
National Government Parliament
The Judiciary County Shareable

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Risks to the Economy

Risks to the Economic Outlook
Continued uneven and sluggish growth in advanced and
emerging markets
Falling commodity prices, will negatively impact exports and
tourism
Adverse weather, drought after El Niño rains
Public expenditure pressure, especially recurrent expenditures
posing a fiscal risk

Fiscal Deficit
• Gradually lower our fiscal
deficit <4% of GDP
• Ensure sustainable debt.

External and Domestic Public Debt
Source: Budget Statement for FY 2016/2017
0%
10%
20%
30%
40%
50%
60%
-
500
1,000
1,500
2,000
2,500
3,000
2007 2008 2009 2010 2011 2012 2013 2014 2015
As%ofGDP
KShsBillions
Public External Debt Public Domestic Debt
Public External Debt (as % of GDP) Public Domestic Debt (as % of GDP)
Total Public Debt (as % of GDP)

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Key Projects and Initiatives

IPP Projects
Power Generation
Ongoing
(USD Millions)
Planned 2015-2018
(USD Millions)
140 WR Longonot Geothermal 760
300 MW Lake Turkana Wind 847
80.32 MR Gulf Power 108
82 MR Triumph HFO Plant 157
87 MW Thika Power HFO 146
60 MW Kinangop Wind Power 150
150 MW Orpower Olkaria III Geothermal 675
90 MW Rabal Heavy Fuel Oil Power Plant 155
74 MW Kipevu II HFO Power Plant 85
35 MW Mumias Bagasse Cogeneration Power Plant 50
960 MW Lamu Coal 2,000
105 MW Menengai Geothermal 210
140 MW Olkaria VI Geothermal 380
FiT Projects (18No.) 600
Total 3,133 3,190
Percent of GDP 4.5% 4.6%

Infrastructure PPP
Infrastructure
Ongoing
(USD Millions)
Planned 2015-2018
(USD Millions)
Road Sector (1st Mover Toll Road PPP's i.e. 2nd Nyali
Bridge, A109, A104, A2, NSB
2,500
Ports (CT2, Kisumu, Shimoni, IMTS) 150
Rail Sector: 404
RVR 120
Nairobi Commuter Rail 53 600
Water Environment (Multi-purpose Dams, Water
Supply Projects, Sold Waste Mgmt.)
2,000
Healthcare Sector (300 Bed Private Wing, Cancer
Mgmt. Centres)
100
Accommodation (Civil Servants Housing, Police and
Prisons Housing)
600
DK Special Economic Zone (SEZ) 1,100
Tourism (MICC, BICEC, Marina) 500
Export Quarantine Sation & LEZ 10
Multi-storey Car Parks in Nairobi and Mombasa 100
Total 457 7,780
Percent of GDP 0.7% 11.1%

Agriculture
• 3.2 bn -Galana-
Kulalu Irrigation
• 3.2 bn for Mwea
Irrigation
• 2.2 bn for National
Expanded Irrigation
Programme
Energy
• 2.0 billion for
Geothermal
Development
• 20 billion for Power
Transmission &
electrification
• 7.6 billion for
Electrification of
Public Facilities
• 3.4 billion for
Exploration and
Distribution of Oil
and Gas
• 2.0 billion for LPG
Distribution
Security
• 8.2 bn for leasing
of police vehicles,
and aircraft
• 13.2 bn for
enhanced security
operations
• 10 bn for Police
Modernization
• 5.1 bn for Police
Medical Insurance
• 2.9 bn for
Construction of
Police Stations
and Housing
• 15.6 bn for
Military
Modernization
• 0.9 bn for Konza
Technopolis
• 13.4 bn for Digital
Literacy Programme
(School Laptop
Project);
I.C.T
Agriculture Energy Security
Key Initiatives at A Glance

Transport
• 117.6 bn - on-going road
construction
• Nairobi Metropolitan Mass
Rapid Transport
• East Africa Road Network
• 600Km South Sudan Link
road.
• 154 bn – SGR railway
• 1.5 bn - Relocation on
Railway lines at Kibera &
Mukuru
• 0.8 bn -upgrading of
Malindi, Isiolo, Suneka and
Lokichogio Airports
• 0.5 bn - Acquisition of 2
Ferries
• 5.5 bn for Mombasa Port
• 10 bn - LAPSSET Project
Health
• 8.7 bn for Kenyatta
National Hospital
• 4.3 bn is for Free
Maternal Healthcare
• 4.5 bn for Lease of
medical equipment
• 3.5 bn for Kenya
Medical Training
Centres
• 5.8 bn for Moi Teaching
Hospital
• 3.0 bn for
Doctors/Clinical
Officers/Nurses
internship programme
• 1.3 bn of universal
health coverage
Others
• Industry and
Manufacturing- 7.7
bn
• Tourism
Development - 2.3
bn
• Governance Law
and order -
KES182.5 billion
• Mining – 2.7 bn
• Social protection –
30.1 bn
• Women and youth
– 2 bn
Transport Health Others
Key Initiatives at A Glance – Cont’d

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right people
right size
right solutions

Proposed changes in the Finance Bill, 2016
• RBA – perpetual licences / third parties to provide the regulator with additional
information
• CMA – licencing of online trading and bureaus
• Banking Act
– SACCOO’s / Public Utility Companies / other institutions to get information from
CRB
– Consultation with the Cabinet Secretary when CBK is to intervene in the
management of an institution
– Higher penalties for non-compliance with laws and regulations
– Increase of core capital

Proposals in the speech
• Issue a new Central Bank of Kenya Bill to strengthen governance and
supervision
• Introduction of Moveable Property Security Rights Bill, 2016
• Nairobi International Financial Centre (NIFC) Bill - strengthen Kenya’s position as
a financial hub
• Introduction of a Financial Services Authority (FSA) Bill aimed at merging non-
banking regulators
• Introduction of new investment products, approved by CMA
• Introduction of M Akiba Government Bond platform

Proposals in the speech (continued)
• Encourage RBA’s to form medical schemes
• Competition Act – maximum penalty defined and thresholds for exemptions
• Air passenger service charges to increase
• Road Maintenance Levy to increase
• Insurance – reduced time for payment of claims / additional guidelines on risk
based / more business expected to be underwritten in Kenya / Regulations on
Takaful / changes to valuation methods for the life business

Corporation Tax Changes
• 20% corporation tax rate for real estate developers - 1,000 residential units p.a.
• Minimum taxable rental income threshold of KShs 144,000 p.a. (12,000 p.m.)
• Reduced withholding tax rate on rent from 12% to 10%
• Commissioner to appoint withholding tax agents for rental income w.e.f 1 Jan
2017
• CGT Exemption - transfer of property to immediate family as part of
divorce/separation or otherwise or to a company where spouses or a spouse and
immediate family hold 100% shareholding - w.e.f 9 June 2016
• Taxpayers earning income outside Kenya to qualify for tax amnesty for historical
taxes, penalties and interest w.e.f 1 Jan 2017

Accountants &
business advisors
Pay As You Earn Changes
• PAYE tax brackets widened as follows:
• Personal relief increased from KShs. 1,162 to KShs. 1,280 per month w.e.f.
1 Jan 2017
• PAYE applicable on earnings of more than KShs. 12,460 p.m. - w.e.f 1 Jan
2017.
• Bonuses, overtime and retirement benefits paid to the low income
employees exempt from PAYE w.e.f 1 July 2016
Tax Bands Current
p.m
Revised
p.m
Rate
On the first 10,164 11,180 10%
On the next 9,576 10,534 15%
On the next 9,576 10,534 20%
On the next 9,576 10,534 25%
In excess of 38,892 42,781 30%

Tax Procedures Act 2015 Changes
• Effective date for rental income tax amnesty backdated to 19 Jan 2016
• Commissioner empowered to collect information from third parties - w.e.f 1
July 2016
• Commissioner to respond to an application for a refund of overpaid tax
within 90 days.
• Period for application for a refund extended from one to five years from the
date the tax was paid. However, an application for VAT refund to be made
within 12 months.
• Commissioner to respond to a taxpayer’s application for an extension of tax
payment within 30 days. Effective date - 1 January 2017

Tax Appeals Tribunal Act 2013 Changes
• Qualifications of a Secretary to the Tribunal introduced.
• Panel clerks of the Tribunal to be appointed by the Tribunal.
• Tribunal may extend the period of filing a notice of appeal to more than 30
days.
• Appellant to be served with a statement of facts by the Commissioner within
2 days after submission to the Tribunal.
• Commissioner’s period to submit and serve statement of facts and other
required documents may be extended.
• Clarity on who qualifies to represent the appellant at the Tribunal –
Advocates are now allowed.
Effective date - 1 January 2017

Value Added Tax Changes
Exempt goods and services
• Garments and leather footwear, manufactured in an Export Processing Zone
• Liquefied Petroleum Gas (LPG)
• National Park entry fees
• Commissions earned by tour operators
• Motor vehicles purchased for donor funded projects
• Equipment and machinery for use by security organs
• Raw materials used in production of animal feeds
• Goods and services used in the construction of specialized hospitals
• Goods and services purchased for use in construction of recreational parks
Effective date 9 June 2016

Other VAT Changes
• Scope of VAT on serviced apartments and holiday homes expanded -
effective 1 July 2016
• Service charge paid in lieu of tips not subject to VAT – effective 1 Jan 2017
• Goods and services purchased from Special Economic Zone Enterprises
now zero rated – effective 9 June 2016
• Medicaments containing other antibiotics (tariff number 3003.20.00) now
zero rated - effective 9 June 2016
• Amendment to the Tax Procedures Act to give the Commissioner powers to
appoint or revoke the appointment of WH VAT agents – effective 19 Jan 2016

Excise Duty Act, 2015 Changes
• Excise duty on cosmetics and beauty products introduced at the rate of 10%.
• Excise duty tax regime for motor vehicles amended to 20%.
• Excise duty on plastic sacks and bags of tariff number 3923.21.00 and
3923.29.00 excluding vacuum bags for food juices, tea and coffee.
• Excise duty exemption for goods imported or purchased for official aid-funded
projects.
• Excise duty on illuminating kerosene at a rate of KShs 7,205 per 1000 litres.
• Excise duty on mineral and aerated water. Previously the law covered all
bottled water.
Effective from 9 June 2016

EACCMA –Exemption from customs duty
• Incinerators for hospitals
• Blood collection tubes of tariff 3926.90.90
• Refrigeration equipment for funeral homes
• HVAC air conditioning equipment
• Uniforms for hospitals staff deleted from subparagraph 28(h) of part B
• Spare parts and accessories deleted from paragraph 26 of part B
• Inputs for agricultural equipment deleted from paragraph 19 of part
B.(Provided for under duty remission)

EACCMA – Import duty rates
Import duty increased on the following:
Item Old rate New rate
Iron and steel products 0% 10%
Specified import duty on iron and steel products - USD
200/MT
Made up fishing net of tariff 5608.11.00 10% 25%
Smart cards and sim cards 10% 25%
Worn clothes and other worn articles of tariff 6309.00.00 USD 0.2
per kg
USD 0.40
per kg
Aluminium cans of tariff 7612.90.90 10% 25%
Oil and petrol filters of tariff 8421.23.00 and air filters of
tariff 8421.31.00
10% 25%

EACCMA –Duty Remission Scheme
HS Code Item Old rate New rate
Motor Cycle CKD Kits 10% for one year
1001.99.10,
1001.99.00 Wheat grain 35% 10%
Delete Par. 19
Part B of 5th
Schedule
Inputs for use in the
manufacture of
agricultural equipment 0%
Raw sugar for refining
into industrial sugar 0% for one year
Industrial Sugar
• FY 2017/18 85% duty remission
and import duty rate of 15%
1511.90.40 Palm Stearin, RBD
Removed from duty remission
scheme

EACCMA –Stay of application of the CET
H.S Code Item Provision
1006.10.00
1006.30.00
1006.40.00 Rice
CET to apply a rate of 35% or USD 200/MT whichever is
higher
7308.90.99
Iron and Steel
structures
CET to import iron and steel products at a rate of 25% or USD
250/MT whichever is higher FY 2016/2017
7318.15.00
7318.16.00
7318.19.00
Screws, Bolts and
Nuts CET at a rate of 25% or USD 250/MT whichever is higher
4907.00.90 Revenue stamps CET at a rate of 25% instead of 0%
4805.19.00
4805.91.00
4805.92.00
4805.93.00
Paper and paper
board CET at a rate of 25% instead of 10%
7311.00.00 Gas Cylinders CET at a rate of 25% instead of 10%
Made up garments
and footwear Ex-EPZ
CET at the rate of 0% for one year on condition that the 20%
limit is not exceeded and the goods obtained shall not be sold
to other partner states

PKF Taxation Services Limited
Value Added Tax

VAT Evolution
Sales TaxSales Tax
VAT Act 1990VAT Act 1990
VAT Act 2013VAT Act 2013

• VAT is a general consumption tax assessed on the value of goods and services
• It applies to all commercial activities involving production/distribution of
goods/services
• It is ultimately borne by the final consumer
• It is charged as a % of price – 0% and 16%
• VAT is collected fractionally – input/output netting
• Input/output netting ensures that the tax collected is neutral
Definition

A transaction is within the scope of Kenyan VAT where:
• It is a supply or importation of goods or services
• Takes place in the Kenya
• Is a taxable supply
• Made by a taxable person
• Is made in the course or furtherance of any business carried on by that
person
Five pillars of VAT

• Done through registration for PIN on
• Registration is mandatory for any person who has supplied taxable
goods or services or expects to supply taxable goods whose value
is ≥ KShs 5,000,000 within twelve months
• Registration should be done within 30 days from the date on which
he becomes a taxable person
• Voluntary registration is allowed.
Registration for VAT

•Taxpayer can de-register for VAT if:
 Does not make taxable supplies in excess of KShs 5M within
12 months;
 Does not expect to make taxable supplies for the next 12
months.
• Taxpayer is required to continue filing returns until de-registration is
approved
• Failure to file the returns crystallizes penalties
De-registration for VAT

supply of goods means –
(a) a sale, exchange, or other transfer of the right to dispose of the goods as
owner; or
(b) the provision of electrical or thermal energy.
Definition of Supply

supply of services means anything done that is not a supply of goods
or money, including –
(a) the performance of services for another person;
(b) the grant, assignment, or surrender of any right;
(c) the making available of any facility or advantage; or
(d) the toleration of any situation or the refraining
Definition of Supply

supply of imported services means a supply of services that satisfies the
following conditions –
1. The supply is made by a person who is not registered for VAT
2. It is a taxable supply if it had been made in Kenya; and
3. the registered person would not have been entitled to a credit for the full
amount of input tax payable
Definition of Supply continued…

The time of supply for purposes of VAT is the earlier of:
• Date of supply of goods/services
• Date a certificate is issued by an architect, surveyor or consultant or in a
supervisory capacity in respect of the service
• Date an invoice is issued
• Date payment or part payment is received in whole or part
Time of Supply

What is the difference between taxable and exempt supplies?
Taxable supplies
• Standard rated supplies (16%) or zero-rated (0%)
• Supplier can claim input VAT incurred in making taxable supplies within 6
months
Exempt supplies – Not taxable supplies
• Persons who deal exclusively in exempt supplies are not liable to register
and cannot claim input tax on these supplies
Taxable vs Exempt Supplies

• Supplier place of business is in Kenya
• Case study -F.H. Services Kenya Ltd vs Commissioner of
Domestic Taxes (2012)
“...the place of performance is immaterial, what is material is the
place of use or consumption...”
• What constitutes an export of service?
Place of supply- Services

Input VAT is:
• Tax paid by a registered person on the purchase of goods or services to be
used for the purpose of his business
• Tax paid by a registered person on the importation of goods or services to
be used for the purpose of his business
• Taxpayer can claim input VAT if registered for VAT
Input VAT

• A newly registered taxpayer can claim input VAT on stock at hand and fixed
assets
• Such input VAT is claimed using the prescribed form
• Stock/fixed assets must have been purchased within 24 months immediately
preceding registration or exempt supplies becoming taxable
• VAT claim must be made within 3 months of registration
Pre-registration Input VAT

• Purchase, repair and maintenance of passenger cars and minibuses,
including spare parts.
• Entertainment, restaurant and accommodation services unless the
services are provided in the ordinary course of business.
Non-deductible Input Tax

• Mixed supplies – taxable and exempt supplies
• Direct attribution – full deduction of input tax directly attributable to taxable
supplies
• If exempt supplies < 10% of total sales – entitled to a full credit of input tax
(taxable supplies > 90%)
• If exempt supplies > 10% of total sales – apportionment of input tax
(taxable supplies < 90%)
• Deductible Input = Total value of taxable supplies * Input tax
Value of total supplies
Apportionment of Input Tax

• Input tax only claimed against a valid tax invoice
 Supplier name, address, PIN
 Date of supply and of invoice
 ETR/ESD number
 Serial number
 Name and address of recipient of supply
 Description of goods/services
 Taxable value of goods/services
 VAT rate and amount of tax
 Total value of supply and amount charged
Tax Invoice

• A claim for refund of VAT should be lodged within 12 months from the date
the tax became due and payable
• An application for refund of tax on bad debts should be made within 3 to 5
years from the date of supply
• Tax refunded in error should be refunded to the Commissioner within 30
days of service of demand. 1% interest for non compliance.
Refund of Tax

What is the validity period for a credit note?
• The validity period of credit notes is 6 months.
Credit Notes

Are remissions still granted?
• Only remissions awarded prior to the commencement of the
VAT Act, 2013 shall remain in force for a period of 5 years
from the date of commencement of VAT Act 2013.
Remissions

Reverse charge VAT is Value Added Tax on imported services
Accounted as follows:
Mixed supplies persons
• Registered persons will get credit for part of input tax that
relates to taxable supplies
Reverse Charge VAT

Illustration
Fully taxable
200
200
Nil
Mixed Supplies
200
Apportioned
Balance
Exempt
supplies
200
0
Nil
Import
Value
Import
Value
Taxable
Value
Input Value

Offences
Offence Penalty/Interest
Late Payment of VAT 1% interest on amount payable
Fraudulent refund claims 2 times the amount of the fraudulent claim
Late filling of returns KShs 10,000 or 5% of tax due
Registration offences KShs 200,000 or imprisonment not exceeding 2 years or both

International Symposium
Montreal
18 – 21 October 2015

Income Tax

• Income Tax - Tax charged on all income of a person (individual or corporate),
whether resident or non resident
• Income accrued in or is derived in Kenya
Resident company –
 Incorporated in Kenya.
 Management or control conducted in Kenya.
 Declaration in Kenya Gazette.
• Non-resident companies with Permanent Establishments (PE) in Kenya are
taxed on their Kenyan income at a non-resident tax rate.
Income chargeable to tax

• Resident individual –
 Permanent home in Kenya & present for any period in a particular time;
or
 No permanent home but present for 183 days in a year of income or
average of 122 days in that year of income and the other 2 preceding
years.
• Incomes chargeable to tax:
 Business, employment/service rendered, rent, dividends, interest,
pension, capital gain and any other income deemed under the ITA.
Income chargeable to tax

• From an accounting perspective all income is credited in the Income
Statement
• Accountant takes all the sales less all the expenses to arrive at
accounting profit or loss.
• What about the Taxman?
 Specified sources of income.
 Allowable or non-allowable expenses.
Accounting vs. Taxable income

KShs
Net profit/(loss) per accounts xx
Add:
Non-allowable expenses xx
Expenses relating to exempt income xx
Less:
Capital allowances (xx)
Other deductible expenses (xx)
Exempt income (xx)
Adjusted profit/(loss) for tax xx
Computing taxable business income

• Expenditure wholly and exclusively incurred in the production of income for that
year of income.
• Bad debts written off if guidelines are met.
• Expenses incurred prior to the commencement of business that would have
been deductible if incurred after the date of commencement.
• Club subscriptions paid by an employer on behalf of an employee.
• Expenditure on advertising.
Allowable expenses

• Donations to approved charitable organisations and social infrastructural costs.
• Cost of structural alterations (not including additions and replacements) to
premises, incurred by a landlord to maintain the rent.
• Employee contributions to NSSF and registered pension funds that are not in
excess of the annual KShs 240,000 limit.
Allowable expenses

• Expenditure or loss not wholly and exclusively incurred in the production of
income.
• Capital costs and losses.
• Taxes - income tax, compensating tax etc.
• Personal expenses, other than those incurred specifically in the course of
business.
• Expenditure or losses that are recoverable under any insurance, contract or
indemnity.
• Restricted interest for “thinly capitalised” companies.
Disallowable expenses

• Basis of estimation of tax payable:
 Current year
 Prior year
• Current year basis is more appropriate where the operating results do not
fluctuate substantially.
• In case of variance of 10% or more, penalties and interest are levied.
Estimation of instalment taxes

• Instalment tax (non agricultural) - payable by the 20th day of the 4th, 6th, 9th
and 12th months in a year of income.
• Instalment tax (agricultural) – 75% payable by the 20th day of the 9th and
remaining 25% by the 20th day of the 12th month.
• Final tax (agricultural & non-agricultural) payable by the last day of the 4th
month after the end of the financial year.
• Self assessment return (SAR) is due by the end of 6th month after year end.
• Individuals year of income runs from January to December.
• Filing and payment of taxes is now mandatory to be done on iTax.
Payment of taxes and filing of returns

• Investment deduction
• Industrial Building Allowance
• Commercial Building Allowance
• Wear and Tear Allowance
• Loose tools under Section 15(2)(g)
• Farm works deduction
• Mining deduction
Capital Allowances

• Pricing of cross-border transactions between two related entities.
• In some jurisdictions, domestic transactions with resident related parties also fall
under TP rules e.g. Uganda and Tanzania.
• Relationship - participation directly or indirectly in the management, control or
capital of the other entity. Includes relation through degree of consanguinity and
affinity.
• Transactions between two related parties have to be on an arm’s-length basis.
Transfer Pricing

• Related party transactions subject to TP:
 Sale of tangible goods
 Provision of various services e.g. management services
 Presence of intangibles e.g. goodwill, royalties etc.
 Financing facilities e.g. loans, overdraft, LCs
 Year end adjustments i.e. any other transactions that will affect the profit of
an entity
Transfer Pricing

• Global organization structure, including an organization chart
• Nature of the business or industry and market conditions
• The controlled transactions
• Strategies and assumptions regarding factors that influenced the setting of
any pricing policies
• Functional, asset and risk analysis
• Selection and application of transfer pricing method
• Any other information, data or document considered relevant by the
commissioner.
Transfer Pricing Documentation

Transfer Pricing
Transfer Pricing Methods
Traditional Transaction Methods Transactional Profit Methods
Transactional
Profit Split
Method
Transactional Net
Margin Method
Resale Price
Method
Cost Plus
Method
Comparable
Uncontrolled
Price (CUP)
Method

• Foreign control & ratio of debt to equity exceeds 3:1
• Control by a non-resident person alone or together with 4 or fewer other persons
– > 25% shareholding or voting power
• Loans - overdrafts, ordinary trade debts, overdrawn current accounts or any
other form of indebtedness for which the company is paying financial charge,
interest, discount or premium.
• Interest expense will be restricted to the extent of excess debt to equity ratio
• Realized exchange losses deferred until thin capitalization ceases or loans are
fully repaid
Thin Capitalization

Restricted interest =
Total interest expense x Highest amount of all loans in year – 3x (IC+RR)
Highest amount of all loans in year
where:
IC – Issued capital
RR – Revenue reserves (including accumulated accounting losses)
Thin Capitalization

• Introduced in 2010 to combat tax planning schemes for thinly capitalized
companies.
• Interest is deemed in case of interest free loans at the Commissioner’s
prescribed rates (currently 10% for Q2 2016).
• The rationale: there is no interest expense on interest free loans hence no
need to add back any excess interest expensed.
• Deemed interest is disallowed for tax purposes.
• WHT at 15% now applies on such deemed interest.
Deemed Interest

• Compensating tax is applied on distribution of untaxed incomes arising from
capital gains or tax exempt income.
• Dividend is any distribution made either in cash or in kind by a company to its
shareholders with respect to their equity interest in the company.
• Monitored through maintaining a memorandum account called a Dividend Tax
Account (DTA).
• DTA is credited by the income tax paid and dividends received by the company
(0.3/0.7 of dividend received) and debited by a fraction of dividend paid to
shareholders of the company (0.3/0.7 of dividend paid).
Compensating Tax

Compensating Tax
• Compensating tax rate 42.86%.
• The DTA must always have a credit balance for there to be no compensating
tax.
• DTA credit balances should be carried forward.
• DTA debit balance means excess distributions have been made and
compensating tax must be paid to bring the DTA back to zero.

• CGT is a tax charged on transfer of properties
• Property – land & buildings situated in Kenya or marketable securities
(excluding listed shares)
• Applicable at 5% of net gain
• Net gain is transfer value – adjusted costs
• Adjusted costs –
 acquisition or construction costs
 expenditure wholly and exclusively incurred on the property;
 incidental cost to the transferor of acquiring the property.
Capital Gains Tax (CGT)

Transfer of property for the purpose of:
• securing a debt or a loan;
• issuance by a company of its own shares or debentures;
• vesting in the personal representative of a deceased person by law;
• administration of the estate of a deceased person;
• liquidation by an order of a court of the property of a company;
• bankruptcy of the property of a bankrupt;
• transfers between spouses/former spouses/immediate family;
• compensation from Government for infrastructure development.
CGT – Transactions not deemed to be transfers

• Income taxable under other specified sources of income;
• Gain accruing to a company on the transfer of machinery; and
• Company restructuring subject to being public interest.
• Transfer of private residence occupied for more than 3yrs.
• Transfer of land by an individual where:
 the transfer value is not more than three million shillings;
 agricultural property having an area of less than fifty acres where that
property is situated outside a municipality, gazetted township or an area
that is declared by the Minister, by notice in the Gazette, to be an urban
area
CGT - Exempt Transactions

Offence Interest TPA Section
Late return
submission penalty
5% of tax payable under the return or KShs 20,000
whichever is higher
83(1)(c)
Interest 1% - Simple Interest 38(1) (3)
In duplum rule still applicable - interest cannot
exceed principal
38(8)
Tax shortfall penalty
*applicable where there is false
or misleading or omitted
statement that results in a tax
liability
75% of the tax shortfall when statement or omission
was deliberate
84(2)(a)
20% in any other case 84(2)(b)
Increased by 10% for 2nd time offenders 84(3)(a)
Increased by 25% for 3rd time or more offenders 84(3)(b)
Reduced by 10% if voluntary disclosure is made 84(4)
Offences under TPA

Offence Interest
TPA
Section
Failure to keep, retain, or
maintain documents required
by a tax law for a reporting
period
10% of the amount payable under the law or
KShs.100,000 in absence of tax payable in the
reporting period
82/93
Failure to register/deregister
for tax where required to do so
by a tax law
Kshs.100,000 per month or part thereof but not
more than Kshs.1 million
81
Tax avoidance penalty 200% of the amount avoided. 85
Failure to submit a tax return
or pay tax electronically as
required by a tax law.
Commissioner's written notice requesting for
reasons resulting to the offence must be
responded to in 14 days. Failure to respond shall
attract a penalty of KShs 100,000.
86
Offences under TPA

Offence Interest
TPA
Section
Failure to appear before the
Commissioner.
Kshs. 10,000 if an individual and Kshs. 100,000 in
other cases
87
Failure to submit a document
other than a return as required
by a tax law by the due date
The penalty shall be KShs 1,000 per day to a
maximum of KShs 50,000
94
Fraudulent acts A fine not exceeding KShs 1,000,000 and to
imprisonment for a term not exceeding three years,
or to both
97 &
104
Fraudulent claim for a refund Two times of the tax so claimed 88
Offences by tax agents Two times the amount of tax evaded or to a KShs 5
million whichever is higher or imprisonment for a
term not exceeding 5 years or both
92 &
104
Offences under the TPA

Tax Topical Matters

Withholding VAT (WHVAT)
• A taxpayer supplies and invoices an appointed withholding VAT Agent
• The payment for the supply is made less 6% of the taxable value
• The withholding VAT agent pays the withheld VAT to the Commissioner and
withholding VAT certificate is issued online to the supplier
• The certificate entitles the supplier to claim back the withheld VAT in the next
VAT 3 return
• Payable on or before the 20th day of the month following the month of supply
• Does WHTVAT result in VAT refunds?

Sample Invoice
Professional fee 100,000
VAT @16% 16,000
Total 116,000
WHVAT = 6%*100,000 = 6,000
WHVAT illustration

Tax on Rental Income
• Rental income has always been subject to tax in Kenya
• Residential Rental Income (RRI) – 10% of gross turnover (> KShs144,000 but
<=10mil per annum)
• RRI is due by the 20th of the following month & is final tax
• Taxpayer can elect to remain in the current tax regime by making an application
to the Commissioner
• Appointment of Withholding tax agents for rental income – WHT rate 10%. Due
by 20th of following month
• WHT on non-residents rental income at 30%

• Rental income tax amnesty introduced by Finance Act 2015
• No taxes (principal, penalties & interest) due for period prior to 2014
• Principal tax payable for 2014 & 2015 provided returns are filed by 30 June
2016. Penalties and interest waived.
• Rental income not applicable if taxpayer is under audit or investigation on
the undeclared rental income
• Taxpayers earning income outside Kenya to qualify for tax amnesty for
historical taxes, penalties and interest w.e.f 1 Jan 2017
Tax Amnesty

• Periodic KRA audits and compliance checks
• TAT handles all tax appeals filed against any tax decision by the
Commissioner – more independent and professional
• Notice to Appeal within 30 days from issuance of confirmed assessments
• 14 days to file the Appeal documents
• Alternative Dispute Resolution Mechanism
• Power to engage the service of an independent expert and expert witnesses
• Appeals to High Court and Court of Appeal
KRA Audit & Tax Appeals

WHT Rates- Residents
Nature of payment Rate
Management, technical , professional, training, agency, consultancy fees 5%
Contractual fees -Building, civil and engineering works 3%
Royalties 5%
Interest: - Bearer instruments (>10 years)
-Financial institutions and Government 2 year bearer bonds
10%
15 %
Dividends > 12.5% voting power
Dividends <12.5% voting power
Exempt
5%
Winnings from Betting and Gaming 20%
Rent, premium or similar consideration for the use or occupation of immovable property 10%

WHT Rates-Non-residents
Nature of payment Rate
Management, professional, training fees
Management, professional fees paid to E.A citizen
20%
15%
Royalties 20%
Dividends 10%
Pensions and retirement annuities 5%
Rents (leases) for use or occupation of: - Movable property and cross border
leases
- Immovable property- Real Estate
15%
30%
Winnings from Betting and Gaming
Bookmakers (introduced through Finance Act , 2015)
20%
7.5%
Interest 15%

Double Tax Agreements
Nature of payment UK Germany &
Canada
Denmark, Norway,
Sweden
Zambia
India France EAC
% % % % % %
Management or Professional fees 12 ½ 15 20 17 ½ 20 15
Royalties 15 15 20 20 10 20

Country Status
EAC States Awaiting ratification and notification by Tanzania, Uganda and Burundi
Iran Awaiting ratification and notification by both Iran and Kenya
Kuwait Awaiting ratification and notification by both Kuwait and Kenya
Mauritius
Awaiting notification by Kenya
Seychelles
Awaiting notification by Kenya and ratification/notification by Seychelles.
Pending DTA’s

THE END

Accountants &
business advisers
For more information or assistance with this matter or any tax advisory related matters contact us:
Michael Mburugu
Tax Partner
Tel +254 20 4270000
mmburugu@ke.pkfea.com
advice.You should not act upon the information contained in this presentation without obtaining specific professional advice.
This presentation has been prepared for general guidance on matters of interest only and does not constitute professional
No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained
in this presentation . To the extent permitted by law, PKF, its members, employees and agents do not accept or assume any
liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the
information contained in this presentation or for any decision based on it.

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