TAXATION & FINANCIAL
REPORTING
Taxation & Financial Reporting
William M. Kinai
Wednesday, 19 October 2022
10:00am — 12:30pm
MODULE 7:
TAXATION & FINANCIAL REPORTING
Mission
The module provides an understanding of taxation laws
relevant to business and information on financial reporting
useful to investors & creditors in making sound investment
decisions.
OUTLINE
• Basics, Taxes of Concern & Impact on Business
• Tax Planning: Compliance, Incentives, Efficiencies, Management
• Tax Disputes & Resolution
•Q&A
INTRODUCTION
Tax Legislative & Statutory Framework
• Constitution
• Statutory framework
• Tax Procedures Act, No. 29 of 2015
• Income Tax Act, Cap. 470 of 1973
• Value Added Tax, No. 35 of 2013
• Excise Duty Act, No. 23 of 2015
• The East African Community Customs Management Act of 2004
Common Business Entities for MSMEs
• Company — Resident
• Subsidiary of company — Resident or non-resident
• Branch — of a non-resident
• Partnership
• Sole proprietorship
Classification of Taxes
Turnover Tax
What? Rate?
• TOT is charged on • 1%
gross sales of a business. • Due date for filing and
• Payable by resident persons paying is on the 20th day of
whose annual gross the following month.
turnover is more than • Final tax
KES 1,000,000 but less than
KES 50,000,000
Turnover Tax
Exemption? Mandatory?
• Income below KES • Taxpayer may opt out
1,000,000 and above KES • Application in writing to the
50,000,000 Commissioner of Domestic
• Employment Taxes.
• Rental • Subject to approval.
• Management & professional
services.
• Any income subject to
final withholding tax
Income Tax - Corporate & Individual
What? Rate?
• Charged on taxable income • Corporate resident — 30%
• Taxable income is net • Corporate non-resident
profit as per accounts add (Branch) — 37.5%
back non-allowable • Partnership — graduated
expenses and less capital scale on share of profits
allowances • Sole proprietorship —
graduated scale
Income Tax - Corporate & Individual
Due Date? Mandatory?
• Corporate — 25% payable • Taxpayer may opt out
by the 20th day of every 4th • Application in writing to the
month → Kshs.40,000/year. Commissioner of Domestic
• Income Tax Company Taxes.
Return filed on or before 6th • Subject to approval.
sixth month after the end of
an accounting period.
• Individual income tax
return filed by 30th of June
Withholding Tax (WHT)
What? What?
• Is deductible from certain • WHT is deducted at source
classes of income at the from the following sources of
point of making a payment, income: Interest, Dividends,
to non-employees. Royalties, Management or
professional fees (including
consultancy, agency or
contractual fees),
Commissions, Pensions
Value Added Tax (VAT)
What?
• Mandatory registration where annual turnover above KES
5,000,000
• Chargeable on taxable supplies
• 0% - for Zero rated supplies e.g. Exportation of
goods/services, goods supplied to EPZ, Privileged persons
and Public bodies etc.
• 8% - Petroleum oils obtained from bituminous, Motor Spirits
(Diesel Super, Aviation spirit etc.)
• 16% - General rate for other Goods and Services
Value Added Tax (VAT)
What?
• Exempt supplies are not taxable supplies and any related
input tax is therefore not deductible.
• Taxpayers who only make exempt supplies are not required
to register for VAT.
• Exempt supplies are listed in the first schedule of the VAT
Act 2013 e.g. Artificial teeth and dental fittings; sugarcane;
maize (corn) flour; cassava flour; current, deposit or savings
accounts; insurance and reinsurance services; making of any
advances or the granting of any credit, etc.
Value Added Tax (VAT)
Obligations of a VAT registered Taxpayer 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.
• File tax returns on time → on or before the 20th day after the
end of that tax period.
• Pay tax due on time → on or before the 20th day after the
end of that tax period.
• Pay penalties and interest (where applicable).
THE NEED FOR TAX PLANNING
Tax Planning
What?
• Analysis of one’s financial situation from the tax efficiency
point-of- view.
• Reducing your tax liabilities by utilizing exemptions,
deductions, and benefits
Why?
• KRA attempts to extract the maximum amount possible while
taxpayer desires to keep her tax liability to a minimum.
Tax Planning
Basis?
• Income Tax Act allows taxpayers to reduce their payable tax
by legally arranging the affairs to maximize on incentives
offered.
Tax Planning
Justification?
• Channeling funds from taxable sources to different income
— generating plans
• Ensures optimal utilization of funds/working capital for
productive causes
• E.g.
• Mortgage Interest Deduction - Interest paid on an
amount borrowed for purchase of premises occupied
for residential purposes is deductible against employment
income, up to a maximum of Kshs 300,000/- per annum.
Tax Planning
Justification?
• Channeling funds from taxable sources to different income
— generating plans
• Ensures optimal utilization of funds/working capital for
productive causes
• E.g.
• Insurance relief is granted to an employee who has paid
insurance premiums for life or health or education polices
for himself, his wife or child & contributions to National
Hospital Insurance Fund (NHIF) → 15% of premiums paid
up to a maximum of Kshs 60,000 per annum
Tax Planning
Compliance
• Avoid penalties & interest
• Engaging tax consultants
• Paying under the correct rates
• In-house tax team?
• Private ruling - A taxpayer may apply to the Commissioner
for a private ruling which shall set out the Commissioner's
interpretation of a tax law in relation to a transaction entered
into, or proposed to be entered into, by the taxpayer (Tax
Procedures No. 29 of 2015, Section 65(1).
• Target 100% compliance
Tax Planning
Expenses
• Tax gross-up - additional money an employer pays an
employee to offset any additional income taxes (NSSF, NHIF,
etc.)
• Tax obligations - e.g. VAT registration
• Non-deductible expenses – e.g. Depreciation and depletion,
Goodwill, Start-up expenses, Interest Expenses, Bad debts,
Charitable contributions, Fines and penalties, Taxes, Net
operating losses, Payments to foreign affiliates
Tax Planning
Expenses
• Allocation of costs i.e. personal vs business e.g. non-cash
benefits over Kshs.3000 per month are taxable.
• Manage import costs - demurrage etc.
Tax Planning
lncome/lncentives
• Taking advantage of allowable deductions - capital
allowances.
• Non-cash benefits
• Insurance premiums
• Manage tax overpayments → apply for refunds
Tax Planning
Other Considerations
• Tax health checks
• Budgeting & contract reviews
• Provisions, write-offs etc.
• Validation of exemption certificates
• Review of tax codes by - DTAs & Customs, etc.
TAX DISPUTE & RESOLUTION
LEGAL BASIS
Constitution of Kenya
Article 210 - Constitution of Kenya states:
”No tax or licensing fee may be imposed, waived or varied except
as provided by legislation.”
Dispute Drivers: Tax Procedure - Domestic
Tax Procedures Act (TPA)
“...to harmonise and consolidate the procedural rules for the
administration of tax laws in Kenya...”
“...unless a tax law specifies a procedure that is unique to the
administration of a tax thereunder, the procedures provided for
under the TPA shall apply...”
Dispute Drivers: Tax Procedure - Domestic
Tax Procedures Act (TPA):
• Income Tax Act (ITA), Value Added Tax Act (VAT), Excise
Duty Act and Miscellaneous Fees and Levies Act, 2016 &
• Any Regulations or other subsidiary legislation made under
the above.
Dispute Drivers: Tax Procedure - Domestic
East African Community Customs Management Act:
• “...An Act of the Community to make provisions for the
management and administration of Customs and for related
matters...”
• Post Clearance Audits - require importers and exporters to
furnish KRA PCA with the relevant documents for a period of 5
years.
Revenue Authority Audits
Three main stages:
• Pre- audit — Request of information/intention to audit
• Audit — understanding business, actual review, clarifications
• Post-audit — preliminary findings, clarifications, assessments
Types of Revenue Authority Audits
Place of audit:
• Desktop audits — phones, email, tax review
• Field audits — physical records, electronic, etc.
• Mixed audits — widely used, mostly in-depth
Types of Revenue Authority Audits
Depth of audit:
• Compliance audits — returns, correct amounts;
• Normal audits — deeper review, longer periods;
• ln-depth audits — largely a mix, thorough; and
• Investigations — suspected evasion/avoidance
Seek Professional Assistance
Audit — Outsider’s view to match reality:
Contact person — advisor
Kick-off meeting — define scope, timeframe, chain of request
Assess risk — must be addressed professionally and
appropriately
Audit Risk Matrix
Audit Risk Matrix
Medium Risk
Low Risk
High Risk
Low Risk Medium Risk High Risk
Matters under this Matters noted with Issues noted with
category are issues that potential exposures crystallized exposures
management need to i.e. payables to the
take note regulators
Post Audit
Pre-assessment:
• Clear outstanding matters — align information request to
information provided;
• Clarification — respond to preliminary findings/tax queries
• Way forward — closure of issues, if assessed there must
be a legal basis
Audit Findings
End product:
• Should indicate areas for clarification or more information;
• Should list any tax issues emerging from the review
• Closure — Compliant, “clean bill of health”... or not → tax
assessment
Tax Dispute
Notice of
intention to audit
is issued KRA Audit is done
based on the
Tax demand is
notice
issued on
instances of non-
compliance if any Tax payer objects
to demand (S. 51
(2) of the TPA)
Tax Dispute
Taxpayer objects to Independent
demand Review of
Objections
60 days
KRA accepts/
amends or rejects
objection
30 days
Issue notice of
appeal to the Tax
Appeal Tribunal
14 days
Provide appeal
Appeal to the Appeal to the
documents the 14 days High Court 14 days Court of Appeal
Tax Appeal Tribunal
DISCUSSION FORUM
Compliance is Low Cost, Efficient and Effective
Compliance is Low Cost, Efficient and Effective
Compliance is Low Cost, Efficient and Effective
Thank You
William Kinai
Director of Finance, Novatus Limited
Phone 0722604194, 0721692895
Email [email protected]
