Nafisa Alibhai & Company

Certified Public Accountants& Business Advisors

Kenya Tax Guide 2010

This Newsletter is prepared for guidance only and is not a substitute for professional advice. Whilst every care has been exercised in ensuring the accuracy of the information contained herein, we will not accept any responsibility for errors or omissions or for any action taken without appropriate professional advice. Nafisa Alibhai and Company, A. Alibhai & Associate Advocates and Elegance Registrars are affiliate firms. Each affiliate firm is a legally separate and independent firm. One affiliate firm is not responsible for the services or acts of any of the other affiliate firm.

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Education fees of an employee's dependants or relatives, if taxed on the employer. Education fees paid by an educational institution or low income employee's dependants attending the institution. International passage for expatriates Employers canteen meal for low income employees Non-cash benefits not exceeding Shs. 36,000 p.a. For employees working outside station the first Shs. 2,000 per diem is deemed to be reimbursement and not taxable. Note expenses reimbursed are not taxable however are required to be supported.

PERSONAL TAXATION
INDIVIDUAL INCOME TAX RATES
ANNUAL TABLE 2005 2010
Cumulative Income KShs First Next Next Next Over 121,968 114,912 114,912 114,912 KShs 121,968 236,880 351,792 466,704 466,704 Tax Rate % 10 15 20 25 30 Tax on Band KShs 12,197 17,237 22,982 28,728 Cumulative Tax KShs 12,197 29,434 52,416 81,144 -

b)

Taxable employment benefits: Motor Vehicle

ANNUAL TABLE 2002 2004

Cumulative Income KShs 116,160 225,600 335,040 444,480 444,480 Tax Rate % 10 15 20 25 30 Tax on Band KShs 11,616 28,032 49,920 77,280 Cumulative Tax KShs 11,616 28,032 49,920 77,280 -

First Next Next Next Over

KShs 116,160 109,439 109,979 109,439 -

Where a motor vehicle is provided to an employee, the benefit value is the higher of the prescribed rate of benefit and the fixed monthly rate by the Commissioner. Leased and hired vehicles are taxed at the cost of hiring or leasing the vehicle. Where restricted use Commissioner pay prescribe lawer rates based on usage.
Fixed Monthly Rates by the commissioner:

EMPLOYMENT BENEFITS
All benefits are taxable at the higher of cost and the fair market value except: a) Tax Free Benefits

Saloons, Hatchbacks & Estates KShs p.m.

0 - 1200cc 1201 - 1500cc 1501 - 1750cc 1751 - 2000cc 2001 - 3000cc 3000cc + 3600 4200 5800 7200 8600 14400

Pick-up or Panel Van KShs p.m.

0 - 1750cc 1750cc + Landrovers and Landcruisers 7200 3600 4200

Medical services provided to a full-time employee and a whole-time service director (holding less than 5% shares) Medical benefits provided to a non-whole-time service director subject to a maximum value of Kshs. 1 million. With effect from 1st January 2010, partners and sole proprietors also entitled to the benefit

The prescribed rate of benefit of cars is the Following for each month on the initial cost

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of the vehicle 1996 - 1% per month 1997 - 1.5% per month 1998 to date - 2% per month
Housing benefit Director Whole- time service director 15% of total income Higher of 15% of Total employment Income or rent paid 10% of total employment income earlier of the date the option is vested in the employee or is exercised by him. Other Benefits Domestic benefits namely staff meals, club subscription, house helps, water security, electricity and all others are taxed at the higher of the cost or fair market value. The Commissioner has prescribed the value of benefit where the cost of the employer is difficult to ascertain. The prescribed rates are:
Agricultural Employee Water (communal or borehole Telephone (landline and mobile) Electricity (communal or generator Furniture 200 Other employee 500

Agricultural employee (including whole time service Director) Other employees

15% of total Employment income or rent paid, whichever is higher

30% of bill

900

1500

Rental recovered from an employee is deducted before computing the housing benefit Loans to employees Low Interest loans Loans made prior to 11 June 1998 are taxed on the employee at the difference between the interest charged to the employee and the lower of the prescribed interest rate or the market lending rate. Fringe Benefit Tax
th Loans granted after 11 June 1998 are subject to Fringe benefit tax payable by the employer at the rate of 30% on the difference between the market interest rate and the interest paid by the employee. th

1% of purchase price or actual cost of hire

c)

Reliefs
2011 Personal relief Mortgage interest relief on owner occupied property (for purchase or improvement) Maximum Home ownership savings plan (For first 10 years. Interest earned on deposit of up to KShs. 3 million exempt Life, health and education insurance relief 15% of premium to a maximum of 60,000 60,000 13,944 2010 13,944

150,000

150,000

48,000

48,000

Registered Employee Share Ownership Plan Employee is taxed on the difference between the market value and the offer price per share on the

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PERSONAL TAXATION
d) Pension and Provident Funds

National Social Security Fund a) 10% of monthly salary, up to a maximum of KShs 400; half paid by employer, half by employee. Compulsory for employers of five or more employees. b) 5% of total monthly casual wages, contribution by employer only. National Hospital Insurance Fund (NEW RATES) According to a recent legal notice, employee contributions to the National Hospital Insurance Fund (NHIF) are to be increased by up to 525%! The legal notice (No.107) does not indicate the effective date but was published on 16th July 2010. Contrary to newspaper reports this makes the effective date to be 1st August 2010. Employers are advised to change their payroll systems/calculations to compute the correct NHIF deductions from 1st August 2010 Failure to remit the correct contributions could result in a penalty of 500%
Monthly income KShs 1000 - 5999 6000 -7999 8000 -11999 12000 -14999 15000 -19999 20000 -24999 25000 -29999 30000 -49999 50000 -99999 Over 100000 Self employed Contribution p.m. KShs 150 300 400 500 600 750 850 1000 1500 2000 500

Deductible Contribution to registered funds in respect of employees is the lower of 30% of pensionable income, actual contribution or Kshs. 240,000 p.a. From 1st July 2004, employees of tax exempt entities are to be taxed on contribution in excess of the permitted limits that such entities make on their behalf to retirement benefit schemes. Lump sum withdrawals up to the specified limit tabulated herein under is exempt from tax. Withdrawals above the limit is subject to withholding tax.
Yearly Registered pension fund Maximum withdrawal 480,000(2009 prior)
st

48,000(2009 prior) 60,000 (wef 1 Jan 2010)

600,000 (wef 1 Jan 2010) 480,000(2009 prior)

st

Registered provident fund

48,000(2009 prior) 60,000 (wef 1 Jan 2010)

st

600,000 (wef 1 Jan 2010) 1,400,000

st

Registered fund payable to Estate of deceased employee Pension from registered scheme for persons over 65 years

180,000 (prior to 2009) 300,000( wef 1 Jan 2010)

st

Directorate of Industrial Training Levy Payable by every employer at Kshs. 50 per employee including an apprentice, indentured learner, other trainee, temporary, seasonal and casual worker, Due at the end of every month. Not applicable to those remitting catering levy.

Pension Contributions to unregistered retirement benefit schemes are fully taxed on the employee Pension Income from such schemes is tax exempt.

OTHER EMPLOYER OBLIGATIONS

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CORPORATION TAXATION
INCOME TAX RATES 2010
Resident company Resident company newly listed on the Stock Exchange with minimum 30% issued shares and complying with certain conditions(available for first 5 years only) for 2002 30% issued shares and rate available for 3 years only Permanent establishment of nonresident company Export processing zone enterprises first ten years next ten years Export processing zone enterprises those engaged commercial and/or manufacturing activities:next ten years 30%

Wear and Tear allowance

Calculated on cost, net of investments allowance, on a reducing balance basis on the following:
Allowance Tractor, lorries over 3 tonnes and similar heavy self-propelled vehicles Computer hardware, calculators, copiers and duplicating machines 25% Aircraft and Motor Vehicles (non commercial, 'limited to notional cost of KShs. 2 million % 37.5%

30.0% 25.0%

37.5% Nil 25% Plant & machinery, furniture and fittings and other equipment including Ships 20.0%

Telecommunications equipment straight line (w.e.f. 12th June 2009) 30% Computer software straight line (w.e.f. th 12 June 2009) Concessionary arrangements the th concessionary period (w.e.f. 12 June 2009) Section 15(2)(G) Claims : Utensil and loose tools what is just and reasonable to the Commissioners satisfaction straight line by practice

20.0%

20.0%

INSTALMENT TAXES
Instalment tax is payable on the basis of:(i) (ii) the current year's estimate, or 110% of the preceding year's tax
20th of the 4th month 20th of the 6th month 20th of the 9th month
th th 20 of the 12 month

Equally over

331/3%

1st Installment 2nd Installment 3rd Installment 4th Installment Final tax

25% 25% 25% 25% Balance

20th of the 4th month after the year end

Other capital allowance CAPITAL DEDUCTIONS

Industrial building Allowance %

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Industrial building allowance is calculated on cost, net of investment deduction, on a straight- line basis.
Factories Industrial building (2.5% upto 2009 workshop machinery used for factory maintenance, hotel buildings and electricity generation for national grid ( effective 2004 onwards) Qualifying investment outside the city of Nairobi, within the Municipality of st Mombasa or Kisumu (w.e.f. 1 January 2010) Purchase of filming equipment by st licensed film producers (w.e.f. 1 January 2010) Mining allowance (on capital expenditure or mining) Year 1 Year 2 - 7 Special rate runs from 2004 to 2008: Manufacturing under Bond combined investment deduction Farm Works Allowance Shipping investment deduction On structures excluding machinery necessary for proper operation of a farm (calculated on cost, on a straight line basis. (Prior to 2007 allowance was 331/3%) 50% 40.0% 100.0%

150.0%

10.0%

Hotels (up to December 2009 - 4%)

10.0%

50.0%

Hostel, educational building and buildings in use for training certified by the Commissioner (w.e.f. 1st January 2010)

50.0%

40.0% 10.0%

Rental residential buildings in planned development areas approved by the Minister (Between Jan 2008 to 31st Dec 2009 5%)

25.0%

TRANSFER PRICING
Related parties are required to develop an appropriate transfer pricing policy based on one of the following prescribed methods: a) Comparable uncontrolled price method b) Cost plus method c) Resale price method d) Profit split method e) Transnational net margin method

Commercial Building (w.e.f. 1st January 2010) Commercial building (w.e.f. 12th June 2009) Commercial building with services (w.e.f. 12th June 2009) 25.0%

2.5%

f)

Any other method prescribed by the Commissioner

Investment Deduction Eligible on cost of building and machinery used for manufacturing,

% 100.0%

TAX LOSSES
Tax losses in Kenya used to be carried forward perpetually to be allowed against future income.

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However with effect from 1st January 2010, tax losses can be carried forward to a maximum of four succeeding years.
Offence Failure to furnish return by due date Penalty 5% of tax due (min. Kshs. 10,000 for companies and Kshs. 1,000 for individuals) 20% of unpaid tax 2% per month

MOTOR RATES

VEHICLE

ADVANCE

TAX
Penalty on unpaid tax Interest on unpaid tax Underpayment of tax or underestimation of instalment tax Fraud or wilful omission in a return

Capacity: Goods carrying vehicles including prime movers and trailers Higher of KShs 1,500 per tonne of load capacity or KShs 2,400 per annum Capacity: Passenger carrying vehicles Higher of KShs 60 per passenger capacity or KShs 2,400 per annum Effective 12th June 2010, advance tax is not payable: by drivers and conductors in respect PSVs on trailers and tractors for agricultural use

20% on difference

Double the amount of tax unpaid Fine not exceeding KShs. 200,000 Imprisonment not exceeding 2 years

Failure to deduct or remit PAYE

25% of the amount of tax involved (Min. 10,000)

Penalties and interest is restricted to a maximum of the principal tax due.

SELF ASSESSMENT RETURNS

Income tax returns are due for filing on the following dates: Corporations: 6th months after the end of the financial year. Individuals and Partnerships: By 30th June of the following year

INCOME TAX PENALTIES

WITHHOLDING TAX
The applicable rates for residents and nonresidents

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United Kingdom (%) Germany & Canada (%) Denmark, Norway, Sweden & Zambia (%) India (%)

Resident Artists and entertainers Management fees Professional fees Royalties Dividends (nil for shareholders with>12.5%). East Africa Community citizen at resident rate of 5% Equipment Leasing Interest (bank) Final tax for individuals unless received from a source other than financial institutions. Not final tax for resident companies, trusts, clubs etc. Interest (Housing bond-HBI) Interest Two-year government bearer bonds Other bearer bonds interest Rents buildings(immovable) Rents - others (except aircraft) Pensions/provident schemes (withdrawal) Insurance commissions Consultancy and agency (from 1 July 2003) Contractual (from 1 July 2003) Message transmission 5% 5% 5% 5%

Non Resident 20% 20% 20% 20% 10%

Management and professional fees Royalties Dividends

12.5

15

20

17.5

15 10 15

15 10 15

20 10 15

20 10 15

3%

5% 15% Interest Pension and retirement annuities Entertainment and sporting events Promoting entertainment or sporting events Rent immovable property Rent - Other than immovable property

15%

10% 15% 25% n/a 3% 10-30% 10% 5% 3% -

15% 15% 25% 30% 15% 5% 20% 20% 20% 5%

20

20

20

20

20

20

20

20

30

30

30

30

15

15

15

15

Withholding tax is payable by the 20th of the following month

VALUE ADDED TAX

The following lower withholding tax rates are applicable with Countries Kenya has double taxation agreement with.

RATES

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Standard rate (effective 13th June 2003) Hotels and restaurants 16%

16% VAT on commercial Rents effective 1.1.2008 Importation of taxable service (Reverse VAT) VAT as a fraction of the inclusive price (standard rate) Plus catering levy(effective 16 June 2006) 16% 16%

Restriction on VAT claim is imposed on passenger cars, restaurant and hotel accommodation services, entertainment services and certain furniture and fittings. Note that restriction does not apply where the supplies are stock in trade.

VAT REFUND
A taxpayers input VAT exceeds the output VAT, the excess is refundable if such excess arises from: Making zero- rated supplies Tax withheld by withholding VAT agents

16/116 2%

Industrial fuel and electrical electricity Supplies under the 5th Schedule to the VAT Act Supplies under the 2nd and 3rd Schedule to the VAT Act

12% 0%

A taxpayer can also apply for refund where: The tax has been paid by error. The debt has become bad. Note the supply must have been made within a period of 3 years to 5 years.

Exempt

VAT ANNUAL THRESHOLD

Annual turnover limits: Turnover limit prior to 1st January 2007, however designated services under the 4th Schedule, VAT Act where mandated to register for VAT Effective 1st January 2007 turnover threshold increased and 4th Schedule repealed Kshs. 3,000,000

VAT REMISSION
Upon satisfaction and approval of the Minister of Finance, VAT remission has been granted on: Capital goods purchased locally or imported for investments of not less than Kshs. 1 Million Supply of taxable goods or services to specific project approved as low cost housing Taxable supplies for use in the construction or expansion of private universities (excluding student hostels and staff housing) Any other VAT remission as approved by the Minister of Finance subject to the provision of the VAT Act.

5,000,000

INPUT VAT
A taxable person can claim input on VAT charged by a suppliers.

VAT PENALTIES
Offence Non display of registration Penalty Kshs. 20,000

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certificate default penalty plus fine not exceeding Kshs. 200,000 and/or imprisonment not exceeding 2 years From Kshs. 10,000 to Kshs. 200,000. Goods connected with offence can be forfeited. 5% of the tax due (Min. Kshs. 10,000)

Customs duty is chargeable under the East Africa Community Customs Management Act for imports. The following are the prescribed duty rates: Raw materials 0.00% Semi Finished goods 10.00% Finished goods 25.00% IDF Fees (exempt for EAC Countries) 2.25% Certain capital goods are eligible for duty remission on approval of the Minister of Finance. Goods imported preferential rates. from COMESA have

Failure to issue a tax invoice, cash sale or maintain proper books and records

Failure to furnish a return on time

Failure to pay tax on time

Interest if 2% p.m. compounded

Failure to produce books of accounts or records

Kshs. 15,000 or 6 months imprisonment

EXCISE DUTY
Excise duty is charged on variety of products namely: o Beers, ciders, wines and spirit: Between KShs. 55 and 65 per litre Ad Valorem o Mineral and aerated waters: KShs. 3 or 5% per litre o Carbonated drinks, nonalcoholic beverages and juices: 7% Ad Valorem o Vehicles locally assembled and imported: 0 to 20% o Airtime on cellular mobile phones: 10% o Plastic shopping bags: 50% o Cosmetics and skin care products: 5%

Making false statements or fraudulent claims or providing false information Failure to maintain an ETR and other non-specified offences

2 times the amount of claim Maximum fine of Kshs. 500,000 and/or upto 3 years imprisonment

Penalties and interest restricted to a maximum of the principal tax due

CUSTOMS AND EXCISE

CUSTOMS DUTY

STAMP DUTY

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Creation or increase of share capital Transfer of Stock or marketable security except of quoted securities, which are exempt) Transfer of immovable property situated within a municipality outside a municipality Debenture or mortgage primary security auxiliary security Transfer Lease between one and three years any other period 1% 1%

New or expanded listing on stock exchange Transfer of immovable property between husband and wife or transfer of a family property to a limited company wholly owned by family Land acquired for construction or expansion of educational institution Instruments creating asset-backed securities through a scheme approved by the Capital Markets Authority Transfers between holding and subsidiary companies with shareholding exceeding 90%

4% 2% 0.50% 0.20% 0.10% 1% of annual rent 2% of annual rent

The information contained in this guide should not be substituted for professional advice. The guide includes the proposed provisions included in the finance bill 2010 which may be subject to amendments by the Finance Act 2010. Whilst every care has been exercised in ensuring the accuracy and completeness of information contained in this guide, Nafisa Alibhai and Company and A Alibhai and Associates Advocates and their affiliate companies and their staff do not accept any liability for any errors, or omissions contained herein.

Exemptions: