Direct taxes include:
- Pay As You Earn (PAYE)
- Corporation Tax
- Withholding Tax
- Advance Tax
Pay As You Earn
Employment income in Kenya is taxed at source by the employer under the PAYE tax deduction system. Taxable income from employment includes wages, salary, bonuses, commission, allowances and directors’ fees. An employer is required by law to operate a PAYE tax deduction system. Responsibilities include the monthly deduction of employees’ PAYE tax and remunerating it to the Income Tax Department by the 9th of the month following the deduction, maintaining a series of records for each employee, and issuing them with pay slips monthly.
Tax certification regulations require employers to submit the following documents annually at the end of the tax year, which in Kenya falls on June 30:
- Employer’s Certificate indicating total monthly PAYE tax deducted for year. (Form P10)
- Supporting list to End of Year Certificate (Form P10A in duplicate)
- Fringe benefits tax return (Form P10B)
- Tax deduction cards for all employees taxed during the year (Form P9A, P9A (HOSP), P9B)
- A list of all employees who received lump sum payments during year indicating their full names, gross amounts received, the relevant years and amounts of deducted tax
- Copies of All pay-in-credit slips (P11s) for year
More details concerning PAYE can be found from the Kenya Revenue Authority website at www.kra.go.ke.
The Finance Act 2016 modified annual Personal Income Tax rates as follows:
|Rates||Current Income per annum||Amended Income per Annum|
|10%||On 1st KES 121, 968 (€1,080)||On first KES 134,164 (€1,197)|
|15%||On next KES 114,912 (€1,026)||On next KES 126,403 (€1,128)|
|20%||On next KES 114,912||On next KES 126,403|
|25%||On next KES 114,912||On next KES 126,403|
|30%||On all above KES 466,704 (€4,167)||On all above KES 513,373 (€4,583)|
Corporate entities in Kenya are subject to Corporate Income Tax under the Income Tax Act. The corporation tax rate for resident companies in the country is 30 per cent. A resident company is one incorporated in Kenya, under the Laws of Kenya, or one whose management and control of affairs is exercised in Kenya in the particular year of income under consideration, or one declared by the cabinet secretary of the Treasury to be resident in a notice in the Kenya Gazette. Non-resident companies permanently established in the country are taxed at a rate 37.5 per cent on income earned from Kenya.
Withholding tax is chargeable on payments by Kenyan companies to resident and non-resident firms or individuals including dividends, interest, commission, royalties, management or professional fees, pension or retirement annuity, rent, appearance or performance fees for entertaining, sporting or diverting an audience.
Withholding Tax Rates
|– Housing Bonds||10%||15%|
|– Other Source||15%||15%|
|Management & Professional fees||5%||20%|
|Sporting & Entertainment Income||–||20%|
|Real Estate Rent||–||30%|
|Lease of Equipment||–||15%|
|Pension & Recruitment amenities||0-30%||5%|
|Agency & Consultancy Fee||5%||20%|
Source: Kenya Revenue Authority
This is tax applicable to public service vehicles, which include commercial or company vehicles used for business. It is not a final tax but a tax partly paid in advance before the vehicle is registered or licensed. The current rates for vans, pickups, lorries, and trucks are KES 1,500 (€13.40) per ton of load capacity per year or KES 2,400 (€21.43) whichever is higher. The rates for saloons, station wagons, mini-buses, buses and coaches are KES 60 (€0.54) per passenger capacity per month or KES 2,400 (€21.43), whichever is higher.
Capital Gains Tax
KRA defines Capital Gains Tax, which was reintroduced effective January 1, 2015, as tax chargeable on the whole of a gain that accrues to a company or an individual on or after January 1, 2015 on the transfer of property situated in Kenya, whether or not the property was acquired before that date. The rate is 5 per cent of the net gain, and it is a final tax and cannot be offset against other income taxes.
Value Added Tax (VAT)
This is tax charged on the supply of goods or services in Kenya and on the importation of taxable goods and services into Kenya. There is a flat rate of 16 per cent, although some goods and services are exempt, or ‘zero rated’. Registered entities must charge VAT when supplying taxable goods and services often referred to as ‘Output VAT’. Those buying or acquiring those goods and services to be used in their business are required to pay VAT normally referred to as ‘Input Tax’.
Taxable value is determined according to a series of factors, including:
- The taxable value of imported services is the price at which those services are provided
- The taxable value of imported goods is the cost of such goods plus duty of customs payable on such goods
- The taxable value of barter transactions, i.e. transactions not involving money, is the consideration which would have been made if money was the only consideration
- The taxable value of a discounted supply is the value of the supply less the discount offered
- Any amount that is charged on packaging, advertising, servicing, financing, commission and other liabilities that the purchaser has to pay in addition to the price of the commodity is added to the commodity price and used to calculate the taxable value
VAT is due and payable, to the Commissioner of VAT, when either a supply takes place, an invoice is issued, full or part payment is made, or a certificate of completion is issued as in the case of the construction sector.
Register for VAT
Any business including sole-proprietors, partnerships, and limited companies already in business that expect annually to manufacture, or supply, taxable goods or services exceeding KES 5,000,000 (€44,642) are required to register for VAT. Registration is necessary even if your business produces or sells zero-rated services or goods. Businesses dealing with jewellery, motor vehicle parts, and domestic appliances, those selling pre- recorded music, or who sell four or more vehicles annually, and those in accounting, legal services, auctioneering, clearing and forwarding, and valuing, should all register.
There are several advantages of registering for VAT. It boosts a business’s profile with investors, clients, and lenders who can be confident that the company is professional and meets tax regulations, and is large enough to clear the VAT registration threshold. It allows VAT refunds on goods and services purchased for purposes of expanding the business. It avoids financial penalties for failure to register, and it allows reclaim of VAT from the previous four years provided proper VAT records are available.
It is useful to note that those registered for VAT can claim back all the VAT they incurred buying supplies to expand their business.
Registered traders must pay VAT to the Commissioner of VAT by the 20th of the following month, and the documentation must be lodged whether there is VAT payable or not (known as a ‘nil return’). The return form should indicate the following for each rate of tax:
- The particulars of the total value of supplies
- The taxable amount
- The total value of taxable supplies received
- The tax rate to which supplies are liable
- The rate at which tax is paid
- The amount of tax paid in respect of claimed deductible input tax
Tax invoices are normally issued on supplies made. These invoices provide evidence of supplied goods and services including record keeping. The tax invoice must be issued at the time of the supply or within 14 days of completion of the supply transaction.
Zero-rated Goods and Services
In Kenya, these include:
- Exported goods and services
- Supplies made to export processing zones
- Supplies of coffee and tea for export to auction centres for export
- Ship stores supplied to international sea or air carriers on international voyage or flight
- Transfers of businesses
- Transportation of passengers by air carriers on international flights More information on VAT can be found on the KRA website.
Turnover tax, payable at 3 per cent, is an indirect tax applicable to small businesses whose total revenue and/or sales is below KES 5 million (€44,642).
Branch of Foreign Companies Profits Tax
Branches in Kenya of foreign companies or entities are liable for 37.5 per cent tax. Note the distinctions below.
|Branch of Foreign Company||Subsidiary Company|
|Not a separate legal entity but an extension of parent company||Distinct legal entity separate from parent company|
|Taxed at 37.5%||Taxed at 30%|
|No withholding tax is payable when profits are repatriated to head office||Withholding tax of 10% applies on dividends repatriated to foreign parent company|
Double Taxation Agreements (DTA)
Lower tax rates are applicable on some income and payments with countries that have double taxation agreements with Kenya, which in Europe include the United Kingdom, Denmark, France, Germany, Norway, and Sweden.
Customs and International Trade and Excise Duties
Custom duties are import duty, excise duty, VAT, import declaration fees, and the railway development levy. Import duties vary according to the item: raw materials (0%), intermediate goods (10%) and finished goods (25%). Goods imported from the regional trading blocs, the EAC and COMESA, are either duty-free or have minimal 1 per cent duty.
These are geared towards promoting investments and exports, and are centred in Export Processing Zones (EPZs) and Special Economic Zones (SEZs). See ‘Manufacturing’ in Chapter 3.
Key Points on Taxation
- All individuals and corporate entities must register for Personal Identity Number (PIN) with Kenya Revenue Authority
- Corporate entities are required to register with the National Hospital Insurance Fund (NHIF) and National Social Security Fund (NSSF)
- NHIF is a national health cover and NSSF is a pension fund
- Corporation tax for resident companies is charged at 30 per cent while non- resident firms pay 37.5 per cent on net profit
- Capital gains was introduced on January 1, 2015 and is charged on transfer of property at the rate of 5 per cent on the net of the transfer value over adjusted cost
- Capital gains tax is a final tax and cannot be offset against other income taxes
- Turnover tax is payable by businesses with a turnover of over €4,444 but less than
- €44,642. If a business has a turnover of more than €44,642 they are liable to pay VAT
- Taxation on employment income is charged on all of a taxpayer’s income which accrued in or was derived in Kenya regardless of residency status
- Filing tax returns is the responsibility of the employee and not employer and should be filed by June 30 each year
- Failing to follow Pay As You Earn (PAYE) rules attracts penalties of 25 per cent on the unpaid tax. Interest of 2 per cent is also charged for the period of the unpaid tax
- VAT is charged at 16 per cent, with some items zero rated
- Exported services are zero rated
- Unpaid tax attracts 1 per cent interest monthly, compounded until it is paid
- Penalty for late filing of the monthly VAT 3 return is 5 per cent of tax due.
Summary of Taxes in Kenya
|Tax or Mandatory Contribution||Statutory Tax Rate||Tax Base|
|Corporate income tax||30%||Taxable net profit|
|Standards Levy||0.2%||Net sales|
|Single Business Permit (Manufacturer)||KES 100,000 (€893)||Fixed rate|
|Tax on interest||15%||Interest income|
|Employer paid – training or apprentice tax||KES 600 (€5.36)/employee||No. employees|
|Land Rates||0.6%||Land value|
|Road Maintenance levy||KES 9 (€0.08) per litre||Fuel consumption|
|Advance motor vehicle tax||The higher of KES 1,500 (€13.40) per tonne orKES 2,400 (€21.43) per annum||Vehicle weight|
|Single business permit – trader||KES 20,000 (€178)||Fixed fee|
|Petroleum development duty||KES 0.4 per litre||Fuel consumption|
|Land rate||Various county rates|
|Tax on cheque transactions||KES 2 per cheque||No. of cheques|
|Value Added Tax (VAT)||16%||Value added|
|Fuel tax- excise duty||KES 10.31 (€0.09) per litre||Fuel consumption|
|Stamp duty on contracts||Various rates||Type of contract|
|Employee paid-NSSF||5%||Gross salaries|
|Employee paid-NHIF||Various, based on salary scale||Gross salaries|
Source: Kenya Revenue Authority