Kenya has seen tremendous growth in both foreign and domestic investments, which has in turn resulted in an increase in tax revenue contributions to the national kitty. However, both the government and private sector have faced a number of challenges in so far as administration of the different types of taxes is concerned. Furthermore, there have been quite a number of corporate tax structures which the government considers to be schemes for profit shifting from Kenya to other tax friendly jurisdictions. This is where the Tax Procedures Act, 2015 (the Act (which came into force on 19th January 2016)), comes in.
Principal objectives of the legislation
The key objective of the Act is first and foremost, to simplify and consolidate tax administration, both for the government and the taxpayer. Secondly, it is aimed at broadening the tax base to net in more taxpayers. Most importantly, the Act is aimed at preventing tax avoidance schemes which lack commercial substance.
Key highlights of the Act include:
• Directors’ liability – where director(s) or any senior officer(s) of a company enter into an arrangement with the intention of interfering with the company’s current or future tax liability, they will be liable for the tax liability of the company if they fail to demonstrate that they did not benefit from the arrangement, opposed the transaction, were unaware of the arrangement or they notified Kenya Revenue Authority (KRA) of the same.
• Record keeping – taxpayers will be required to retain records for a period of 5 years. This period may be extended in the event of an amendment of filed returns or where legal proceedings have been instituted before the lapse of the 5 year period.
• Tax returns – the period of submission of tax returns may be extended. This is on condition that the Commissioner General of KRA (the Commissioner) is satisfied with the reasons for delay (it is noteworthy here, that this does not mean that there is an extension of the deadline for payment of the tax associated with the return).
• Tax assessments – KRA can only issue assessments for a maximum period of 5 years in the case where there is no neglect, evasion or tax fraud by the taxpayer.
• Payment of Taxes – a taxpayer may apply to the Commissioner in writing for an extension of time to remit taxes due.
• Interest chargeable - The interest chargeable on late payment of tax has now been reduced to 1% from 2% per month and shall be charged as simple interest.
• Transfer of tax liability - in the event that a taxpayer transfers all or part of its business assets to a related party, the latter shall be liable for the taxes of the transferor.
• Tax rulings – the Commissioner may make a public ruling which will be binding on him unless he withdraws the same by publishing a notice in at least two newspapers with national circulation. Moreover, taxpayers may also apply for private rulings which shall be published (with the taxpayer’s identity concealed) in at least two Kenyan newspapers with national circulation.
• Offences & Penalties - The Act has also introduced some significant stringent penalties for non-compliance with certain tax law provisions. These are as outlined :-
- Failure to register or de-register for tax purposes; Penalty of KES 100,000 per month or part thereof subject to a maximum of KES 1 million.
- Failure to maintain proper documents; Penalty equal to 10% of the amount of tax payable subject to a minimum of KES 100,000.
- Late submission of PAYE returns; Penalty equal to 25% of the tax due or KES 10,000; whichever is higher.
- Late filing of any other tax return; Penalty of 5% of the amount of tax payable under the return subject to a minimum of KES 20,000.
- Failure to file any other document, other than a tax return; Penalty of KES 1,000 per day subject to a maximum penalty of KES 50,000.
- Failure to submit a tax return online or pay a tax electronically as required; Penalty of KES 100,000.
- Tax shortfall as a result of deliberate provision of false statement or omission;
- 75% penalty on tax shortfall attributable to fraudulent tax filing
- 20% penalty on tax shortfall not attributable to fraud.
- Penalty reduced by 10% when a person discloses tax shortfall voluntarily to the KRA.
- Tax avoidance; Penalty equal to 200% of the amount deemed avoided by a taxpayer.
- Fraudulent claim for a refund of tax; Penalty of 200% of the amount of the claim.
- Offences committed by KRA officers or persons required to act on Commissioner Instructions; Fine not exceeding KES 2 million and to imprisonment for a term not exceeding 5 years or both.
- Fraudulent act of omission or commission in relation to a tax period; Fine not exceeding KES 10 million or 200% of the amount of tax evaded whichever is higher or to imprisonment for a term not exceeding 10 years or to both.
- Offences committed by tax agents e.g participating in creation of tax avoidance or evasion schemes; Fine equal to 200% of the amount of tax evaded or a fine of KES 5 million whichever is higher or to imprisonment for a term not exceeding 5 years, or to both.