Taxpayers making enquiries at KRA offices in Nairobi. FILE PHOTO | NMG
This the season and although the Kenyan government may not have the magical resources of Santa Claus, it is an opportune time to communicate our tax wish list.
The Income Tax Act has not been reviewed for decades and an exercise is now underway to overhaul the law, simplify, modernise and rationalise it to support growth of the economy to achieve Vision 2030, improve administration and broaden the tax base.
We have zeroed in on a few provisions where the rules have not kept pace with the swift changes to the Kenyan and global economy. This is by no means a prediction of what might be released in the draft Income Tax bill, but more of a wish list of tax provisions that affect a large chunk of taxpayers and would benefit from a rethink.
1. Definition of a permanent home
An individual working overseas is deemed a resident for tax purposes if they have a permanent home in Kenya and were present in the country for any period in a particular year of income.
A permanent home has never been defined in the tax legislation nor clear guidelines been issued and the result is that the interpretation of what a permanent home may be very broad.
2.Lower tax rates for non-residents and on certain lump sum payments
Introducing a lower flat tax rate for non-resident individuals would help to alleviate the tax burden where Kenya does not have a Double Tax Agreement (“DTA”) with the individual’s home country.
Given Kenya’s narrow DTA network, the burden to contribute to the exchequer for individuals who are not in Kenya on long- term assignments should be reduced.
Aside from making Kenya more competitive in terms of attracting foreign investors (who may need to import skilled labour), lower tax rates will also encourage greater tax compliance among taxpayers.
We also suggest pruning the tax rates on certain lump sum payments such as bonuses to, say 20 per cent, so as to encourage employees to work harder.
For termination and redundancy payments, the government can also consider introducing an exemption on the first Sh 750,000, for example, to cushion employees who are now out of a job.
Many African countries have adopted such practices and it is generally true that the fairer a taxpayer perceives the tax system to be, the better the rate of compliance.
Moreover, there are many examples around the world that show that lower tax rates do not translate to low tax collection – the reverse is often the case and the reduced residential rental income tax is a testament to this.
3. Taxation of overseas / unapproved stock options
This is another area of ambiguity as the law does not deal with the key questions around employee share schemes. We would ask that the Income Tax Bill incorporate provisions on this subject, which align international best practice such that the taxable gain for unregistered employee share schemes arises at the date of exercise (and not vest) so that employees are not out of pocket.
Time apportionment relief of the equity gain should be permitted based on the period the individual has spent in Kenya from the date of grant to date of exercise, since it is only logical to classify the apportioned income to be derived or accrued from Kenya.
Similarly a corporate tax deduction is permissible where the costs of the stock options are borne in Kenya, since these are bona fide staff costs.
This should enable employers, in particular start-ups to effectively incentivise their white collar workers and executives by linking their pay with growing performance targets, indirectly spurring economic growth since employers will foster a competitive environment for their employees to deliver on their targets.
4.Housing
The taxman should provide some respite such that the 15 per cent basis of determining the housing benefit should only be applied where the Fair Market Value (“FMV”) of housing cannot be determined.
This is in the interests of fairness as it reduces the occasions where a taxable benefit is valued on a ‘deemed’ basis rather than on its actual value.
Even where the 15 per cent deemed basis is applied, it should be calculated on the basic salary given the soaring costs of living.
Otherwise, the value of the benefit will fluctuate when the employee is still in the same house and in certain months where lump sum payments are received, the taxpayer will have to cough up additional tax on the housing benefit.
Such additional tax would essentially be arising on a non-existent or artificial benefit.
5.Inflationary adjustments
With the exception of the doubling earlier this year of the mortgage interest deduction threshold, other thresholds for tax incentives to individuals have remained static for a number of years. Some of the culprit items are:
uF0A7 The Home Ownership Savings Plan (“HOSP”) deduction of Sh 4,000 per month;
uF0A7 The pension deduction of Sh 20,000 per month;
uF0A7 The non-cash benefit threshold of Sh 3,000 per month;
uF0A7 Staff meals tax free threshold of Sh 4,000 per employee per month;
uF0A7 The tax free pension lump sum withdrawal amount of Sh 60,000 p.a. to a maximum of Sh 600,000 as well as the tax free pension annuity amount of Sh 25,000 per month; and
uF0A7 Insurance relief of up to KES 5,000 per month.
Whilst it is laudable that the Government expanded the tax brackets and personal relief by 10 per cent effective January 1, 2017 (and a further similar increase applies from 1 January 2018), it must also muster the courage to increase the various thresholds identified above to align them with the prevailing inflation rates and cost of living indices.
The above measures would be welcome indications that the Government appreciates the need to cushion low/middle income earners and provide them with the much needed relief.
It is commendable that the Government has undertaken the Income Tax Act overhaul and whilst we acknowledge the crucial role of the Government in tax reform, we all have a part to play so as to protect domestic revenue and enhance the tax base to achieve financial sovereignty.
Shreya Shah is a manager within the tax team at PwC.
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