Rope in more countries into tax treaties

Are Kenyans in diaspora liable to taxes in Kenya? There is no straight answer to this question. It is important to examine the surrounding factual circumstances of every case.

Tax liability in Kenya is based on the character of the income and the residence of the taxpayer. Income accrued in or derived from Kenya is taxable in Kenya notwithstanding the residence of the taxpayer. This legal provision is based on the source-based principle which posits that the jurisdiction to tax is premised on the fact that a State creates economic opportunities that allows a person to derive income from that State.

For example, take Jane Kerubo, a Kenyan living in North Carolina. Jane has rental property in Kisii. The rent from the property in Kisii is taxable in Kenya whether Jane is resident in Kenya or not.

Being resident in Kenya is principally based on whether one has a permanent home in Kenya. Having a permanent home in Kenya automatically makes one a Kenyan resident for tax purposes if one is in Kenya for any period in a given year of income. If a person does not have a permanent home, residence is determined by the number of days the taxpayer was in Kenya.

If a person does not have a permanent home in Kenya but is present in Kenya for a period or periods amounting in the aggregate to 183 days or more in a given year of income, the person satisfies the residency threshold in that year of income.

If a person does not have a permanent home in Kenya but is present in Kenya in that year of income and in each of the two preceding years of income for periods averaging more than 122 days in each year of income, the person also satisfies the residency threshold in that year of income.

However, the law does not define a permanent home. Assume that Kerubo has been living in North Carolina for five years. Does Jane have a permanent home because she has some rental property in Kisii?

No. Owning rental property does not, per se, amount to a permanent home. It is common for tax advisors and tax administrations to refer to international best practices to resolve controversial tax issues.

According to the OECD, for a dwelling to be a permanent home, an individual must have arranged to have the dwelling available to him at all times continuously. Where a person is resident in two countries, one would need to look at the center of vital interests or the place where personal or economic relations are closer.

If the test gives ambiguous results, one then looks at the taxpayer’s habitual abode or where the individual spent most of the time. If the habitual abode test is not determinative, one would look at the individual’s citizenship. Where the individual is a dual citizen, the revenue authorities would need to resolve the issue by mutual consent.

Let’s now turn to double taxation. Kenya has three principal avenues to mitigate the effects of double taxation.

First, it has negotiated double tax treaties with some countries such as the UK. Secondly, under section 39(2) of the Income Tax Act, Kenyan citizens can claim a credit in respect of tax suffered abroad.

However, this foreign tax credit is only available in respect of employment income and income derived from other personal services such as entertainment and sport events. Regaining Kenyan citizenship is therefore a tax incentive as one is able to claim a credit in respect of tax suffered abroad.

Thirdly, section 16(2)(c) of the Income Tax Act allows the deduction of foreign tax suffered in respect of income deemed to have accrued in or to have been derived from Kenya.

To mitigate the effects of double taxation, the government should consider expanding the Kenyan double tax treaty network. The government should consider negotiating and concluding double tax treaties with the US and China.

The Kenya Revenue Authority should also consider issuing comprehensive guidelines on the meaning of a permanent home.
Mr Miano is an international tax attorney with Deloitte Tax LLP in the US.