In the era of global financial transparency, governments worldwide have been implementing regulations to combat tax evasion and promote tax compliance. One such significant initiative is the Common Reporting Standard (CRS), developed by the Organisation for Economic Co-operation and Development (OECD).
This is a pivotal framework for facilitating the automatic exchange of financial information between countries. Kenya, as part of the global community, has also embraced CRS regulations to enhance its tax information exchange mechanisms and uphold international standards.
The CRS was developed in 2014 by the OECD to enhance transparency on financial information across tax jurisdictions following the revelation that many organisations were using offshore entities to trade or hold financial assets for aggressive tax planning or to conceal taxable income.
CRS regulations in Kenya require Financial Institutions (FIs) to collect and report information on foreign account holders to the Kenya Revenue Authority (KRA), who then share this data with the tax authorities of the account holders’ countries of tax residence. This information exchange enables KRA and other tax authorities to identify and assess taxpayers' compliance with their tax obligations, particularly concerning income earned and assets held abroad.
Implementation in Kenya
Kenya recognising the importance of international cooperation in tax matters, has taken steps to implement CRS regulations within its financial system. The KRA serves as the central competent authority responsible for overseeing the implementation of CRS in the country.
Kenya, as a signatory to the CRS Multilateral Competent Authority Agreement, legislated the Common Reporting Standard (CRS) through the introduction of section 6B of the Tax Procedures Act (TPA) through the Finance Act 2021. The CS National Treasury vide Legal Notice No. 8 of 2023, gazetted the CRS regulations on 7 February 2023, with an effective date of 1 January 2023.
The implementation will enable Kenya to exchange financial account information with over 100 jurisdictions worldwide. Switzerland, Cayman Islands, BVI and even Mauritius to mention but a few are among the participating jurisdictions which have domiciled CRS into domestic laws. Notably, these are all key jurisdictions for setting up offshore wealth management structures.
Accordingly, these jurisdictions having adopted and implemented CRS have acceded to the exchange of financial account information with other participating jurisdictions, Kenya included.
Under these regulations, financial institutions are required to conduct due diligence procedures to identify and document reportable accounts. Once reportable accounts are identified, financial institutions must report relevant information to the KRA.
This information typically includes details such as the account holder's name, address, tax identification number, account balance and income generated from the account.
Implications for Taxpayers
For individuals and entities with foreign financial accounts, CRS regulations have significant implications. This entails accurately determining their tax residency status in accordance with CRS guidelines and accurately disclosing relevant financial information to the KRA.
Therefore, individuals and entities with offshore financial assets need to proactively manage their tax affairs to ensure compliance with the local tax authority. In addition, entities with complex financial structures should review their existing setups to ensure compliance with CRS regulations.
In particular, the exchange of information has also influenced global tax planning strategies for high-net-worth individuals and families. Taxpayers may need to consider the impact of CRS regulations when structuring their affairs, including the choice of jurisdictions for investment, residency and asset holding.
From a legal perspective, the implementation of CRS has led to changes in the regulatory environment, including updates to tax laws and regulations to align with CRS requirements.
On the converse, we have observed changes in domestic tax and structuring laws on the tax benefits available to family trusts and holding companies including private limited liability companies set us as family-owned companies as wealth management tools. These amendments to the law have resulted in tax-efficient local solutions for wealth management and succession planning.
Conclusion
From a tax perspective, the implementation of CRS regulations in Kenya underscores the country’s commitment to combatting tax evasion and promoting international tax transparency.
Overall, CRS has brought about a fundamental shift in the landscape of private wealth management, requiring individuals, financial institutions and advisors to adapt to the new regulatory framework and ensure compliance with local and international tax standards.
