Tax amnesty has in the past been employed by governments as a tool to promote economic policies such as widening of the tax base, enhancing compliance and encouraging repatriation and reinvestment of capital.
The provisions granting tax amnesty on repatriation of foreign earned income and assets introduced by the Finance Act, 2016, initially appeared to be well intentioned. The aim, it seemed, was to promote the repatriation of foreign earned income for reinvestment in the country.
However, over time, the implementation of the amnesty scheme has revealed massive deception and mischief in what appears to be a scheme of legitimising and cleaning proceeds of corruption.
The amnesty scheme, which has now been extended for two years in a row, bars the Commissioner from assessing tax on foreign sourced income and assets of a Kenyan resident, if declared and repatriated to Kenya.
For example, the amendment to the Tax Procedures Act by the Finance Bill, 2018 exempts the income and assets so repatriated from investigations under the Proceeds of Crime and Anti-Money Laundering Act, 2009 or any other Act relating to reporting and investigation of financial transactions.
To understand the mischief in the amnesty scheme, it is important to un-package the income tax regime in Kenya as well as the concept of tax amnesty.
On one hand, the imposition of income tax is both source and residency- based. As such, income of residents is taxable in Kenya if earned here or outside Kenya in the case of employment income. In addition, citizen residents qualify for a tax set off to the extent of taxes paid in other countries relating to employment income earned outside the country.
Income derived from Kenya is also subject to tax in here irrespective of the residency of the earner. The upshot is that income is only taxable in Kenya if it has been earned in the country or earned from outside by a resident person from employment activities or earned by a company based outside whose management and control is exercised in Kenya.
Save for employment income and income of a non-resident company whose management and control is exercised in Kenya, all other types of income earned outside are not taxable here.
On the other hand, tax amnesty has a connotation of reprieve or pardon from a tax liability. For a case of tax amnesty to arise, there must be a tax liability due in the first place. Purporting to give amnesty otherwise is self-defeating.
The income and assets targeted by the scheme is certainly not employment income and income earned by companies whose management and control is exercised in Kenya due to the existence of the tax set off schemes for the former and the insignificance of income accruing from the latter. This makes the entire scheme suspect at worst, and gratuitous at best.
Moreover, exempting the repatriated incomes from investigations from Proceeds of Crime and Anti-Money Laundering Act speaks volumes about the real intention of the scheme.
There is dire need to re-evaluate the scheme and address the mischief of “cleaning” graft money.
Samuel Kioko Musyimi, Senior Tax Associate at KN Law LLP.