All taxpayers have an inherent desire to minimise the amount of taxes they pay. This could be informed by two main factors: First, tax is an involuntary mandatory contribution sanctioned by the state and secondly the experiences of wastage and embezzlement of public resources, especially in developing economies.
Unlike the conventional tax avoidance concept, tax planning not only deals with reduction of tax liability but also deferring payments within the confines of the law. Deferment of tax payment leads to better management of cash flows. There are several ways through which taxpayers can conduct their affairs in order to reduce or defer tax liabilities to a future period:
Claim of capital allowances: Capital allowances are an exception to the general rule of non-deductibility of capital expenditure for tax purposes.
Capital allowances include wear and tear deduction on machinery, software deduction, investment deduction, industrial building deduction and commercial building deduction and they range between five and 150 per cent of the cost of the asset. Taxpayers should ensure that they properly claim capital allowances where applicable to reduce their tax liability.
Deduction of all allowable deductions: Taxpayers should be keen to ensure that all expenses relating to generation of their incomes have been properly claimed. Under-claiming of expenses leads to higher tax liabilities while over-claiming of expenses leads to additional assessments and penalties.
Claim of tax reliefs: There are several tax reliefs available under the Kenyan tax legislation. They include personal relief, insurance relief, mortgage relief and relief under double tax agreements. Tax reliefs reduce the income tax payable.
Issuance of proforma invoices: proforma invoices are ordinarily issued instead of tax invoices. Proforma invoices aid in the management of cash flows in respect of value-added tax (VAT).
The VAT is due at the earlier issue of invoice or the date of the payment or supply. Therefore, issuance of a document reference number allows the taxpayer to effectively request for payment without triggering VAT liability on the payment requested and as a result, a timing advantage is created.
Preferential residential income tax regime: There are several preferential tax regimes which include: The simplified residential rental income of 10 per cent on the gross rental income earned from residential properties, 15 per cent corporation tax for developers who put up more than 400 low cost housing and lower corporation tax rates for listed companies.
Proper documentation: Kenya has adopted a self-declaration tax regime. The upshot of this regime is that the burden of proving that no taxes are due lies with the taxpayer. Proper documentation enables a taxpayer to easily discharge the burden of proof to the right standards. The lack of proper documentation leads to penalties as well as additional assessments by the Kenya Revenue Authority (KRA).
Observance of filing and payment timelines: The tax statutes have imposed heavy penalties and interest for late filing of returns and payment of taxes. These penalties can be avoided through timely filing and payment of taxes. Taxpayers can include the due dates for the periodic taxes such as VAT and withholding tax on their calendar planners to avoid forgetting.
Engaging the services of tax professionals: Tax law is technical in nature and in most times, it is important to engage the services of a professional in interpreting its application.
In addition to the engagement of tax professionals, the taxpayer can also apply for a private ruling from the KRA on the interpretation of various provisions. Private rulings are binding on KRA but not on the taxpayers.
In conclusion, taxpayers should avoid shortcuts in tax matters due to the serious pecuniary or criminal liability which may arise in the long run.
Samuel Kioko Musyimi is a senior tax associate at KN Law LLP.