The Treasury and the Kenya Revenue Authority (KRA) have turned their focus on payments made to local and foreign contractors involved in donor-funded projects as they seek to increase tax collection in current financial year.
In a memo to Cabinet Secretaries, county governors and accounting officers at State departments, the Treasury says that all contractors and consultants involved in such projects will be compelled to pay up their tax dues, noting that compliance has been poor over the years.
“It has been established that the Ministries, Departments and State Agencies (MDAs), who are the withholding tax agents for the official aid funded projects, have been facing challenges in withholding income tax on direct payments made by
development partners to contractors or other persons engaged in the implementation of the projects,” acting Treasury Secretary Ukur Yatani says in the memo.
“In order to address these challenges and ensure compliance with the provisions of the Income Tax Act relating to withholding income tax on payments to the contractors or other persons engaged in the implementation of the projects… any request made shall be accompanied by a valid tax compliance certificate and a proof of payment of withholding income tax on the payment being requested.”
Under the new regulations, payments made to local contractors shall attract a 20 percent withholding income tax and three percent withholding income tax on contractual fees.
The taxman has in recent months been seeking details of suppliers and contractors hired by county governments in the quest to tighten the noose on individuals and firms evading tax.
The Treasury has set KRA a target to collect Sh1.938 trillion in tax and other revenue in the current financial year, up from Sh1.58 trillion last year, from an initial Sh1.81 trillion earlier in that year. The government is seeking to raise Sh242.2 billion in excise taxes in the 2019/2020 year compared to a target of Sh210.1 billion previously.
Mr Yatani said that for contractors and consultancies to enjoy tax concessions they will be required to seek approval from his office. Those that get the concessions will also be required to show the proof to the relevant MDAs.
“The MDAs and county governments shall not process any payment request unless the request is accompanied by relevant documents,” the memo says.
Projects undertaken with funding from foreign governments often enjoy tax exemptions under the Kenyan law in a practice aimed at encouraging aid inflows. The exemptions apply to imports and procurement of goods and services, and extend to both direct and indirect taxes — including customs duties.
Exemptions for various transactions under international assistance projects apply in Kenya, often at the insistence of donors and foreign governments. Kenya’s bilateral partners ordinarily offer assistance in the form of grants, in kind or project financing using concessional loans.
The standard gauge railway (SGR), which is mainly financed through a Chinese loan, tops the list of mega projects currently enjoying tax breaks. For instance, official data shows that the taxman forfeited Sh5 billion on SGR-related supplies between March and July 2017 in duties assessed on the basis of cost, insurance and freight (CIF) value. The CIF value for SGR supplies during the period stood at Sh30 billion.
President Uhuru Kenyatta’s administration is banking on the railway to move 40 percent of cargo handled at the Mombasa port from roads to the SGR to reduce the damage that trucks cause to the highways, reduce accidents and cut the costs associated with slow movement of goods. Tax experts have noted that aid-funded projects provide a catch-22 situation for the government because taxing them could leave the assisting countries with no option but to take their money elsewhere for bigger impact.
“It’s a two-way street,” Nikhil Hira, Deloitte East Africa tax leader, told the Business Daily in an earlier interview, adding that compelling bilateral partners to pay taxes on concessional loans would be counterproductive.
The latest move by the Treasury comes as the taxman, who has perennially missed tax targets, moves to seal revenue leaks against the backdrop of ever higher collection targets set by the government.
Faced with the huge task of improving revenue collection, KRA has set its eyes on suspected tax cheats and tax avoiders following an order from President Kenyatta in November 2018. As part of the crackdown, KRA is expected to constantly monitor high-networth individuals whose lifestyles are not in tandem with the taxes they pay.
The enforcement unit at KRA has sought to do this through various strategies including using databases such as bank statements, import records, motor vehicle registration details, electricity and power bills as well as data from the Kenya Civil Aviation Authority (KCCA) to trace potential tax cheats and evaders.
The latest move targeting donor-funded projects is expected to help KRA close loopholes that deny it revenue. The move comes against the backdrop of Kenya’s increasing appetite for loans to fund its infrastructure projects.