While Kenya has over 22 million registered taxpayers, only about 7 million actually pay taxes, with roughly 3 million of these remitters being formally employed. And with the Kenya Revenue Authority (KRA) cracking down on individuals and firms who do not remit taxes yet earn money in the country, we have seen an increase in the number of tax disputes in the country, thousands of which have made it to court. It is for this very reason that more people are looking into tax planning in Kenya. So, what is it and how can it help you get on KRA’s good books?
What is Tax Planning in Kenya?
Tax planning is a broad expression that covers many areas in tax matters. It involves the consideration of the following:
- The tax obligations for the taxpayers,
- When to pay the taxes,
- How to calculate the same,
- How to avoid unnecessary disputes and how to deal with them when they arise, and
- How to avoid penalties, etc.
This broad explanation does not cover all the areas of tax planning in Kenya, but gives you an idea of what ideally should be covered. In essence, this means that the taxpayer ought to know, or alternatively have a tax consultant well versed in what pertains to the taxpayer’s business tax matters.
Why Does Tax Planning Matter?
Taxpayers operate different businesses, and as such, their tax obligations are different. They are consequently obliged to pay different taxes, including Income tax, Excise duty, Customs duty, VAT, Withholding tax, etc. It’s therefore essential for each taxpayer to know their tax obligations because different taxes operate in different ways in terms of when they are payable, calculations of the same, and, where applicable, penalties for failure to observe the requirements for the different taxes.
Some people are not aware of what taxes they are liable for. In these cases, tax planning in Kenya gets murkier.
For example, when a taxpayer has been registered for collecting and remitting withholding tax, and yet they fail to collect and or remit to KRA, and are not aware of the consequences. If you fail to collect and remit withholding tax, you are liable to pay the same, together with applicable penalties for the failure.
Taxpayers also need to know that once they are registered for a particular tax, they can only get out of that tax obligation by either exemption, amendment of the law, etc., but not by failing to remit the taxes in issue or ignoring them.
As such, this guide will explore the benefits of tax planning in Kenya for the taxpayers. It will also show how the taxpayers can organize their businesses to eliminate some taxes and lessen the same, and how to eliminate or lessen unnecessary disputes with KRA (Kenya Revenue Authority) and the costs connected thereto. The tax planning process ought to give the taxpayer all the details they need to benefit.
Everything to Know About Tax Planning in Kenya.
As mentioned earlier, tax planning in Kenya is quite a broad category. Even so, we can boil it down to the following main factors:
Factoid 1: Tax exemptions.
Some people are exempt from paying taxes. This applies generally to people living with disability. There are also exemptions relating to Charitable and nonprofit-making organizations. Some special business transactions are also exempt from paying some taxes. If one does not know that they are exempt from this, they will not benefit from the same.
The exemptions do not benefit the taxpayers as a matter of course. They are provided by the law. However, there are terms and conditions applicable to them. One of them is that there are set procedures the taxpayers are supposed to follow in making applications for exemption. If you do not conform to the procedures, then you will not benefit from the same.
Factoid 2: Tax Reliefs.
The tax laws also provide for tax reliefs on certain taxes. This applies in Income tax matters to certain income-earning grades. Sometimes it is also applicable to certain Insurance schemes and mortgages. They can also apply in other areas where the law specifically provides for that. The reliefs are applied as tax credits against tax liability, thus reducing the tax payable for the covered taxpayers.
Factoid 3: Business expenses.
A taxpayer must have a good record of business expenses. This is very important because the applicable income taxes are reduced by business expenses. Failure to record these will mean that the taxpayer’s gross income will be taxed. All businesses incur expenses, but once you fail to have proper records, you are bound to forget them, and you will also fail to prove them should a dispute arise over the same. You will end up paying over and above the requisite taxes and thus hurting the business.
Factoid 4: Avoidance of penalties.
Most taxes have timelines within which they should be paid. All taxpayers are expected to abide by that. It’s therefore very important for the taxpayers to know when they are expected to pay taxes and the consequential penalties should they fail to pay on time. Some of the penalties can also be compounded, leading to hefty figures.
Factoid 5: Avoidance of expensive legal processes.
Sometimes, taxpayers find themselves in dispute with the KRA. At such times, it’s very important to seek legal advice to see what one can do to solve the dispute. The legal advice will inform the taxpayer on the best way to solve the dispute. It’s always imperative to listen to the advice given and determine the matter accordingly. If one is not satisfied with the legal advice given, one can always seek a second legal opinion on the dispute.
Should it turn out that the taxpayer is not likely to win the legal battle, one can always settle the matter with KRA, thus avoiding an expensive legal process. The settlement may also afford the taxpayer a good proposal from the KRA on the settlement method and process.
Factoid 6: Use of ADR in legal disputes.
In some cases, the taxpayers cannot avoid the Tribunal’s or Court processes when disputes arise with the Revenue Authority. To lessen their legal expenses and avoid lengthy court battles, the taxpayers can employ and try to see whether the matter can be settled through ADR (Alternative Dispute Resolution).
The ADR system has so many advantages, including lower costs and a faster process of settling the dispute. The ADR can be used even after the matter is filed in the Tribunal or the High Court, as the matter awaits hearing and determination.
Factoid 7: Good record keeping.
Records are an essential part of a business and the tax-paying process. Without records, a taxpayer will not be able to ascertain the profits or losses made by the business. The law also requires the taxpayers to keep business records and even specifically lays out what the records for each tax are. In tax disputes, it’s always upon the taxpayer to prove that the assessments by KRA are wrong. This can only be achieved by the production of documents. Thus, good record-keeping for any business is paramount.
Factoid 8: Avoidance of Agency Notices.
When a dispute between KRA and a taxpayer has been determined to the effect that the latter owes taxes to the Revenue Authority, the taxpayer has to meet this obligation. Likewise, where a taxpayer has been assessed by KRA, and the assessment has been communicated to the taxpayer, and yet the taxpayer does not object to the same, the Revenue Authority assumes that there is an admission of tax liability. In those circumstances or in any other scenario where the taxpayer is owing taxes and has no dispute pending between him and the Revenue body, there exists the risk of Agency Notices being levied against the taxpayer.
The consequences of the Agency Notices being levied on the taxpayer include the freezing of the taxpayer’s bank accounts. It can also be extended to the collection of the taxpayer’s credit from their debtors. This action can cause untold harm to the operations of the business. It is advisable that where the taxpayers are in debt to the KRA, they agree with the revenue body on how the debt can be cleared through workable proposals. This will allow the taxpayer time to manage the debt and the business.
Factoid 9: Criminal consequences.
It’s also important for the taxpayers to know that some tax disputes or offenses can lead to criminal conviction. Therefore, it’s important to plan tax affairs in such a way that you do not end up facing criminal charges. When you face criminal charges, this does not mean that the taxes in issue will not be paid. You will still deal with the tax payment and the consequences of the court’s conviction.
Covering all the above bases allows you to understand what taxes you need to pay, when you should pay them, how to figure out how much you owe, and what happens if you fail to meet your tax requirements.
The Consequences of Poor Tax Planning in Kenya.
Often are the times that people go about their businesses without thinking much about the impact of their lack of tax compliance. But what happens when KRA finally catches up to you? We have two cases to show the consequences of failure to appropriately plan your business:
Case 1: Nairobi Tax Appeals Tribunal Case No.E652 of 2024 – Ann Kananu Mwende vs Commissioner of Legal Services and Board Coordination
This was an appeal by the Taxpayer to the Tax Appeals Tribunal upon the latter being assessed for Income taxes based on her bank deposits. The taxpayer had objected to the assessments, but her objection was considered not to be of any evidential value by the Commissioner, who consequently confirmed the assessments. The amounts in dispute were hefty.
The Tax Appeals Tribunal, upon considering the appeal, dismissed the same because the taxpayer had not given any evidence to disprove the Commissioner’s decision. She had not provided any documentary evidence to the Commissioner or to the Tribunal to show that the assessment was wrong.
In this case, the taxpayer failed to keep proper records to assist her in objecting to the assessments. If she had such records, she would have been able to disprove the assessments.
Case 2: Nairobi Tax Appeals Tribunal Case No. E1349 of 2024: Beatrice Wairimu Wanyeki vs Commissioner of Domestic Taxes.
This was an appeal by the taxpayer against a decision of the Commissioner confirming a tax assessment against the taxpayer. However, the taxpayer filed the appeal outside the provided time without seeking orders from the Tribunal to allow her to do that. Her appeal was consequently struck out by the Tribunal.
The mistake made by the second case’s taxpayer could have been avoided if she had sought legal advice from the right Consultants.
Embark on Timely Tax Planning in Kenya.
Many of the tax planning mistakes that make it to court are highly avoidable if you take the steps to be proactive with your tax compliance. Luckily, even if you have received a demand notice or tax assessment from KRA, you still have time on your side and can use it to your advantage by consulting a tax professional who is well-versed in tax disputes in Kenya.
By filling out the form below, you can contact our team of legal experts, and one of us will reach out to you as soon as possible to help you with your tax planning journey or if a dispute has arisen, your tax dispute resolution.