ALN Member Firms
BOTSWANA
Collins Newman & Co.
BURUNDI
Mabushi Chambers
ETHIOPIA
Mesfin Tafesse
KENYA
Anjarwalla & Khanna
MALAWI
Savjani & Co.
MAURITIUS
BLC Chambers
AN INDEPTH LOOK AT THE TAX AMNESTY ON
FOREIGN INCOME
The Finance Bill 2016 introduces a provision in the Tax Procedures Act,
2015, which will grant tax amnesty to tax payers who earn taxable
income from foreign sources. The Amnesty gives the right to tax
payers to declare their foreign income on or before 31 December
2017 in respect of any year ending on or before 31 December 2016.
The provisions relating to the Amnesty will come into force on 1
January 2017.
The Amnesty provisions are set out below:
“… the Commissioner will refrain from assessing or recovering taxes,
penalties and interests in respect of any year of income ending on or
before 31st December 2016 and from following up on the sources of
income under the amnesty where:
i)
that income has been declared for the year 2016 by a
person earning taxable income in Kenya; and
ii)
the returns and accounts for the year 2016 are submitted
on or before 31st December 2017.
NIGERIA
G. Elias & Co.
RWANDA
K-Solutions & Co.
SUDAN
Omer Ali Law Firm
TANZANIA
ATZ Law Chambers
UGANDA
MMAKS
ZAMBIA
Musa Dudhia & Co.
Provided that this section shall not apply in respect of any
tax where the person who should have paid the tax:
i)
has been assessed in respect of the tax or any matter
relating to the tax; or
ii)
is under audit or investigation in respect of the undisclosed
income or any matter relating to the undisclosed income.”
In this Legal Alert, we consider certain salient issues arising from the
Amnesty as currently drafted.
Basis of taxation in Kenya
Kenya operates a source basis of taxation which means that any
income which is ‘’accrued in or derived from Kenya’’ is taxable in
Kenya.
The implication of a ‘’source based’’ system of taxation is that income
will only be taxed in Kenya where, in essence, the income arises from
within Kenya. Kenya’s source based system of taxation can be
contrasted with the residence basis of taxation applied in certain
jurisdictions under which a tax resident person is generally taxed on
his worldwide income irrespective of where the income arises and
whether or not within the jurisdiction of the taxing state. By way of
example, the United States and Tanzania have a residence based tax
system.
Justice Mary Kasango in Motaku Shipping Agencies Limited vs
Commissioner of Income Tax (Civil Suit No. 60 of 2013) confirmed
Kenya’s source based system of taxation when she observed that
income cannot be taxable in Kenya unless it was income which was
accrued in or derived from Kenya. The honourable Judge held:
“From section 3 (1) of the Income Tax Act, it is clear that subject to the
provisions of the Act, income of a person, whether resident or nonresident, is chargeable to income tax provided the income accrued in
or was derived from Kenya. Therefore, income of a person cannot be
subject to income tax unless it is income “which accrued in or was
derived from Kenya”.
Kenya’s sourced based taxation system has certain specific limited
exceptions.
In this regard, the Income Tax Act provides that where a business is
carried on or exercised partly within and partly outside Kenya by a
resident person, the whole of the gains or profits from that business
shall be deemed to have been accrued in or derived from Kenya.
Further, employment income is taxable on a worldwide income basis
in Kenya and not solely where it is accrued or derived from Kenya.
It should be noted that the provision dealing with a business carried
out partly within and partly outside Kenya only applies to “business
income” and not to, say, dividends or interest.
An example of foreign-sourced business income which may be taxable
in Kenya would be the profits of a foreign branch of a Kenyan
company. In comparison, foreign-sourced dividends or interest (for
example, dividends or interest paid by a foreign subsidiary company
to a Kenyan resident) would not be chargeable to tax in Kenya.
An interesting outcome of the above analysis is that a Kenyan tax
resident who owns equity or debt instruments in a foreign company
and receives dividends or interest income from such a foreign entity
would not, prima facie, be taxable in Kenya on such income.
The above analysis assumes the foreign company is not deemed to be
resident in Kenya for a particular year of income. A foreign company
could be considered to be resident in Kenya where the “management
and control” of its affairs is exercised in Kenya for a particular year of
income and liable to Kenyan taxes on this basis.
The Amnesty
The Cabinet Secretary in the June Budget statement stated that the
Government was aware that tax payers who owned assets and
businesses outside the country would be willing to reinvest their
assets in Kenya provided a conducive environment to facilitate such
reinvestment is created. The Budget statement went on to state that
tax payers who took up the Amnesty would have all principal taxes,
interest and penalties for the year of income 2016 and prior years
automatically remitted in total and, in addition, the Government
would not follow up on the sources of such income and assets
declared.
We would point out that while the Budget statement referred to both
income and assets, the Amnesty as drafted does not extend to assets
and, in addition, does not refer to the issue of repatriation of funds to
Kenya. There are certain important differences between the proposed
draft legislation and Government policy as set out in the Budget
statement. It is unclear whether the Government will seek to amend
the terms of the Amnesty prior to the Finance Bill 2016 becoming law.
The Amnesty is a timely development in light of Kenya having agreed
to participate in the Common Reporting Standards (CRS) regime. CRS
is a global initiative developed by the Organisation for Economic Cooperation and Development to enhance tax transparency and
compliance. One of the key objectives of CRS is to enable home tax
authorities to obtain information relating to overseas investments
held by tax resident persons in foreign bank accounts. Under the CRS
regime details of investments in foreign bank accounts will
automatically be shared with home tax authorities without the
requirement for the home tax authority (the Kenya Revenue Authority
in the case of Kenya) to demand such information. Whereas it is still
unclear when the first exchange of information under CRS will be
undertaken for Kenya, we expect that this will not be later than 2018,
in line with other countries globally.
In anticipation of the coming into force of CRS, many countries are
declaring tax amnesties to encourage their citizens to become
compliant ahead of the implementation of new CRS regime. Argentina
and Indonesia are among other countries which have recently granted
a tax amnesty. The tax amnesties extended by countries such as
Indonesia and Argentina have set out detailed guidelines and
procedures relating to the type of income which will benefit from the
amnesty and include the requirement for repatriation of funds and
the nature of investment to be made in their country. The Kenya
Amnesty is not as detailed and it would be helpful if the KRA would
provide detailed guidelines on its application.
Foreign income which could benefit from the Amnesty
The Amnesty has been drafted as if Kenya taxes income on a
residency basis and not on a source basis as discussed above (it is
indeed our belief that many persons do not fully appreciate Kenya’s
sourced based taxation system). This is a conceptual error. The
Amnesty therefore assumes all foreign income is taxable in Kenya.
Therefore, a taxpayer will need to consider the nature of the foreign
income held and if indeed the foreign income is subject to tax in
Kenya.
We set out below some hypothetical examples of foreign income held
by a Kenya resident tax payer and whether in each case the Amnesty
may be relevant to that tax payer:
(a) Scenario A: A Kenyan tax payer inherited real estate in Kenya
from his late mother in 2015. He sold the real estate and
invested the sale proceeds in a foreign unit trust with a bank in
Switzerland from which he receives an annual distribution.
Scenario A - Issues for consideration: the income arising from
the unit trusts is not “income accrued or derived from Kenya”
and therefore, in our view, this income is not subject to tax in
Kenya. As such, reliance on the Amnesty is not necessary.
(b) Scenario B: A Kenya tax resident person operates a sole
proprietorship business in Kenya which sells macadamia nuts
and other agricultural produce all over the world. While most
of the income of the sole proprietor was paid to a Kenyan
account, and was fully taxed, some of the sole proprietor’s
customers paid him directly to his UK bank account and this
income was never taxed in Kenya.
Scenario B - Issues for consideration: the foreign income held
in a bank account in England was improperly sourced as the
tax payer breached his obligations under the Income Tax Act.
This was “income accrued or derived from Kenya” and
therefore liable to tax in Kenya. The tax payer would in this
case benefit from the Amnesty.
(c) Scenario C: A Kenyan incorporated company which
manufactures and distributes children’s toys has grown over
the years and now has a regional presence in Kenya, Uganda,
Rwanda and Zambia. It operates outside Kenya through
branches of the Kenyan company. The company pays income
taxes in each country in which it operates. In Kenya, it has in
the past only paid taxes on its operations in Kenya.
Scenario C - Issues for consideration: The Kenyan company
has a business which is carried on or exercised partly within
and partly outside Kenya. Therefore, the whole income should
be reported and taxed in Kenya (subject to any relief that may
be available in the case of income from Zambia since Kenya
has a double tax treaty with Zambia). The tax payer would in
this case benefit from the Amnesty.
One further issue to note is that the proviso to the Amnesty makes the
provision inapplicable to a tax payer who has been assessed in respect
of the tax or who is under audit or investigation in respect of any
undisclosed income. As the proposed amendment grants an amnesty
in respect of all foreign income which is taxable in Kenya but has not
been declared in Kenya, the proviso should ideally specifically make
reference to foreign income which is taxable in Kenya, otherwise the
proviso as currently worded is very broad and would water down the
purpose of the Amnesty.
Way forward
The actual procedure for triggering the Amnesty has not been set out
in the law. In our view, it would be helpful if the Government would
allow for a process of confidential consultation between the KRA and
the tax payer. This process of consultation would allow the tax payer
to discuss the tax treatment of foreign income as well as the scope
and applicability of the Amnesty beforehand thereby allowing the tax
payer to make an educated decision. Further, the law should allow for
the KRA and the tax payer to enter into a negotiated agreement,
which agreement would be legally enforceable under the law.
It would enhance the confidence of a tax payer if the above
procedures were instituted. In addition, express clarification should be
provided by the KRA to some of the additional challenges set out
below:
1. Whether repatriation of funds to Kenya is required or not. If
repatriation is not required what will be the future reporting
requirements and obligations to pay tax in the future.
2. Whether the Amnesty will cover assets and if so how? For
example, if a tax payer owns a home in the United States will
he be required to sell the home? What is the position of an
overseas commercial property generating income?
3. Clarity that the Amnesty applies only to income which is
taxable in Kenya (the Amnesty currently suggests that resident
persons are taxable on their worldwide income and not on
income which is derived or accrued from Kenya).
4. Clarity as to whether an income which has a Kenyan source but
which has been invested abroad would be eligible for the
Amnesty.
Finally, it should be noted that no amnesty can be granted prior to the
Amnesty provisions (that is, section 37B of the Tax Procedure Act)
having entered into force on 1 January 2017 (or such earlier date as
may be set out in the Finance Act 2016 once enacted) and therefore
consideration should be given as to the appropriate time to
commence negotiations with the KRA.
Should you have any queries or need any clarifications with respect to
the above, please do not hesitate to contact Daniel Ngumy or Kenneth
Njuguna or your usual contact in Anjarwalla & Khanna.
The content of this alert is intended to be of general use only and should not be relied upon
without seeking specific legal advice on any matter.