Do you know the do’s and don’ts of tax compliance in Kenya? If you don’t have the correct information, you risk making mistakes. And unfortunately this can be costly for companies. In this article, I have highlighted the most common mistakes to avoid in order to be tax compliant in Kenya:
- A wrong choice of structure when registering
- Undervaluation of income or tax evasion
- Late or no tax return
- Lack of proper accounting records
- Failure to Register as a Taxpayer in Kenya
A bad choice of structure during registration
First of all, identifying the structure of your company is very important, what do I mean? Defining whether your business is a sole proprietorship, a limited liability company or a branch of a foreign company is crucial. This will indeed determine the future procedures for the company in relation to Kenyan taxation.
When setting up a business, it is important to keep all official documents secure. They will be needed later for the tax return so that you know what is expected of you. Of course, companies have legal obligations, but some of these obligations depend on the category of activity.
For example, small and micro-enterprises owned by Kenyan residents with an annual turnover of less than 5 million KES are required to pay a presumptive tax. In addition, the tax is paid once a year upon acquisition or renewal of a business permit or business license. The rate is currently 15% of the business permit or license fee. The penalty is 5% of the tax due, as set out in the Tax Procedures Act of 2015.
Undervaluation of income or tax evasion
Another big mistake would be to try to evade taxes. It sounds obvious but as an old saying goes, you can’t avoid “death and taxes”. Tax evasion is the deliberate or illegal act of not paying or underpaying taxes. Governed by law by individuals or companies depending on the country.
Taxation in Kenya is irrevocable: a person will be guilty of an offence if, without reasonable cause, he or she makes an incorrect income tax return by omitting or underreporting any income that should have been reported. Sometimes this can even happen through forgetfulness or carelessness, so be careful … KRA has become stricter in such cases recently.
Here are a few examples of tax evasion. For example, not paying the correct income tax when a company underestimates the value of its imported goods. Failure to deduct withholding tax: when KRA appoints entities to withhold tax at source and then remit it on time. An expenditure anomaly in which a company falsifies financial statements or expenses in order to pay less tax.
Delay or absence of a tax return
It is the payment of the tax to the competent authority within the time limit. In Kenya, filing is done through an online platform called itax. Individuals and businesses must file their returns by June 30, which marks the end of the fiscal year.
Businesses must pay several types of taxes. Of particular note is the income tax, PAYE (Pay as You Earn), which is deducted monthly from employees. PAYE is supposed to be paid on the 9th of the following month. Value Added Tax (VAT) must be paid before the 20th of each month. A company must comply with all these tax regulations in order to be in compliance with the tax authorities.
All Kenyan businesses will be required to file an annual corporate tax application with the Kenya Revenue Authority. As mentioned in the first paragraph, the tax rate will vary depending on whether you are a subsidiary or a branch. In addition, a company limited by shares in Kenya will also have to file annual returns with the Registrar of Companies.
Lack of proper accounting records
That seems to be the most elementary thing, doesn’t it? Accounting is the process of recording all financial transactions made by a company. It is essential that your bank reconciliation is done seriously so that every debit and credit transaction is recorded correctly and in the right account. Otherwise, your account balances will not match and you won’t be able to close your books.
Accounting can make or break a business, which is why it is very crucial for a business. Because every operation of a business is recorded in it. From determining profits, generating reports that can help determine future investments and processing payroll.
You will have to prepare financial reports, most of them in real time. This can be a lifeline for small business owners who need to make quick financial decisions based on the immediate health of their business. Backlogs caused by inaccurate accounting result in heavy penalties when it’s time to go through the annual audit of your accounts to file and pay corporate taxes for your business.
Failure to register as a taxpayer in Kenya
Suppose you are opening a small business in Kenya. And afterwards, you want to keep a low profile until your business takes off. That means you won’t apply for a business license or register the business with the Registrar of Companies from the start. And then later, it may be too late…
Individuals and companies require a PIN certificate for several administrative processes. For example, it is a requirement for a tax compliance certificate. In Kenya, a Tax Compliance Certificate (TCC) is used to procure tenders from the government. All the documents are closely linked to each other.
A small tip: if a company has employees working on a contractual basis. And are not permanently based in Kenya. The company must ensure that when the contract expires. The employee must have deposited and paid all relevant taxes. Therefore, upon the employee’s departure, the company must ensure that a nil tax return is filed with KRA to avoid any penalties.
In addition, it is important to note that if the employee(s) plan to return to the country, the company must ensure that the PIN code is unsubscribed, while if the employee leaves the company permanently, the company must ensure that the employee requests the cancellation of the PIN code. Failure to which the penalty highlighted above would apply.
As we know, taxation in Kenya is constantly changing and it can sometimes be a bit difficult to keep up to date. For example, with the Covid19 earlier this year, President Kenyatta approved an Act of Parliament. The Taxation (Amendment) Act 2020 which made various changes to the existing tax laws in Kenya.
But then how do you focus on a new market, the growth and success of your business? Here’s a tip, don’t take shortcuts when it comes to tax compliance in Kenya. Instead, get a reliable local partner who knows the Kenyan tax system inside out and who will advise, guide and support you as much as you need. This lifts the load off your shoulders and allows you to focus primarily on a specific objective. Great, isn’t it?