How to Calculate Withholding Tax on Invoice in Kenya: A Must-Read Guide

Withholding tax, also known as tax retention, plays a crucial role in the Kenyan tax system. It's a mechanism that requires a taxpayer to deduct and withhold a portion of income tax at the source before making payments to the income recipient. Understanding how to calculate withholding tax on an invoice in Kenya is essential for businesses and individuals to comply with tax regulations and avoid penalties. This article will explore everything you need to know about withholding tax in Kenya, from what incomes are subjected to it to the calculation process.

Key Takeaways from the Article

1. Withholding tax in Kenya is a mechanism where a portion of income tax is deducted at the source before making payments to the income recipient.
2. Various types of income are subjected to withholding tax, and the rates vary based on the nature of the income and the tax residency of the recipient.
3. Withholding tax can be considered final for non-residents and, in specific cases, for residents, such as qualifying interests, dividends, pensions, and winnings from gaming and betting.
4. Taxpayers can reclaim withholding tax if they have overpaid within a given year by filing for a refund during the annual tax return process.
5. Calculating withholding tax on an invoice involves identifying the type of income, applying the applicable tax rate, deducting the tax, and remitting it to KRA by the due date.
6. Compliance with withholding tax regulations is crucial to avoid penalties and contribute to a transparent tax system in Kenya.

What Incomes Are Subjected to Withholding Taxes?

Withholding tax in Kenya applies to various types of payments, and the specific rates may vary depending on whether you are a Kenyan resident or a non-resident. Some of the income types subject to withholding tax include:

Dividends

• Dividends received by resident corporate shareholders with more than 12.5% voting power are exempt from withholding tax.
• For non-resident shareholders, the withholding tax rate is 15%.
• East African Community Partner States citizens pay a reduced rate of 5% on dividends.

Interest and Deemed Interest

• Interest on bearer instruments of at least two years is subject to a 25% withholding tax.
• Interest on government bearer bonds with maturity of 2 years or more is taxed at 15%.
• Interest on bearer bonds with maturity of 10 years or more is taxed at 10%.
• Interest paid by Special Economic Zones (SEZ) to non-residents is subject to a 5% withholding tax.

Fees

• Management, professional, and training fees are subject to a 5% withholding tax for residents and 20% for non-residents.
• Contractual fees have a 3% withholding tax rate for residents and 20% for non-residents.
• Management fees paid by SEZ to non-residents are taxed at 5%.

Royalties and Natural Resource Income

• Royalties and natural resource income are subject to a 5% withholding tax for residents and 20% for non-residents.
• Royalties paid by SEZ to non-residents are also taxed at 5%.

Winnings from Gaming and Betting

• Winnings from gaming and betting are subject to a 20% withholding tax.

Rent and Leasing

• Rent/leasing of immovable property is taxed at 10%.
• Rent/leasing of property other than immovable property is subject to a 15% withholding tax.

Pensions and Retirement Annuity

• The withholding tax rate for pensions and retirement annuities varies on a graduated scale.

Other Payments

• Payments to sportspeople and entertainers are subject to a 5% withholding tax for residents and 20% for non-residents.
• Supporting, assisting, or arranging an appearance or performance is taxed 20% for non-residents.

It's important to note that not all incomes are subject to withholding taxes. Some payments are exempt, such as those made to tax-exempt bodies, interest payments to banks and insurance companies, and certain dividends from resident companies from local and international subsidiaries.

Is Withholding Tax a Final Tax?

Whether withholding tax is considered a final tax depends on your tax residency and the nature of the income. Here's a breakdown:

For Non-Residents:

• Withholding tax is considered final if it relates to payments made to non-resident individuals or entities with no permanent establishment in Kenya.

For Residents:

• Withholding tax can be final in cases of:
• Qualifying interests and dividends.
• Pensions.
• Winnings from gaming and betting.

In all other cases, withholding tax is not considered final for residents. Taxpayers (payees) must declare their income and the withholding tax details when filing their annual tax returns and pay any tax balance due.

Can Withholding Tax Be Reclaimed?

Yes, withholding tax can be reclaimed under certain circumstances. If you've paid withholding tax in excess within a given year, you can apply for a refund. To do so, follow these steps:

1. File your annual tax return.
2. Apply for a refund immediately after filing your tax return.
3. Include supporting documents to prove your claims.
4. Send your refund application to the processing officer.

How to Calculate Withholding Tax on an Invoice in Kenya

Calculating withholding tax on an invoice in Kenya involves several steps. Here's a simplified guide:

1. Determine the type of income: Identify the nature of the payment and the applicable withholding tax rate. Refer to the withholding tax rate table provided earlier.
2. Calculate the withholding tax amount: Multiply the payment amount by the applicable withholding tax rate. For example, if you're paying a resident consultant a fee of Ksh 10,000, and the withholding tax rate is 5%, the withholding tax amount would be Ksh 500 (Ksh 10,000 x 0.05).
3. Deduct the withholding tax: Subtract the calculated withholding tax amount from the total payment amount. In our example, the consultant would receive Ksh 9,500 after deducting the Ksh 500 withholding tax.
4. Record and remit: Keep accurate records of the withholding tax deducted and remit it to the Kenya Revenue Authority (KRA) by the 20th day of the following month.

Withholding Tax Rates

Withholding tax rates in Kenya vary based on the type of income and whether you're a resident or non-resident. Here's a comprehensive list of rates to help you calculate withholding tax:

• Dividends: 10% (Resident), 15% (Non-resident)
• Qualifying Dividend: 5% (Resident)
• Interest on Bearer Instruments: 25% (Resident and Non-resident)
• Interest on Government Bearer Bonds (Maturity ≥ 2 years): 15% (Resident and Non-resident)
• Interest on Bearer Bonds (Maturity ≥ 10 years): 10% (Resident), 25% (Non-resident)
• Fees payable to Insurance Brokers: 5% (Resident)
• Royalties, Natural Resource Income: 5% (Resident), 20% (Non-resident)
• Management Fees, Professional Fees, Training Fees: 5% (Resident), 20% (Non-resident)
• Contractual Fees: 3% (Resident), 20% (Non-resident)
• Rent/Leasing of Immovable Property: 10% (Resident), 30% (Non-resident)
• Pension/Retirement Annuity: Graduated Scale (Resident), 5% (Non-resident)

Exemptions from Withholding Tax

Certain incomes are exempt from withholding tax in Kenya, including:

• Dividends received by a resident company from a local subsidiary with ≥ 12.5% voting power.
• Marketing commissions and residue audit fees for exporting flowers, fruits, and vegetables.
• Interest payments to banks and insurance companies.
• Payments made to tax-exempt bodies.
• Local management and professional fees below Ksh 24,000/month.
• Local air operators pay air travel commissions to overseas agents.

READ ALSO: Withholding Tax in Kenya: What Is It, How to Calculate, New Rates, and Filing Returns

Conclusion

Understanding how to calculate withholding tax on an invoice in Kenya is essential for businesses and individuals to ensure compliance with tax regulations. It's important to determine the correct withholding tax rate based on the payment's nature and the recipient's tax residency. Additionally, timely remittance of withheld taxes to KRA is crucial to avoid penalties. By following these guidelines, you can navigate the complexities of withholding tax and contribute to a transparent and efficient tax system in Kenya.

Frequently Asked Questions (FAQs)

What is withholding tax in Kenya, and who is responsible for paying it?

Withholding tax in Kenya is a standard income tax paid by the income payer on behalf of the income receiver. The income payer, often the employer or entity making payments, is responsible for deducting and remitting this tax to the Kenya Revenue Authority (KRA).

Is withholding tax the same for all types of income?

No, withholding tax rates vary depending on the type of income and whether you are a resident or non-resident. Different income categories have specific tax rates, as outlined by the KRA.

How do I file withholding tax returns using the iTax system?

To file withholding tax returns, you should update your taxpayer obligations, register your employer company with iTax, and access the iTax portal. From there, you can choose between using Excel for multiple transactions or the Web Form for single transactions. Follow the provided guidelines to complete the filing process.

Are there any exemptions from withholding tax in Kenya?

Certain incomes are exempt from withholding tax, such as dividends received by resident companies from local subsidiaries with significant voting power, interest payments to banks and insurance companies, and payments to tax-exempt bodies. Be sure to check the specific exemptions relevant to your situation.

What are the penalties for late filing of withholding tax in Kenya?

Late filing of withholding tax can result in penalties. Currently, the penalty is set at 20,000 Ksh or 5% of the payable fee, whichever is higher. It's essential to remit withholding tax on time to avoid these penalties.

Is withholding tax a final tax in Kenya?

Withholding tax can be a final tax in certain situations. It may be considered final if you are a non-resident with no permanent establishment in Kenya or if your income falls under specific categories like qualifying interests, dividends, pensions, or winnings. However, for most other cases, withholding tax is not a final tax, and you must declare it when filing your annual tax returns.