Taxation of Companies in Kenya: What You Need to Know
Learn about company taxation in Kenya and understand the different tax obligations, rates, and regulations that businesses should be aware of.
Taxation is essential to any country's economic landscape, and Kenya is no exception. In Kenya, the Kenya Revenue Authority (KRA) plays a pivotal role in collecting revenue on behalf of the government. This article delves into the taxation of companies in Kenya, shedding light on various tax types, rates, and regulations that businesses, especially Small and Medium-sized Enterprises (SMEs), should be aware of.
- SMEs in Kenya face various tax obligations, including Turnover Tax, PAYE, VAT, Corporation Tax, and Withholding Tax.
- Turnover Tax is a simplified tax on gross turnover for SMEs with annual earnings between KShs 500,000 and KShs 5 million.
- Corporation Tax is a direct tax on business profits, currently set at 30%.
Kenya Revenue Authority (KRA)
Before diving into specific taxes, it's crucial to understand the role of the Kenya Revenue Authority. Established by an Act of Parliament in 1995, the KRA is responsible for collecting revenue following written laws and specified provisions. Moreover, it advises on revenue-related matters and performs functions directed by the Minister. Now, let's explore some of the critical taxes affecting businesses in Kenya.
Turnover Tax, introduced under the Finance Bill 2019, is a tax on a business's gross turnover. It is set at a rate of 3% of the gross turnover for SMEs, with annual earnings expected to be between KShs 500,000 and KShs 5 million. This Tax simplifies the payment process as it is a final tax. In other words, businesses that opt for Turnover Tax pay a flat 3% on their total sales, making it a straightforward method for small businesses to meet their tax obligations.
Pay As You Earn (PAYE)
PAYE, governed by the Income Tax Act, obliges employers to deduct income tax from their employees' earnings. These deductions follow a graduated scale and must be remitted to the KRA by the 9th day of the following month. Employers can also offer incentives, such as pension contributions to registered pension schemes, which enjoy tax deductions of up to Kshs 20,000 per month for both employer and employee contributions combined.
Value Added Tax (VAT)
If your business doesn't qualify for Turnover Tax—for instance, if you're involved in management, professional services, or have sales exceeding the prescribed threshold—you'll need to register for Value Added Tax under the VAT Act. VAT is 16% on taxable supplies, including goods and services. Importantly, VAT paid on business purchases (input VAT) can be claimed back, provided it adheres to certain restrictions. This means you can offset the VAT you collect from customers against the VAT you pay when buying supplies for your business.
To comply with VAT regulations, businesses must acquire an Electronic Tax Register (ETR) or an Electronic Signature Device (ESD) machine to issue tax invoices.
Under the Income Tax Act, companies in Kenya are subject to Corporation Tax, a direct tax on business profits. As of now, the tax rate stands at 30%. This Tax is assessed on a company's net income after accounting for expenses, depreciation, and other deductions.
Withholding Tax is a mechanism that requires businesses to withhold a portion of their payments to creditors. This amount is later remitted to the KRA as an advance tax on the payee's behalf. The Income Tax Act specifies rates for various types of payments, such as management and professional fees. The applicable rate depends on whether the recipient is a resident or a non-resident with a permanent establishment in Kenya.
It's worth noting that Kenya has double tax treaties with some countries to alleviate the tax burden for taxpayers, so businesses should verify the applicable tax rates for such countries.
SMEs and Tax Compliance
For Small and Medium-sized Enterprises (SMEs), navigating Kenya's tax landscape can be challenging. However, complying with tax obligations is vital to avoid penalties and ensure the sustainability of your business. SMEs should seek professional tax advice from experts registered by the Institute of Certified Public Accountants of Kenya (ICPAK) and accredited by the Kenya Revenue Authority (KRA).
In conclusion, understanding and adhering to Kenya's tax regulations is essential for businesses, especially SMEs, to thrive. The critical taxes covered in this article, including Turnover Tax, PAYE, VAT, Corporation Tax, and Withholding Tax, are fundamental to a company's tax compliance journey. Engaging a qualified tax professional is highly recommended to ensure accuracy and compliance.
Frequently Asked Questions
What is Turnover Tax, and who does it apply to in Kenya?
- Turnover Tax is a tax on a business's gross turnover. It applies to Small and Medium-sized Enterprises (SMEs) with annual earnings expected to be between KShs 500,000 and KShs 5 million.
What is PAYE, and who is responsible for deducting it in Kenya?
- PAYE, or Pay As You Earn, is tax deducted from employees' earnings. Employers are responsible for deducting and remitting PAYE to the Kenya Revenue Authority (KRA).
What is the VAT rate in Kenya, and who needs to register for VAT?
- The VAT rate in Kenya is 16%. Businesses that do not qualify for Turnover Tax, such as those involved in management and professional services, rental properties, or sales exceeding the threshold, must register for VAT.
How is Corporation Tax calculated in Kenya?
- Corporation Tax in Kenya is calculated at 30% of a company's net income after accounting for expenses, depreciation, and other deductions.
What is Withholding Tax, and when is it applicable in Kenya?
- Withholding Tax is a mechanism where businesses withhold a portion of payments to creditors and remit it to the KRA as advance tax. Depending on the payee's residency status, it applies to various charges, such as management and professional fees.
Can SMEs in Kenya seek tax advice?
- Yes, SMEs in Kenya can seek tax advice. It is advisable to consult with tax experts registered by the Institute of Certified Public Accountants of Kenya (ICPAK) and accredited by the Kenya Revenue Authority (KRA) for professional guidance.
What should businesses do to comply with Kenya's tax regulations?
- To comply with Kenya's tax regulations, businesses should maintain accurate records, meet tax payment deadlines, and seek professional tax advice when needed.
Is there a double tax treaty between Kenya and certain countries?
- Yes, Kenya has double tax treaties with some countries to mitigate the tax burden for taxpayers engaged in cross-border transactions. Businesses should verify the applicable tax rates for such countries.