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Financial Reporting for Saccos Tax Planning & Management. Julius Mwatu CFO – Indigo Telecom, Member – Taxation Workgroup. Our Menu Today. TAX MANAGEMENT Tax Planning Tax Crimes Tax Risks – Auditors Rights & Obligations. TAX COMPLIANCE Business tax Withholding Tax Personal Tax VAT
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Financial Reporting for Saccos Tax Planning & Management Julius Mwatu CFO – Indigo Telecom, Member – Taxation Workgroup
Our Menu Today TAX MANAGEMENT Tax Planning Tax Crimes Tax Risks – Auditors Rights & Obligations TAX COMPLIANCE Business tax Withholding Tax Personal Tax VAT EAC & Saccos
Taxation in Kenya Do you understand the tax structure? Tax Direct Taxes Indirect Taxes Income Taxes VAT Personal Taxation Customs & Excise Duties Withholding Tax How does this structure affect you? Business Taxation
Tax… Tax…
What is taxable? • All income of a person which accrued in or was derived from Kenya • Applies to both resident or non-resident persons • It could be cash or/and non-cash • The tax year for individuals runs from 1 January to 31 December
Withholding Tax
Withholding tax • Withholding tax is deductible upon payment of a taxable amount. • Tax point … “Payment” is deemed to include the date of accrual/ crediting of the amount payable. • Whose responsibility?
Dividends • Dividends could be cash, stock, redeemable preference shares, debentures, or payments during winding up • Classified as exempt, qualifying or non-qualifying • Qualifying – WHT is final, non-qualifying – WHT not final • Rates – 5% (Residents); 10% (Non-residents) • Exempt dividends – Paid to exempt persons listed on 1st Schedule or those received by a resident co. controlling >12.5% - S7(2) • Non-qualifying dividends – Paid by a designated co-op society (Taxed under section 19A) - S2 • Qualifying dividends – All the others
Exemptions • Withholding tax is not deductible on payments to exempt persons who are in possession of a tax exemption certificate • Examples of exempt persons - POSB – Interest on savings accounts - Local Authority - Registered pension/provident schemes - EA Dev Bank - NSSF
Interest • Classified as: • Exempt - 1st Schedule • Qualifying – Interest received by individuals from bank or fin inst., housing bonds [max: 300,000/-, CBK) or • Non-qualifying - all the rest • Qualifying – WHT is final, non-qualifying – WHT not final • Rates – 15% (Bank interest and other sources); 25% (on bearer instruments)
Penalties • 10% penalty (subject to a maximum of KShs 1 million) for failure to withhold or remit tax to KRA • Interest charged at 2% per month or part thereof, on the principal WHT
Business Tax
Gains or profits from business • “Business” is defined to include any - trade, - profession or vocation - manufacture, - adventure and - concern in the nature of trade but does not include employment.
Pertinent issues • Turnover tax regime • Taxation of partnerships • Taxation of Individuals
Specified sources of income • Business income • Employment income • Investment income • Farming income • Rental income • Any other
Taxation of Saccos • Interest income from members – Exempt • Other non-mutual incomes – 30% of 50% of income
Value Added Tax (VAT)? • VAT is a general consumption tax assessed on the value added to goods and services. • The Kenya VAT Act was enacted in 1989,and commenced on 1 January 1990 • Replaced Sales Tax • It is a general tax that applies, in principle, to all commercial activities involving the production and distribution of goods and the provision of services. • It is a consumption tax - Its borne ultimately by the final consumer
VAT Registration • Registration is now online – KRA online • A taxpayer should register for VAT if • His business has supplied taxable goods or taxable services or expects to supply taxable goods or taxable services or both, the value of which is KShs. 5 Million or more in a period of 12 months (taxable person) • To register within 30 days • Deregistration – if turnover falls below KShs. 5 Million
Tax point for VAT Once registered for VAT, a company should charge VAT at every point of sale The tax point is the earlier of: date of supply; date of invoice/certificate; date of payment
VAT Penalties • Failure to file return – Kshs. 10,000 • Late payment of VAT shown on a VAT return – the higher of KShs 10,000 or 5% of the tax due • Additional penalties for late payment – 2% per month or part thereof • Failure to comply with ETR regulation – Kshs. 500,000 or 3 years’ imprisonment • General penalty - Kshs. 500,000 or 3 years’ imprisonment
Tax Planning versus tax crimes Tax Planning Paying the right amount of tax at the right time in the right way. Tax avoidance (planning) is the legal utilisation of the tax regime to one's own advantage, by means that are within the law. Why? To reduce the tax burden; To defer tax payment; To avoid penalties; To manage tax risks; How thin is the thin line…? • Tax Crimes • Tax evasion (tax crime) is the general term for efforts to reduce taxes or pay no taxes by illegal means. • Tax crimes are therefore acts or omissions that are in violation of tax laws and regulations. • Its dependent upon the amount of admissible evidence against the taxpayer, not the amount involved.
School fees Medical benefits Loans to employees Pensions/Provident Funds Mortgage Home Ownership Savings Scheme Benefits in kind Insurance relief Personal Taxation 1
Staff training and development Staff party expenses Study leave Home leave passages Telephone benefit Personal Taxation 1
Why do we commit tax crimes? Lack of effective tax planning measures Inadequate knowledge of taxation Unrealistic tax regimes (perceived?) Inefficient tax authorities Self – discipline Payback (perceived?)
When do you become a tax criminal? Failure to file tax returns Filing false tax returns Conspiracy to impede/defeat the collection of tax (Tax planning??) Keeping two sets of books
The Balancing Act ... Your rights & Obligations Balanced?? Yes/No The right (s) has nothing right Perceptions Taxpayers Charter Rights Obligations ‘Substance over form’
THE CEO…where the buck stops… Introduction
The Auditors Risk… Auditors’ exposure on “other taxes” The numerous forms? VAT, PAYE, WHT, Customs, Business tax Auditors/ tax advisor seem to concentrate on business tax only Are we doing tax health – checks, and, can we use the findings to adjust accounts under audit? The dual role of business? Saccos are both tax payers & tax collectors Tax penalties accrue in both Is tax compliance a contingency or is it a risk we can arrest?
Invest wisely… Land stamp duty - Collected by KRA Rates - Leasehold Buildings Transfer - commercial or non-commercial Shares & Unit trusts
Buildings cont...Tax Incentives • Use of Pension as collateral • You can assign up to 60% of the accrued benefits as security for mortgages
Investment Deduction • building used for manufacture (100%) • hotel certified as an industrial building (100%) • building outside Nairobi, Mombasa or Kisumu valued at more than KShs 200M (150%) • Can you claim on construction of rental property?
Tax on Buildings • Investment deduction • VAT • VAT 5 claim
