taxation in the manufacturing sector in kenya · taxation of the manufacturing sector in kenya 1....

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Manufacturing Sector in Kenya

Manufacturing Sector in Kenya | July 2018

Introduction 3Corporation Tax 5Capital Gains Tax 10Employee Taxes 11Withholding Tax 14Value Added Tax (VAT) 16Customs Duties 22Excise Duty 26Miscellaneous fees and levies 28

Contents

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The Manufacturing SectorKenya being a developing economy and one of the leading business hubs south of the Sahara is focused on ensuring its economy grows. Its leadership is fully cognizant that for the economy to grow, the Gross domestic product must increase and it is for this reason manufacturing has been identified as a sector of the economy which can greatly accelerate the countries and regions economic growth agenda. Growth of the manufacturing sector ensures there are jobs for its citizens, affordable livelihoods, affordable goods and services as well as taxes. Manufacturing is defined as the process of converting raw materials, components or parts into finished goods that meet a customer’s expectations or specifications. Manufacturing commonly employs a man-machine setup with division of labour in a large scale production.

2017- 2018 Economic surveyThe manufacturing sector currently employs over 330,300 people accounting for a growth of 11.4% of the total formal employment and thousands more in the informal sector.

In the Export processing Zone (EPZ) which includes a number of gazetted zones, operating enterprises, employment and cumulative investment recorded growth in 2017. The number of local employees engaged by EPZ enterprises increased to 54,622 persons in 2017 from 52,947 persons in 2016. The cumulative capital investment increased to KShs 92.3 billion in 2017. However, total sales decreased in the period under review due to reduced exports.

The total approved credit to the manufacturing sector rose to KShs 311.8 billion in 2017 from KShs 275.8 billion in 2016.

2018-2019 Economic OutlookThe Government has identified manufacturing as one of its big four-agenda and has set targets for growth and employment creation in the sector. The plan has emphasized Government focus to boost fish processing, agro-processing, leather and textiles sub-sectors.

Successive budget pronouncements in the recent past have offered several incentives to attract foreign investments and protect locally manufactured goods. Towards this end, the Government allocated resources for modernization and development of basic infrastructure in selected Special Economic Zones (SEZ). The commencement of the SGR freight services will lower domestic transport costs. The Government will also start subsidizing electricity supplied to manufacturers and increasing supply of renewable energy. All these measures are expected to spur the growth of the manufacturing sector to higher productivity.

Manufacturers in Kenya can be broadly classified to fall within the following classes;

• Chemicals, Pharmaceuticals and medical equipment

• Automotive and metal industry

• Food and beverages

• Energy, electrical and electronics

• Plastics and rubber

• Paper and boards

• Timber wood and furniture

• Textiles and apparel

• Building and constructions

• Among others.

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Taxation of the Manufacturing Sector in Kenya

1. Corporation Tax

1.1 Taxable IncomeTaxation in Kenya is based on the concepts of source and residence.

Section 3 of the Income Tax Act (ITA) provides that gains or profits of a person, whether resident or non-resident, which accrued in or was derived from Kenya, is subject to tax in Kenya.

1.2 Determination of Taxable IncomeIn the determination of taxable income, only expenditure incurred wholly and exclusively for the purposes of production of the taxable income are deductible against the taxable income. Conversely, the ITA provides that no deduction shall be allowed in respect of expenditure or loss which is not wholly and exclusively incurred in the production of the income.

Taxable income is determined as follows;

Relevant provisions of the Income Tax Act that Apply to Manufacturing Companies include:

DetailsSection of the ITA

Amount (KShs)

Profit Before Tax XXX

Add: Disallowable expenses and deductions Section 16 XXX

Less: Allowable deductions Section 15 (XXX)

Non-Taxable IncomesVarious Sections

(XXX)

Taxable Income XXX

In the event that the results of the above computation is a tax loss, the loss can be offset against future taxable profits. A tax loss can be carried forward for a maximum of nine years, however, the period could be extended, on application by the Cabinet Secretary in charge of Finance upon the recommendation of the Commissioner.


1.3 Specified Sources of IncomeGains or profits of a person from specified sources of income should be computed separately. Any loss realised from a specified source of income can only be deducted against future gains or profits from the same source of income.

Specified sources of income under the ITA include; rental income, employment income, income from agricultural activities (including pastoral, horticultural and forestry), surplus funds withdrawn from registered pension/provident funds, income of a licensee or contractor from license or contract areas, (applies to the extractive industry), and other sources relating to business income but not relating to sources listed above.

1.4 Tax RatesThe ITA provides the following tax rates for companies in the manufacturing sector;

Type of company Details Rate

Resident company 30%

Permanent establishments of non-resident companies (A Branch) 37.5%

Newly Listed Companies At least 40% of share capital issued 20%

At least 30% of share capital issued 25%

At least 20% of share capital issued 27%

1.5 Turnover Tax Turnover Tax only applies to persons whose income from business exceeds KShs 500,000 but not more than KShs 5,000,000 in a year of income. The tax rate of 3% on the turnover is final tax. The below incomes and entities are not subject to Turnover Tax;

• Rental income, management, professional or training fees

• Income of an incorporated company

Income which is subject to Turnover Tax is not subject to further taxation.

Turnover Tax is a tax available to small and medium enterprises who are normally not within the tax net. However, Turnover tax is optional.

1.6 Payment of Tax The ITA provides that taxes are paid by way of instalment taxes.

Instalment taxes due are determined as follows;

The estimated income tax charge for the year, or;

110% of the previous year’s tax liability.

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Instalment Percentage of tax liability Due Date

First instalment 25% 20th of the fourth month

Second instalment 25% 20th of the sixth month

Third instalment 25% 20th of the ninth month

Fourth instalment 25% 20th of the twelfth month

Tax Balance Last day of the fourth month

Manufacturers operating commercial vehicles are also required to pay Advance tax. Advance tax is determined as follows;

Motor vehicle CC. rating The higher of

Vans, pick-ups, trucks, prime movers, trailers and lorries;

KShs 1,500 per ton p.a. KShs 2,400

Saloons, station-wagons, mini-buses, buses and coaches

KShs 60 per passenger capacity p.m.

KShs 2,400

1.7 Export processing Zone (EPZ) & Special Economic Zone (SEZ)The Kenyan Government is focused on promoting production for export purposes as well as ensuring affordable goods are available locally. Towards this end, the Government has provided an incentive in form of EPZ’s and SEZ’s.

Instalment EPZ Tax Rate % SEZ Tax Rate %

First ten years Nil 10%

Next ten year 25% 15%

Thereafter 30% or 37.5% 30% or 37.5%

1.8 Thin capitalizationThe ITA provides that a company is said to be thinly capitalized where the sum of all loans held by the company is greater than three times the company’s equity (revenue reserves and paid up capital for all classes of shares) and is controlled by a non-resident person or an associate of the non-resident person.

Thinly capitalized companies are required to defer (not take into account) foreign exchange losses realized by the company as well as restrict the interest expense incurred in respect of the loans when determining taxable income. In view of this, thinly capitalized companies incur a higher tax burden than companies that are not thinly capitalized.

ITA defines loans as overdrafts, ordinary trade debts, overdrawn current accounts or any other form of indebtedness for which a company is paying a financial charge, interest, discount or premium.

Instalment taxes are due as shown below;


1.9 Graduate ApprenticeshipsAny employer who engages at least ten university graduates as apprentices for a period of six to twelve months during any year of income shall be eligible for tax rebate in the year subsequent to the year of such engagement. The employer must obtain approval from the Director General of the National Industrial Training Authority. The employer shall deduct a rebate equal to fifty percent of the salaries and wages paid to at least ten apprentices.

1.10 Tax Return SubmissionThe due date for submission of the company’s tax return to the Domestic Taxes Department is the end of the 6th month after the year end.

On 31 July 2015, KRA issued a public notice to the effect that, as from 1 August 2015, taxpayers would no longer be allowed to submit manual self-assessment returns at any of the KRA offices country wide. Hence, effective 1st August 2015, all taxpayers are required to submit their self-assessment returns via the i-Tax system.

Failure to file a self-assessment return online attracts a fine of one hundred thousand shillings. Failure to submit the return by the due date attracts a penalty of 5% of the tax balance for the year subject to a minimum of KShs 20,000.

1.11 Income Tax Bill, 2018In May 2018, the National Treasury released the draft Income Tax Bill which is expected to repeal the current ITA. Treasury has already received proposals on the Bill from the general public. The draft Bill will be amended and thereafter presented to parliament for discussion and thereafter enacted into law. The legislative timelines are not clear but the Bill is expected to become law within the year 2019.

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1.12 Capital AllowancesThe ITA provides incentives to taxpayers in the manufacturing sector. This incentive is in the form of capital allowances (tax depreciation) for capital expenditure incurred in the process of generating taxable income from manufacturing.

These incentives compensate tax payers for their capital investment. Capital allowances are deductible against taxable income. The following are some of the capital allowances available to taxpayers in the manufacturing sector;

a) Investment Allowance/Deduction

Details Rate %

Building and machinery used for manufacturing purposes 100

Civil works and structures forming part of an industrial building used for manufacturing purposes 100

Construction of a building or purchase and installation of machinery for manufacturing purposes outside the city of Nairobi or the municipalities of Mombasa or Kisumu whereof the investment is KShs 200 million or more.

150

b) Industrial Building Allowance

Details Rate %

Industrial buildings 10

Hotel buildings 100

Hostel, educational and training buildings, provided such building has been certified by the Commissioner as such.

50

Rental residential buildings constructed in a planned developed area approved by Cabinet Secretary 5

Commercial buildings 25


c) Wear and tear allowances

Class Details Rate %

Class Itractors, combine harvesters, heavy earth-moving equipment and such other heavy self-propelling machines of a similar nature

37.5

Class IIcomputers and peripheral computer hardware, calculators, copiers and duplicating machines;

30

Class III All other self-propelling vehicles including aircraft; (a) 25

Class IV All other machinery, 12.5

Includes motor vehicles, pick-ups and vans

d) Farm Works Allowance

Description Rate %

Construction of farm works, farmhouses, labor quarters and any other immovable buildings necessary for the proper operation of the farm, fences, dips, drains, water and electricity supply works other than machinery, windbreaks and other works necessary for the proper operation of the farm.

100

2. Capital Gains Tax

Capital Gains Tax (CGT) is a tax chargeable on the gain to a company or an individual on the transfer of property situated in Kenya. CGT is chargeable on any transfer that occurred on or after 1st January, 2015.

The rate of tax is 5% of the net gain. The net gain is the excess of the transfer value (selling price) over the adjusted cost of the property.

Effective 1 January 2016, CGT does not apply to gains realised from securities listed on the Nairobi Securities Exchange.

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3. Employee Taxes

Income from employment can be cash or non-cash benefits.

Cash benefits Non-Cash Benefits

Gains or profits from employment are widely defined and include wages, salary, leave pay, sick pay, payment in lieu of leave, fees, commissions, gratuity, travelling, entertainment or other allowances.

Value of benefits (in kind), advantage or facility received from employment are only taxable if the aggregate value exceeds KShs 36, 000 annually. Eg Parking, free goods, mobile phone and Airtime.

It should be noted that benefits received by family members of an employee are subject to Pay As You Earn (PAYE).

One of the most common benefit to employees in the manufacturing sector (including empoyees who are family members) is housing. The value of the housing benefit provided is determined as being the higher of;

• 15% of the gains or profits from employment excluding the value of those premises,

• the market rental value or,

• the rent paid by the employer.

Motor vehicle benefit is taxable as follows;

• Where the employer owns the car the benefit is the higher of 2% per month of the cost of the car or the actual cost to the employer;

• Where the vehicle is leased or hired vehicle, the taxable benefit is the cost of lease or hire of the vehicle.

Fees, allowances or non-cash benefits paid to or for directors are also taxable.


3.1 PAYE dates to observePAYE should be remitted by the employer by the 9th of the month following payroll month. The employer is also required to file monthly PAYE returns.

Late payment of tax attract penalty of 25 % of the tax due and interest at 1% per month for the period the tax remains unpaid.

Non-filing of PAYE return attract penalty of 25% of the tax due or a minimum of KES. 10,000.

3.2 Tax deductionsThe following constitute allowable deductions when determining the taxable pay of an individual;

• Contributions to a registered pension or provident fund, up to a maximum of KShs. 240,000 per year

• Mortgage Interest of up to a maximum of KES. 150,000, on borrowings to finance the purchase of owner-occupied residential property. Effective 01 January 2017, this increased to KES. 300,000 p.a.

• Contributions to a home ownership savings plan, up to a maximum of KES. 48,000 per year

3.3 Tax ReliefsResident taxpayers are granted the following reliefs against tax payable:

• Personal relief in the amount of KES. 15,360 per year, effective 01 January 2018 the relief shall increase to KES. 16,896 per annum.

• Insurance relief (including education and health insurance) in the amount of 15% of premiums paid, up to a maximum relief of KShs. 60,000 per year.

3.4 Tax RatesThe following tax rates apply to employees and self-employed (consultant and sole proprietorships) persons on their annual income earned effective 01 January 2018:

Taxable income (KShs) Tax Rate (%) Tax Due (KShs) Cumulative tax due (KShs)

First 147,580 10% 14,758 14,758

Next 139,042 15% 20,856 35,614

Next 139,042 20% 27,808 63,422

Next 139,042 25% 34,761 98,183

Above 564,710 30%

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From the above general provisions of the ITA on the taxation of the employment income, manufacturing companies are normally faced by the following unique situations;

Scenario Tax Dilemma Professional view

Expatriate employees

How should these category of employees be taxed?

A non-resident person in respect of any employment with or services rendered to an employer who is resident in Kenya or the permanent establishment in Kenya of an employer who is not resident, shall be deemed to have accrued in or to have been derived from Kenya. Therefore expatriate employees working in Kenya should be taxed in Kenya.

School fees for employees

Is this taxable or not?School fees paid by an employer for an employee or his dependents is not taxable on the employee but on the employer.

Casual staff How should they be taxed?If casual employees are paid amounts exceeding the minimum taxable threshold they are subject to employment tax.

Per diem Is this taxable or not?

This is usually given to staff on official duty outside their usual place of work. As such the first KShs 2,000 is deemed to be reimbursement of expenses and is excluded in the calculation of the employment benefit of the staff.

Salary net of taxIs the tax paid by the employer a benefit?

Where employer pays employees net of tax, the tax paid by the employer on behalf of employees is in itself a benefit chargeable to tax.

Company branded Vehicles

Should the employee be taxed on the motor vehicle benefit?

Employees who have restricted use of company motor vehicles, the Commissioner may, if satisfied of that fact upon proof by the employee, determine a lower rate of the benefit depending on the usage of the motor vehicle.

Mobile phone airtime

Is the mobile phone airtime taxable?

The Commissioner has provided guidelines where 30% of such airtime is deemed to be for personal use and thus taxable on the employee.

Alternatively if the employee can fully account that the airtime was used for business purposes then it is not taxable on them.

Meals served at a canteen

Are the meals taxable on the employee?

Meals served in a canteen or cafeteria operated or established by the employer or a third party who is a registered tax payer for the benefit of employees are not taxable on the employees if value of benefit does not exceed KShs 48,000 per annum per employee.


Withholding tax is deducted on specific payments in accordance with the provision of the ITA. The payer acts as an agent for the Kenya Revenue Authority. The tax is paid in advance by the payee but in some instances it can be a final tax.

The tax is administered so that KRA could achieve the following objectives;

• It provides cash flow to Government

• Enhance compliance

• It’s a cost effective way of collecting taxes

• It aids in collecting taxes from non-resident persons

The following items are some of the ordinarily payments subject to Withholding tax for a Manufacturing entity;

No. Description Resident Rate % Non Resident Rate %

1 Dividends 5 10

2 Interest

Housing Bonds 10 15Government bearer bonds 15 15Other sources 15 15Deemed interest - 15

3 CommissionsInsurance Brokers 5 20Other sources 10 20

4 Royalties 5 20

5 Management and professional fees 5 20

6 Contractual fees 3 20

7 Telecommunication service fees 0 5

8 Real estate rent 10 30

9 Lease of equipment - 15

4. Withholding Tax

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The following definitions are provided in the ITA to help in the administration of the WHT;

• Agency fees: Payments to a person for acting on behalf of any other person, group of persons or the Government and excludes reimbursements.

• Management or professional fee: payment made to a person, other than a payment made to an employee by his employer, as consideration for managerial, technical, agency contractual or consultancy services however calculated.

• Consultancy fees: payments to any person for acting in an advisory capacity or providing services on a consultancy basis.

• Contractual payments: payments for work done in respect of building, civil or engineering work.

• Royalty: a payment made as consideration for the use of or the right to use-

• The copyright of a literary, artistic or scientific work; or cinematograph film, including film or tape for radio or television broadcasting; or

• A patent, trade mark, design or model, plan, formula or process; or

• Any industrial, commercial or scientific equipment; or for information concerning industrial, commercial or scientific equipment; or

• Experience, and gains derived from the sale or exchange of any right or property giving rise to that royalty;

Below are some of the additional notes in regards to withholding tax;

• Withholding tax on payments to resident persons for management, professional and training fees applies to payments of KShs 24,000 or more in a month to both registered and non-registered businesses. The non-resident rate in respect of consultancy fees payable to citizens of the East African Community Partner States is 15%.

• However, some of the common payments not subject to WHT include, security charges, cleaning services, payment for equipment such as machine, car, furniture.

• Withholding tax on interest income received by a resident individual from the following sources is final; banks or financial institutions licensed under the Banking Act, building societies licensed under the Building Societies Act and Central Bank of Kenya.

• Lower rates of withholding tax are applicable on some payments to residents of countries that have a Double Tax Agreement with Kenya. Where the treaty rate is higher than the non-treaty rate, the lower rate applies.

Some of the planning areas for the WHT compliance include;

• Paying withholding tax due on time will save the company tax penalties;

• Utilization of double tax treaties;

• In house tax resources;

• Annual tax health checks and implementing tax consultant’s advice;

• Seeking tax advice before major business decisions;

• Review of agreements and contracts;

• Tax training.


5. Value Added Tax (VAT)

A broad based “consumption-type destination-based” VAT regime applies in Kenya based on the invoice credit method that applies to taxable goods and services and excludes exempt items and out of scope supplies. There are three types of supplies that attract different VAT treatment: standard rated taxable supplies, currently at 16%, zero-rated supplies and exempt supplies as listed under the first schedule to the VAT Act.

VAT regime is based on the VAT Act 2013 and subsidiary legislations (VAT regulations 2017, withholding VAT guidelines and Tax Procedures Act, 2015). It is a consumption tax charged on taxable supplies produced locally or imported into the country. The tax is collected by registered taxpayers who act as agents for the revenue authority. Excess output VAT is paid to the Commissioner of Domestic Taxes while VAT on imported goods is collected by the Commissioner of Customs and Border Control at the point of importation.

Every registered taxpayer must maintain a VAT Control account in the ledger showing totals of output tax and input tax in each tax period and the tax payable or recoverable. This account should be reconciled monthly with the VAT return and where differences arise, they should be investigated and reconciled immediately.

5.1 VAT registrationMandatory registration of VAT obligation is required where a manufacturer attains or expects to attain a taxable turnover of Kshs.5,000,000/= or more in a period of twelve months. Failure to register may prompt the Commissioner to register them compulsorily and retrogressively from the date they became due for registration.

Section 37 of the Value Added Tax Act provides that a person who fails to apply for registration as required under this Act commits an offence and shall be liable on conviction to a fine not exceeding two hundred thousand shillings or to imprisonment for a term not exceeding two years, or to both.

Upon registration on i-tax, the VAT obligation will be updated on the taxpayers Personal Identification Number (PIN) certificate.

5.2 VAT DeregistrationRegistered taxpayers qualify for deregistration when they cease to make taxable supplies or they continue to make taxable supplies whose annual value does not exceed the registration threshold. An application for deregistration must be made within thirty days of the date on which the person ceases to make taxable supplies.

5.3 Determination of Taxable SupplyVAT is charged on the supply of goods or services and on the importation of goods or services into the country where:

• The supply is a taxable supply;

• The supply is made by a taxable person;

• The supply is made or provided in Kenya; and

• The supply is made or provided in the course of furtherance of business carried on by the taxable person.

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Type of supply Details Rate Remarks

Standard rated supply

Supply in Kenya by a person in the course or furtherance of a business carried on by the person, including a supply made in connection with the commencement or termination of a business

16%Applies to all supplies that are not listed as exempt or zero rated and supply does not fall outside scope of VAT

Zero rated supplySupplies specified in the Second Schedule

which are subject to tax at a zero rate 0%

Supplier is entitled to claim VAT in relation to provision of supply

Exempt supplySupplies specified in the First Schedule

which are not subject to tax-

Input tax incurred on the supply is not deductible

Out of scope Transactions that do not fall within scope of VAT Act

-Sales excluded in determining apportionment ratios.

5.4 VAT RatesThe following VAT rates apply on various supplies:

The VAT act provides for the following classification of key manufacturing sector taxable supplies:

VAT rate Items

Standard rate (16%)Commercial rent

All supplies not listed as exempt or zero rated

Zero-Rated (0%)

Exportation of goods or taxable services.

The supply of taxable services to international sea or air carriers on international voyage or flight

Supply to an Export Processing Zone or Special Economic Zone

Exempt

(Nil)

Unprocessed milk

Plants and machinery of chapter 84 and 85 used in manufacture of goods

9619.00.10 Sanitary towels (pads) and tampons

Made-up fishing nets of man-made textile material of tariff no. 5608.11.00

Inputs or raw materials supplied to solar equipment manufacturers for manufacture of solar equipment or deep cycle-sealed batteries

Inputs or raw materials locally purchased or imported by manufacturers of agricultural machinery and implements

Garments and leather footwear, manufactured in an Export Processing Zone at the point of importation.

Inputs or raw materials locally purchased or imported by manufacturers of clean cook stoves

Super absorbent polymer (SAP) of tariff number 3906.90.0 0

Carrier tissue white, 1 ply 14.5 GSM of tariff number 4703.21.00

Inputs for the manufacture of pesticides

Specially designed locally assembled motor vehicles for transportation of tourists


5.5 Tax pointVAT charged on supply of goods or services, output tax, is due and payable based on the tax point which is the earlier of:

• the date the goods are delivered or services performed

• the date a certificate is issued by an architect, surveyor or any other person acting as a consultant in a supervisory capacity

• the date the invoice for the supply is issued

• the date payment for the supply is received, in whole or in part.

VAT charged should be paid irrespective of whether or not the supplier has been paid for the goods or not. However, a registered taxpayer may lodge an application for VAT refund on bad debt as a result of the customer becoming legally insolvent or where the debt remains unpaid for three (3) years from the date of supply. That notwithstanding, the refund application must be received before lapsing of five (5) years after the date of the supply.

5.6 Deductible input VAT5.6.1 Input tax claim

The business is entitled to deduction of input tax incurred on purchase or importation of taxable supplies. , At the end of the tax period in which the supply or importation occurred, the registered person is entitled to deduct input tax incurred, from the tax payable by the person on supplies by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies. Deductible supplies must be claimed within a period of 6 months from the date of the supply.

Input tax on account of selected expenditure on passenger cars & minibuses are considered non-deductible. On the other hand, input tax on restaurant and accommodation is only deductible if it is incurred when staff is out of his work station on an assignment.

5.6.2 Apportionment

In instances where a person makes both taxable and exempt supplies, only part of the input tax attributable to taxable supplies is deductible. In this case, taxable supplies includes zero rated supplies, but does not include supplies to project that are VAT exempt.

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Method Details Treatment

i) Full deduction Full deduction of all the input tax attributable to taxable supplies;100% input tax claim

ii) No deductionNo deduction of any input tax which is directly attributable to exempt supplies ; and

0% input tax claim

iii) Apportionment

Deduction of input tax attributable to both taxable and exempt supplies calculated according to following formula:

Where:

A) is the total amount of input tax payable by the person during the tax period on acquisitions that relate partly to making taxable supplies and partly for another use;

B) is the value of all taxable supplies made by the registered person during the period; and

C) is the value of all supplies made by registered person during the period in Kenya.

No apportionment where exempt supplies are less than 10% of the total supplies

5.6.3 Pre-registration input tax

A person may within three (3) months from the date of VAT registration claim input tax incurred within a period of twenty-four months immediately preceding registration (or the exempt supplies becoming taxable) provided the purchases were used in the generation of taxable supplies.

Where tax in respect of exempt supplies exceeds 10% of the whole tax, then the registered person is required to apportion the tax by securing a fair reasonable attribution of tax to taxable supplies using either of the following methods:

A X B

C


5.7 Imported goods and services

5.7.1 Imported goods

VAT on taxable imported goods is collected by the Commissioner of Customs and Border Control before clearance of the goods. It is charged based on the taxable value arrived at as a summation of customs value (Free on board cost, insurance and freight), import duty and excise duty.

The registered person is entitled to deduction of input VAT charged, provided it does not relate to importation of restricted items such as passenger vehicles.

5.7.2 Imported Services

Imported services are services that would have been taxable if made by a person who is not a registered person to a registered person and taxable person is not entitled to full deduction of input tax.

The taxable value in respect of imported services is the price paid in consideration for the supply. Imported services are ordinarily provided by non-resident persons who are not required to register for VAT in Kenya. They may also be provided by Export Processing Zones (EPZs) or Special Economic Zones (SEZs) for use or consumption in Kenya. VAT on imported services is paid to the Commissioner of Domestic Taxes.

Reverse charge VAT: Section 5(6) of the VAT Act on importation of services shall be payable by the person importing the services in so far as the person deals in exempt supplies.

5.8 Withholding VAT For taxable payments made by appointed Withholding VAT Agents, VAT at a rate of 6% of the taxable value should be withheld. Appointed agents include government ministries, parastatals, financial institutions or any other person appointed by the Commissioner. The withholder acts as an agent for the Kenya Revenue Authority. The tax is paid in advance by the withholdee and reflected as a credit in that period’s taxpayer VAT return.

The tax is administered so that KRA could achieve the following objectives;

It provides cash flow to Government

• Enhance compliance

• It’s a cost effective way of collecting taxes;

• It aids in collecting taxes from non-resident persons

Taxpayers may seek exemption from their payments being subjected to withholding VAT obligation in accordance with the provision of Section 42A of the Tax Procedures Act by making an application to the Commissioner. To be exempted, they must prove that their business is in a consistent VAT credit, spreading to over 2 years as a result of Withholding VAT.

5.9 VAT RefundThe VAT Act allows taxpayers to apply for a VAT refund claim premised on the following reasons:

• Excess input tax as a result of making zero rated supplies

• Refund of tax paid in error

• Refund of tax on bad debts

The VAT Act does not provide for a refund of withheld VAT credits due to a taxpayer. Instead, Section 42A of the Tax Procedures Act provides for exemption of withholding VAT obligation. The yet to be passed VAT Regulations provides that a registered person who makes taxable supplies at both the general rate and zero rate, shall only be entitled to a refund arising from making zero rated supplies only.

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5.10 VAT Return SubmissionThe due date for submission of the VAT Return to the Domestic Taxes Department is the 20th of the following month.

On 31 July 2015, KRA issued a public notice to the effect that, as from 1 August 2015, taxpayers are no longer allowed to submit manual self-assessment returns at any of the KRA offices country wide. Hence, effective 1st August 2015 all taxpayers are required to submit their self-assessment returns through the i-Tax system.

The Tax Procedures Act (TPA) which came into effect on 19 January 2016 emphasized the requirement to file returns online via i-Tax. Failure to file returns online attracts a fine of one hundred thousand shillings. Failure to submit the monthly return by the due date attracts a penalty of 5% of the tax balance for the year subject to a minimum of KShs 10,000.

5.11 Payment of VAT

The deadline for payment of tax due is the 20th of the following month or at the point of customs clearance of imported goods. Late payment of taxes attracts simple interest at a rate of 1% per month. Notwithstanding, the revenue authority may grant a waiver of penalties and interest upon an application by the taxpayer on account of hardship/equity or impossibility/undue difficulty/expense of recovery of the tax.

5.12 Tax optimization measures

In order to alleviate and mitigate potential tax exposure, the following may be considered:

• Paying VAT due on time will save the Tax Payer penalties

• In house tax resources

• Annual tax health checks

• Seeking tax advice before major business decisions

• Review of agreements and contracts

• Tax training.


6. Custom Duties

Customs duty is any cess, levy, imposition, tax or surtax, imposed on imported/exported goods or goods leaving customs control. The collection of customs duty is done by KRA’s Customs and Border Control Department which administers the East Africa Community Customs Management Act, 2004. At the regional level, the Act is administered by the Directorate of Customs, an organ of the EAC Secretariat. Other instruments supporting the collection of the duties include:

• EAC Customs Union Protocol

• EAC Rules of Origin

• EAC Customs Management Regulations

• Bilateral and multilateral agreements

The main feature of the EAC Customs Union are import duty rates applied to imports from third countries under a Common External Tariff (CET), a common set of procedures, trade policy and removal of internal tariffs on tradeable goods within the community.

6.1 Customs Agent RequirementAll economic operators in Kenya must enlist the services of a licensed customs agent through a formal appointment in furtherance of goods clearance activities. Alternatively, an operator holding a valid customs agent license may perform such services irrespective of the recipient.

6.2 Duty RatesA specific or ad valorem rate of import or export duties applied on goods based on their tariff classification under a Harmonized System of Coding and Description (HS). The following customs duties are applicable on imported products:

Import duty rate

Category Description

0%Raw materials

Goods not subjected to any form of transformation in production. This category also includes residues, waste and scrap in as far as they are only necessary for recovery of raw materials

Capital goods Durable industrial production goods i.e. most plant and machinery

10% Intermediate goods

Goods that have undergone some degree of transformation. Such goods would require further processing before they are ready for final consumption. This category also includes ‘parts’ as far as they are identified as such in the HS code

25% Finished goods Goods that are ready for consumption

>25% Sensitive goodsGoods considered of economic importance by the Partner States e.g. sugar, milk, rice, wheat, etc.

Where specific duties are applied alongside ad valorem duties, rate that results in a higher revenue collection is applied in the determination of the customs duties.

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6.3 2018 changes in the East Africa Community gazetteThe EAC gazette issued by the Council of Ministers effected the following changes to the Common External Tariff (CET):

Changes in tariff or duty rate Previous statusCurrent status

Polyvinyl alcohol of HS Code 3905.30.00 from 10% to 0% 10% 0%

8903.99.00 was split to the following tariffs:

--8903.99.10 Motor boat ambulance

--8903.99.90 Yatchs and other vessels for pleasure or sports; rowing boats and canoes

0% 0%

Inputs for manufacture of pesticides, fungicides insecticides and acaricides 25% or 10%10% under remission

Inputs for manufacture under the EAC duty remission scheme CET rateRate under EAC duty remission

Motor cycle kits imported by gazetted assemblers 25% 10%

Wheat grain under tariff 1001.99.10 and 1001.99.90 35% 10%

Industrial sugar100% or USD 465 per MT

10%

Inputs for manufacture of pesticides, fungicides insecticides and acaricides 25% or 10% 0%

Inputs and raw material for direct and exclusive assembly, manufacture or repair of clean energy cooking stoves

25%

0%

Gum base of 2106.90.99 10% 0%

Inputs for the manufacture of toothbrushes10%,

25%0%

Roofing tiles coated with acrylic paint of 7308.90.10 25% 0%

Aerosol cans of HS 7310.29.10 used in packaging of insecticides and acaricides

10% 0%

6.4 Available incentives Several regimes exist within which a taxpayer’s import duty obligation is suspended, remitted, reduced or abetted.

This includes:

6.4.1 Application of rules of origin

The 2014 East African Community (EAC) revised rules of origin provide a zero percent (0%) preferential duty rate on imported goods from EAC partner states.


6.4.2 Export promotion schemes

Five (5) key export promotion schemes may be utilized to suspend import duty liability in conjunction with relevant customs procedure codes.

Duty drawback

Manufacture under bond

Other schemes

Duty remission scheme

Export processing zone

Duties paid on importation may be refunded upon export or fulfillment of specific conditions imposed by the Commissioner.

Under MUB, duties are suspended when goods are entered into the factory. Taxes are due at the point the goods leave the factory for home use.

*Although EAC countries have not harmonized Special Economic Zone (SEZ) policy under the customs union, Kenya enacted a SEZ Act in 2015 with corresponding regulations in 2016.

From the above general provisions of the EAC Customs Management Act on customs duties liability, manufacturing companies are normally faced by the following unique situations;

Duty is partially or wholly remitted on raw material and/or packaging material used in manufacture of goods for export or selected goods for home use.

Entry into a licensed EPZ is allowed total relief from payment of duty on imported goods used directly in the production of goods for export.

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Scenario Tax Dilemma Professional view

EAC duty remission scheme

Can my company benefit from duty remission on raw material under the scheme and still secure market access for its finished products in EAC countries at preferential rate?

If duty remission is granted as a region wide policy intervention applicable in all partner states, then goods manufactured can freely circulate in the region. However, a duty remission intervention only benefiting a particular partner state results in goods so manufactured in that state attracting EAC CET rate if sold in another partner state.

Applicable rate of import declaration fee (IDF)

Should I pay IDF 2% of the customs value or a flat rate of KES 10,000 on goods imported under inward processing

IDF applies at a rate of 2% when imported from outside EAC countries or on goods imported from EAC without a valid certificate of origin. The flat fee applies to imports of raw material under the EAC duty remission scheme ONLY.

Exports under Single Customs Territory (SCT)

Which documents does an exporter have to keep where goods are destined to EAC countries?

An exporter must keep the following proof of export documentation for goods exported under the single customs territory (SCT) regime:

Import entry passed in the destination partner state

Stamped exit note

Certificate of export

Cargo manifest (C2)

Release order

Bill of lading (BL)Post importation payment plan of duties on a consignment

We determine amounts of royalties after goods clearance. How do we account for unpaid customs duties due on the royalties?

Additional taxes on account of the royalty amounts can be paid against a generated F147 (miscellaneous payment form) and attributed to the preceding entry.

6.5 Customs duty controversy areasSignificant proportion of expenditure borne by manufacturing entities is directly attributed to the cost of inputs, market access and taxes due to the revenue authority. Below we itemize selected scenarios often encountered by taxpayers:


Excise Duty is a non-discriminative duty imposed on locally produced or similar imported goods. Imposition of excise duty in Kenya is managed and administered under the Excise duty Act 2015 which was enacted in November 2015 and came into operation on 1st December 2015.

7.1 Registration and licensing A person is required to apply for registration where he intends to import excisable goods requiring an excise stamp into Kenya. A mandatory license is required for persons engaged in the following activities:

• manufacture of excisable goods in Kenya, which include beer, spirits, confectionery and vehicles.

• supply of excisable services;

• use of spirit or illuminating kerosene to manufacture goods in Kenya that are not excisable goods; or

• carrying out of any other activity in Kenya for which the Commissioner, by notice in the Gazette, may impose a requirement for a license.

Application for excise duty registration or licensing is done via the i-Tax portal with physical supporting documentation submitted to the Excise Department. It is an offence to apply for registration where he intends to import excisable goods requiring an excise stamp.

7.2 Excisable goods and servicesExcise duty is imposed on excisable goods manufactured in Kenya by a licenced manufacturer, excisable services supplied in Kenya by a licensed person or excisable goods imported into Kenya.

7.3 Excisable value The value of imported goods for purposes of levying excise duty is the sum total of the following amounts;

• the customs value of the goods as determined under the East African Community Customs Management Act, whether or not any duty of customs is payable on the goods; and

• the amount of duty of customs (if any) payable on the goods under the East African Community Customs Management Act, 2004.

The value of locally manufactured goods for the purpose of levying ad valorem excise duty is the ex-factory price. Ex-factory selling price does not include VAT, cost of excise stamps and cost of any returnable containers.

The value of services for the purpose of levying excise duty shall either be;

• the fee, commission, or charge payable for excisable services supplied by a registered person in an arm’s length transaction,; or

• or the open market value of the services in any other case,.

The excisable value of excisable services shall not include the value added tax, if any, payable on the supply of the services.

7. Excise Duty

7.4 Excise duty rates The first schedule of the Excise Duty Act provides specific and/or ad valorem excise duty rates on excisable goods and services. Provided specific rates are subject to an annual adjustment to take into account previous year’s average inflation.

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Selected excisable goods Excise duty rate Excise stamp cost

Fruit juices Shs. 10 per litre

0.6 per stampFood supplements; cosmetics and beauty products of tariff heading 3303, 3304, 3305 and 3307

10%

Bottled or similarly packaged waters and other non-alcoholic beverages, not including fruit or vegetable juices

Shs. 5 per litre

1.5 per stamp

Beer, Cider, Perry, Mead, Opaque beer and mixtures of fermented beverages with nonalcoholic beverages and spirituous beverages of alcoholic strength not exceeding 10%

Shs. 100 per litre

Wines including fortified wines, and other alcoholic beverages obtained by fermentation of fruits

Shs. 150 per litre

2.8 per stamp

Spirits of undenatured ethyl alcohol; spirits liqueurs and other spirituous beverages of alcoholic strength exceeding 10%

Shs. 200 per litre

Cigars, cheroots, cigarillos, containing tobacco or tobacco substitutes

Shs. 10000 per kg

Other manufactured tobacco and manufactured tobacco substitutes; “homogenous” and “reconstituted tobacco”; tobacco extracts and essences

Shs. 7000 per kg

Excisable servicesCurrent Excise Duty Act

2018 Finance Bill

Mobile cellular phone services 10% No changeOther wireless telephone services 10% No changeFees charged for money transfer services by cellular phone service providers

10% 12%

Fees charged for money transfer services by banks, money transfer agencies and other financial service providers

10% No change

Excise duty on money transferred by banks, money transfer agencies and other financial service providers where amount transferred is KES 500,000 or more.

-0.05% of amount transferred

The following excisable goods and services are categorized as exempt under the second schedule of the Excise Duty Act:

7.5 Return filing The due date for submission of the company’s VAT return to the Domestic Taxes Department is the 20th of the following month.

7.5.1 Excisable Goods Management System (EGMS)

Manufacturers with integrated production systems to the Excisable Goods Management System (EGMS) systematically upload production volume data through installed production counters.

Goods• Goods imported into Kenya or purchased in Kenya by

a diplomatic or consular mission,

• Goods imported into Kenya or purchased in Kenya by a foreign government or international organization,

• Goods imported or Purchased locally by the Kenya Red Cross,

• Goods imported by a person changing residence or a returning resident.

Services• Excisable services supplied in Kenya to a diplomatic

or consular mission or to a diplomat or consul, or a member of the diplomat or consul’s family.

• Excisable services supplied in Kenya to a foreign government, international organization, or aid agency.


8. Miscellaneous fees and levies

The Miscellaneous Fees and Levies Act was enacted in 2016 to consolidate other fees and charges collected by the revenue authority. The legislation provides for percentage based rates of export duty, import declaration fee and railway development levy. Exemptions to the above rates are listed in the second schedule of the Act.

8.1 Export dutyExport duty rates are provided on the following products listed below. Where a specific rate applies, an adjustment of inflation may be applied every financial year.

Goods subject to export duty Export duty rate

Raw hides and skins 80% or USD 0.52 per kg

Waste and scrap metal 20%

Notwithstanding the above, goods sold to East African Countries are exempt from export duties.

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8.2 Import declaration fee (IDF)Section 6 of the act imposes an import declaration fee of 2% of the customs value paid to the Commissioner of Customs and Border Control.

Notwithstanding the above rate, imports of raw material and packaging under the EAC duty remission scheme attract IDF at a lower rate of KES 10,000.

The following supplies are specifically exempt from IDF:

• goods destined for approved duty free shops

• goods destined for approved Export Processing Zones enterprises or Special Economic Zones

• goods destined for approved enterprises manufacturing under bond

• samples which in the opinion of the Commissioner have no commercial value

• goods destined for official aid-funded projects

• goods from the East African Community Partner States that meet the East African Community Rules of origin

• any other goods as the Cabinet Secretary may determine are in public interest, or to promote investments which value shall not be less than two hundred million shillings.

• goods imported for implementation of projects a under special operating framework arrangement with the Government.

8.3 Railway development levy (RDL)Section 8 of the act provides a railway development levy of 1.5% of the customs value of the goods payable by an importer on declarations for home use. Transhipped, in transit and goods cleared by Export Processing Zones and Special Economic Zones do not attract RDL.

The following supplies are specifically exempt from RDL:

• Goods for the implementation of an official aid funded project

• Goods for official use by United Nations or its agencies, diplomatic mission, institution or organization

• Goods from the East African Community countries

• Any other goods as the Cabinet Secretary may determine are in public interest, or to promote investments which value shall not be less than two hundred million shillings

• Goods imported for implementation of projects a under special operating framework arrangement with the Government.

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Contacts:Francis Kamau

Tax Partner

Email: [email protected]

Telephone: +254 20 2886000

Catherine Mbogo

Tax Partner


Telephone: +254 20 2886000

Christopher Kirathe

Tax Partner


Telephone: +254 20 2886000


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