By Kavosa Assava, LLB
Income Tax
·
S. 3
(1) – Income tax; charged for each year of income; whether resident or
non-resident; accrued or derived from Kenya.
·
S. 3
(2)- what is chargeable as income tax?
·
S. 5
– when income from employment is deemed to be accrued or derived from Kenya;
this gives two scenarios;
1.
Resident;
S. 5 (1) (a) ; in or outside Kenya
2.
Non-
Resident S. 5 (1) (b); only if you work for a Kenyan Employer; a non-resident
is taxed where he or she renders employment for a Kenyan employer or a
Permanent Establishment.
·
S.
2; definition of ‘Permanent Home.’
·
A permanent establishment is a business
not registered in Kenya but operates its business within Kenya and has done so
for at least 6 months.
·
What
should be included in your employment income? S. 5 (2) (a)
1.
Salaries
2.
Wages
3.
Allowances;
hardship, entertainment, housing, car loans, school fees, insurance, security,
food, vacation, leave. E. t.c
·
S. 5
(2) (a) (ii); any reimbursement from
the employer is not considered part of your salary and hence is not taxable-
where you spend your own money in the course of employment and your employer
pays you back.
·
S. 5
(2) (a) (iii); the first 2000 of reimbursement is tax- free; any amount above
that has to be evidenced by receipt before exemption from tax is granted.
·
Benefits
received from employer that are below 36000 per year are exempt from tax.
·
An
employee is not liable if an employer fails to deduct tax.
·
S. 5
(2) (B); Car allowance- 2% of initial cost of the car; that amount is
added to the salary and the taxed; for tax purposes, the car never depreciates.
·
Some
employers will hire a car for the employee; alternatively the car may never
sleep at the employee’s residence.
·
Airtime; 30% of the total on personal
consumption. It is this 30% of value of airtime that is determined and added to
salary for taxation.
·
Housing: the higher of three things is taxed;
1.
Market
Rate
2.
15%
of [ salary + Taxable benefits ]
3.
How
much employer is paying for rent
·
When
an employer gives an employee money it is added to the basic salary and then
subjected to tax; i. e. duty allowance or entertainment allowance.
Tax exempt
·
Medical
benefits are
not taxable
·
School Fees: If employer pays school fees for
employees children, it is tax free
·
Passages are not taxable; In recruitment of
expatriates, buying the air ticket. However where employer gives employee the
money to buy the ticket, it is taxable.
·
Meals: Provision of meals at the business premises is tax free up to a
maximum of 4000 per month or 48000 per year, per employee.
·
Home Ownership Savings Plan- only taxed at date of withdrawal; you
can only save a maximum of 48,000 a year; if you exceed this it is taxable.
Deductions
·
Mortgage
Interest Deduction- If an employee is paying a mortgage then he or she can deduct the
interest before subjecting salary to taxation. The maximum is 150, 000 per year
or 12,500 per month. [s.15(3)(b)] It must be a residential home and he must be
living in it at the time in order to effectuate the deduction.
·
Pension- pension contributions are deducted from
salary before taxation; the employee makes a contribution and the employer
matches it; the maximum pension deduction allowed is 20,000 per month or
240,000 per year. It is taxed at withdrawal the total at the normal rate unless
you wait until 65 years of age where it will be tax-free.
·
The
20,000 max is shared between the employer and the employee. However, the
employee has priority in terms of the benefit of deduction.
·
Personal
relief: Personal
Relief is deducted from the tax liability. [ P.a = 13,944; P.m = 1,162 ]
·
Where
an employee is terminated before the contract of service expires, he or she is
entitled to an amount in compensation for the remaining years. The compensation
is spread out evenly for the remaining term under the contract.[ Specified Term + Specified compensation =
Spread Out Evenly for remaining contract]
§ Where there is an unspecified term of
employment under the contract but there is a specific amount allocated as
compensation, the amount is spread at the rate of earnings or salary of the
employee according to how he or she was being paid per annum.[ Unspecified Term + Specified
Compensation= Spread out at rate of earnings per year.]
§ Where there is neither a specified term
under the contract nor a specified amount allocated as compensation, the
compensation is spread out for 3 years.[Unspecified
Term + Unspecified Compensation= Spread Out evenly for three years]
Revision Notes
The distinction Between Contract of
Service and Contract for Services
The line between whether an individual is employed or
self-employed is a grey one. Generally;
§ A contract of service between two parties
implies a contract of employment exists
§ A contract for service between two parties
implies the self-employed status of the service provider.
The key issue is that a contract of service obliges the employer
to operate PAYE as the employee is taxable and the employer carries all the
associated tax responsibilities. Under a contract for service the individual is
liable to tax and the person making the payment to him has no responsibilities
associated to tax with regards to that transaction.
There are certain tests that have been applied to determine whether
an individual is employed or self-employed and they include;
1.
The Control Test
2.
The Supplier’s Own Business Test
3.
The Economic Test
The Control Test: To determine the relationship between the
two parties the element of control that the employer can exercise over the
employee must be reviewed. In the Irish case Roche v Kelly [1969] IR 100 it was held that the right of the
master to direct the servants as to what and how the work is to be done was a
main factor in determining the relationship between the parties. The case arose
out of an injury suffered by an individual during the construction of a barn
for a farmer. The question was whether the injured party was an employee of the
farmer. The right to interfere with how the individual carried out their work
and the fact that the farmer did not exercise control over the individual were
important findings and became known as the control test.
It is not always clear whether this level of control applies, as
was demonstrated in a later Irish case of Re
Sunday Tribune [1984] HC. The difficulties in the control test were
recognized where skilled workers were told what to do but not how to do it. In
this case two journalists were doing similar work. The distinction was in how
the work was done by each journalist. It was held that one was an integral part
of the Sunday Tribune while the other was a freelance contributor.
Obviously further clarification was required and additional tests
were laid down following the case of Ready
Mix Concrete (SE) Ltd v Minister of Pensions and National Insurance [1968] 2 QB
497 i.e.
§ Mutual Obligations Test- If there is no
obligation on the employer to offer work or on the other party to do work,
there is no contract of service.
§ Whether the employee agrees that he will
be subject to the other’ s control expressly or impliedly to a sufficient
degree to make the other party his employer.
§ Whether the provisions of the contract are
consistent with it being a contract of service
In this case the individuals had been previously employed as
drivers by Ready Mix Concrete. They entered into a different relationship; they
leased the lorries under one contract and agreed to deliver concrete under
another contract for the company. Their new obligation was to deliver in their
own lorries. The drivers were determined to have contracts for service and be
taxed as self-employed.
The Supplier’s Own Business Test: A major difference in employed v self-employed
is the question of the performance of the service as a person in business on
their own account. The UK case of Market
Investigations Ltd. V Minister of Social Security [1969] 2 QB 173 established
some important factors in considering if a contract of or for service exists,
namely:
§ Does the person performing the services
supply his equipment?
§ Can he hire his own helpers?
§ What opportunity does he have to make a
profit?
§ To what extent does he carry the
responsibility for investment/management?
If the individual supplies the equipment, the staff, takes the
risk and manages the business he is acting in the capacity of self-employed and
not employee.
The Intention of the Parties: The facts of each case will determine
whether the contract is of or for service. However, the intentions of the
parties cannot be overlooked and may be important.
The Economic Test: The case of Henry Denny & Sons (Ireland) Ltd. V Minister for Social Welfare[HC
1995] [SC11998] 1 IR 34 considered various tests and criteria in determining
the status of the contract. It introduced the economic test which examines if
the individual is economically independent from the person requiring the work
to be done.
The case related to the status of a supermarket demonstrator whose
job was to offer free samples to shoppers. The demonstrator was paid by the
supplier of the free samples. Tests applied were:
§ Control test- the demonstrator was found
to be under the control and direction of and could be dismissed by the
employer.
§ Integration test- (integral to the
business) she was considered to be an integral part of the supplier’s business.
§ Own Business test- she was found not to be
in business. She could not profit from her services.
§ Economic test- the engagement terms were
consistent with those of a contract of service. She was not supplying
equipment, or taking risk.
·
Marina
et al. (2002) argue that, “taxation is the only known practical manner for
collecting resources in order to finance public expenditure for goods and
services consumed by any citizenry”.
·
Taxation
in Kenya is governed by the provisions of the Income Tax Act Cap 470- Laws of
Kenya.
·
Prior
to this taxation was governed by the East African Management Act of 1958 which
was in force in all three East African countries until the EAC split.
·
Income
tax is a direct income.
·
Every
person with a taxable income is required to have a Personal Identification
Number [PIN]. It is a personal number given to any person with an income
chargeable to income tax.
·
The
law also makes it mandatory to have a PIN for certain transactions which are
listed in the Act such as motor vehicle transfers, clearing of goods with the
customs service department, new installation of water and electricity metres
among others.
·
Methods
of collecting tax:
o
Pay
As You Earn[PAYE]
o
Withholding
tax
o
Instalment
tax
o
Advance
tax
o
Presumptive
Income Tax [PIT]
o
Direct
payments to the Commissioner of Domestic Taxes for balance of tax and arrears
Pay As You Earn [PAYE]
·
Method
of collecting tax at source from individuals in gainful employment.
·
The
employers will deduct tax according to the prevailing rates of tax from their
employee’s salary or wages on each pay day for a month then remit the tax to
the Paymaster- General through the laid down procedure on or before the 9th day
of the following month.
·
The
employee thus has no extra liability to pay at the end of the year unless he
has income from other sources including other employments
·
PAYE
tax payments help to spread evenly the tax burden for those in gainful
employment, throughout the calendar.
·
Every
individual in receipt of income liable to income tax is entitled to relief
known as personal relief, granted
against tax payable and is not refundable to a tax payer.
·
Unutilized
personal relief can be carried forward from one month to another within the
same calendar year but not from one year to another.
Tax
Incentives
·
For
individuals include:
o
Personal
relief
o
Relief
paid on premiums for Life Insurance
o
Relief/deduction
of interest paid on Mortgage for owner-occupied house.
o
Relief/deductions
of funds deposited under a Registered Home-Ownership Savings Plan, Subject to a
maximum of 48,000 per year.
o
Tax
exemption on Interest accruing on housing bonds up to a maximum of 300,000
shillings
o
Tax
exemption on contributions to registered provident funds and no charge to tax
on the first 480,000 on a lump sum committed from a registered pension or
provident fund.
·
For
Corporations include:
o
Capital
Deductions;
o
wear
and tear;
o
Industrial
building allowance in respect of capital expenditure on hotel buildings and
other industrial buildings;
o
capital
expenditure on Farm works;
o
Investment
allowance
·
EPZs
enjoy the following benefits:
o
10
year tax holiday from corporation tax
o
A
lower corporation tax of 25% for the subsequent 10 years
o
Exemption
from withholding tax on dividends and other payments to non-residents during
the first 10 years.
o
Investment
deductions at 100% of capital expenditure claimable in the 11th year
after commencement of production.
·
The tax base is all items or activities
subject to a tax.
·
It
is important to distinguish between the potential tax base and the actual tax
base.
·
Potential
tax base constitutes a set of items that would be taxed if there were no
special exemptions; whereas the actual base what is used, given exemptions and
other benefits and it is often much smaller.
·
Tax
base is measured to the shilling amount to which a tax rate is applied. •
·
The
tax rate is usually defined as a percentage of a certain value - the tax base.
·
Therefore,
multiplying say a VAT tax rate of 16% on a taxable item such as a pair of shoes
(tax base) worth Ksh. 2,000, the total amount of tax to be collected from this
purchase amounts to Ksh 320. •
·
Tax
burden - refers to the amount of tax borne by an individual or a business.
·
Tax
burdens vary depending on a number of factors including income level,
jurisdiction and current tax rates.
·
It
is worth noting that tax burden may not be the same as the tax actually paid
because of the possibility of passing a tax on.
·
This
distinction helps explain who has the legal liability of a tax-who has the
“statutory burden” and who actually bears the ultimate burden of the tax-who
has the tax burden i.e. bears the economic incidence of the tax •
·
The
average tax rate is calculated by dividing the total income taxes paid by your
total income. •
·
The
marginal tax rate is the rate of tax applied to the last shilling added to your
taxable income
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