5 mistakes to avoid on tax compliance in Kenya
How versed are you with the do’s and don’ts of tax compliance in Kenya? Find out about the most common mistakes to avoid any issue with the revenue authorities. In this article, I have focused on the most common ones to avoid:
- Misidentification of the business structure
- Hiding income or tax evasion attempt
- Delay or failure to file tax returns
- Lack of proper bookkeeping records
- Failure to register as a taxpayer in Kenya
We will now dive into a more compressive look:
Misidentification of the business structure
Firstly, identifying your business structure is very important, what do I mean? Defining if your business is a sole proprietorship, limited liability company or a branch of a foreign company is crucial. This will indeed determine the standard operating procedures for the company.
When setting up a business, it is important to record safely all the official documents. They will be necessary later on in regards to tax filing so that you know what is expected of you. Companies obviously have statutory obligations but some of these obligations depend on the business category.
For example, small and micro Enterprises owned by Kenyan residents with an annual turnover of less than KES 5 Million are required to pay a presumptive tax. Additionally the tax is paid once a year upon acquisition or renewal of a business permit or trade license. The rate is currently at 15% of the business permit fee or license. The penalty is 5% of the tax due as outlined in the Tax Procedures Act, 2015.
Hiding revenue or tax evasion attempt
Another big mistake would be attempting to evade tax. It seems obvious but as an old saying goes, you can’t avoid “death and taxes”. Tax evasion is the deliberate or illegal act of not paying and or underpaying taxes. Governed by law by individuals or corporates in a certain country.
According to the Income Tax Act, a person shall be guilty of an offense if he/she, without reasonable cause, makes an incorrect income return by omitting or understating any income which they should have stated. Sometimes, it may even happen by oversight or lack of attention, so be careful… KRA has become tougher on such cases lately.
Here are a few examples of tax evasion. This refers to not paying the correct income taxes where a company understates the value of their imported goods. Failure to deduct withholding taxes: where KRA appoints entities to withhold tax at the source then remit on time. Misstatement of expenses in the sense that a company falsifies financial statements or expenses so that they pay less tax.
Delay or failure to file tax returns
This mistake refers to timely tax remittance to the relevant authority. In Kenya, tax compliance requires filing of returns via an online platform known as iTax. Individuals and corporates are expected to file before 30th of June, which marks the end of a financial year.
Corporates are expected to pay several types of taxes. Let us highlight the income tax, PAYE (Pay as You Earn), which is deducted monthly from employees. PAYE is supposed to be paid by the 9th of the following month. Value Added Tax (VAT) should be paid before 20th of every month. A company needs to comply with all these tax regulations to be deemed compliant.
All companies in Kenya will have to file annually for corporate tax with the Kenya Revenue Authority. As discussed in the first paragraph, the taxation rate will vary whether you are a subsidiary or a branch. On another note, a company limited by shares in Kenya will also have to file annual returns with the Registrar of companies.
Lack of proper bookkeeping records
This seems like the most basic thing, right? Bookkeeping is the process of recording all financial transactions made by a business. It’s crucial that your bank reconciliation is done seriously so each debit and credit transaction is recorded correctly and in the right account. Otherwise, your account balances won’t match and you won’t be able to close your books.
Bookkeeping can either make or break a company that’s why it is very crucial to a business. Why you ask? ultimately, everything in a company relies on this process. From determining profits, generating reports that may help determine future investments, and processing payroll.
You will have to prepare the financial reports, many in real-time. This can be a lifeline for small-business owners who need to make quick financial decisions based on the immediate health of their business.The backlog caused by inaccurate bookkeeping accrues a business hefty penalties when it is time to go by the annual audit of your accounts to file and pay your business corporate tax.
Failure to register as a taxpayer in Kenya
Let’s assume that you open a small business in Kenya. And subsequently, you want to remain low-profile until your business takes off. This means that you will not apply for a business license nor register the business with the Registrar of Companies right at the beginning. And then later on, it may be too late
Individuals and companies must have a PIN certificate for several administrative processes. For example, this is a requirement for a tax compliance certificate. In Kenya, a tax compliance certificate (TCC) helps in acquiring business tenders with the government. All documents are closely related to one another.
A quick tip: in the event a company has employees who are working on a contractual basis. And are not permanently based in Kenya. The company needs to ensure that at the time the contract lapses. The employee needs to have filed and paid all the relevant taxes. Therefore upon departure of the employee, the company should ensure they file nil tax returns with KRA to avoid any penalty fee.
Furthermore, it is important to note that if the employee(s) are planning on coming back to the country, the company should ensure for PIN deregistration whereas if the employee is leaving the company permanently the company should ensure they apply for PIN cancellation. Failure to which the penalty highlighted above would apply.
As we wind up, Tax laws certainly keep changing, and keeping track can be sometimes a bit hectic. For instance with the surge of Covid19, earlier this year the president assented to an act of parliament. The Tax Laws (Amendment) Act, 2020 which made various changes to the prevailing tax laws in Kenya.
But how do you focus on orienting your employees in a new market, growth, and success of your business? Here is a tip, don’t cut corners when it comes to tax compliance in Kenya. Instead, get a local reliable partner that is conversant with taxation. Doing this lifts the load off your shoulders and lets you focus primarily on a specific goal. How great is that?