Embarking on a journey through Kenya’s taxation, one encounters a crucial element: Kenya withholding tax.
It’s a silent force impacting businesses and individuals. In this discourse, we’ll dissect withholding tax, unraveling its purpose and consequences. We’ll explore its varied forms and its profound role in Kenya’s economic dynamics.
This article delves into fundamental Kenya withholding tax concepts, scrutinizing its diverse manifestations.
We aim to elucidate the implications for businesses and individuals navigating Kenya’s tax landscape.
Prepare for insights that empower a nuanced comprehension of this fiscal mechanism, fostering greater control over financial complexities within Kenya.
What Is Withholding Tax?
Withholding tax, in simple terms, is like a slice of your financial pie that’s reserved before you get it.
It’s a way for governments to ensure they get their share upfront, rather than chasing you down later. In a professional sense, it’s a tax levied on income, and a portion is withheld at the source—usually by an employer or payer—and sent directly to the government.
For instance, think of it like this: You earn some money, and your employer takes a small chunk before handing you the paycheck. This chunk, known as withholding tax, is then forwarded to the tax authorities. It’s akin to securing the government’s cut right away, ensuring they aren’t left waiting for you to settle your dues at the end of the fiscal year.
So, withholding tax is essentially a preemptive measure, ensuring a steady stream of revenue for the government while simplifying the tax collection process for all parties involved.
What Is Kenya Withholding Tax?
In Kenya, withholding tax operates like a tax collection system where, if you’re shelling out some income, you’ve got to hold back a certain amount for the Kenya withholding taxman.
It’s a monthly deal – whatever tax you’ve held back needs to be sent to the Kenya Revenue Authority (KRA) by the 20th of the next month.
Remember, a delay in paying up comes with a 20% penalty, so best not to be fashionably late here. No need to sign up for anything special; if you’re the one paying, you’re also the one handling Kenya withholding tax.
Now, here’s a nifty part: the I-tax system does its magic and auto-generates a Kenya withholding tax certificate. This little document lands in the income receiver’s I-tax account and email.
Come tax-filing time at the end of the year, the income receiver spills the beans on all their earnings, including the Kenya withholding tax – a bit like getting credit for doing the taxman’s job in advance.
Understand with an example
(Note that Sh. refers to the Kenyan currency of the Shilling)
Imagine a scenario where a professional offers services worth Sh. 1,000,000, and there’s a withholding tax rate of 5%. Now, the one getting the service deducts and sends Sh. 50,000 straight to the tax office. So, our professional doesn’t pocket the full Sh. 1,000,000; they get Sh. 950,000, with a heads-up that Sh. 50,000 has been taken out.
When tax return season swings around, our professional has to declare the full Sh. 1,000,000 as income.
The tax is then calculated on this amount, using the applicable rates (graduated scale for individuals, 30% for a company). But, the good news is, they get to subtract the Sh. 50,000 already withheld. So, the final tax bill is on the net amount.
Here’s the kicker: If the one receiving the service doesn’t cough up the withholding tax, there’s a penalty – 10% of the amount.
Plus, these expenses won’t count as deductions if they haven’t faced the tax cut. Oh, and remember, some situations make withholding tax the final deal.
For instance, dividends to locals and interest income to individuals – no extra tax drama here.
Just remember not to declare these in your personal tax return hustle.
Kenya Withholding Tax Rates
Before we run into the Kenya withholding tax table, we need to note a few things.
There are many terms, conditions, and other legalities that surround the Kenya withholding tax. We’ll first run by them quickly, and then take a look at the Kenya withholding tax for different industries.
Training fees cover all extra costs, and if you’re an East African citizen since June 15, 2007, a 5% withholding tax is in play. But hold on, this is just for individuals; corporations, you’re not off the hook. For resident individuals wielding other financial instruments, like bearer instruments, it’s a 20% final tax.
Now, if you’re making up to KES 300,000 annually, you’re in the clear. But, there’s a twist – only specific withholding tax agents, as appointed by the Commissioner, can handle rental income. This applies if it’s between KES 288,000 and KES 15,000,000 per year.
Thinking about cashing out early waiting 15 years or hitting 50?
For withdrawals on graduated PAYE tax rates or in sh. 400,000 bands, there’s a game plan. And, if you’re dealing with a resident broker, set aside 5%.
Flying high?
Insurance/reinsurance premiums for aircraft are in the clear. However, if your consultancy fees to East African Community Partner states’ citizens surpass sh. 24,000 monthly, it’s a 15% withholding tax.
Quick note: Check the fine print for lower rates with active tax treaties. Currently, Kenya has deals with the UK, Germany, Canada, Denmark, Norway, Sweden, Zambia, and India.
Now that we have this in mind, let’s look at the Kenya withholding tax rate table.
Kenya Withholding Tax Rates Table
Source/Type of Income | Residents | Non-residents |
---|---|---|
Artists and entertainers | 0% | 20% |
Management fees | 5% | 20% |
Professional fees | 5% | 20% |
Training fees | 5% | 20% |
Gambling Earnings | 20% | 20% |
Natural Resource Income | 5% | 20% |
Shareholding dividends | 10% | 15% |
Equipment leasing | 0% | 5% |
Bank interest | 15% | 15% |
Housing bond interest | 10% | 15% |
Interest on at least two-year government bearer bonds | 15% | 15% |
Other bearer bond’s interest | 25% | 25% |
Rent – buildings (immovable) | 10% | 30% |
Rent – others (except aircraft) | 0% | 15% |
Pensions/provident schemes (withdrawal) | 10-30% | 5% |
Insurance Commission (Brokers) | 5% | 20% |
Insurance Commission (Others) | 10% | 20% |
Consultancy and agency(from 1 July 2003), ( Consultancy fees to EAC citizen – 15%) | 5% | 20% |
Contractual (from 1 July 2003) | 3% | 20% |
Telecommunication services/Message Transmission | 0% | 5% |
Natural Resource Income (w.e.f. 1st January 2015) | 5% | 20% |
Digital content monetization (w.ef 1st July 2023) | 5% | 20% |
Sales promotion, marketing, and advertising services | 5% | 20% |
Withholding on rental income tax by tax agents (w.ef 1st January 2024) | 7.5% | N/A |
Gains from financial derivatives | N/A | 15% |
How does the Kenya withholding tax work?
Before disbursing payments, the payer is obligated to withhold a portion for tax, which is subsequently remitted to the Kenya Revenue Authority (KRA).
After the remittance of withholding tax to the KRA, the payer is mandated to generate a withholding tax certificate through iTax. This certificate is automatically dispatched to the payee.
It is imperative to observe the timeline for remittance.
The withholding tax, once deducted, must reach the KRA by the 20th day of the month succeeding the month of deduction. Importantly, withholding tax constitutes a claimable credit for the payee during their annual tax filing, serving as a credit against their total tax liability rather than an additional tax burden.
How To Pay Kenya Withholding Tax?
The remittance of any withheld amount must be completed on or before the 20th day of the subsequent month and is conducted through the Kenya Revenue Authority (KRA).
Kenya withholding tax payments are facilitated online via the iTax platform, where a payment slip can be generated. This generated slip can be presented at any designated KRA bank for the settlement of the due tax.
Alternatively, payment can be executed through Mpesa using the KRA Pay Bill Number 572572.
The Account Number required is the Payment Registration number, located at the top right corner of the generated payment slip.
Upon successful remittance of the deducted amount to the KRA, a Withholding Certificate will be dispatched to the email address registered on iTax. This certificate serves as documentation of compliance with your Kenya withholding tax obligations.
Frequently Asked Questions (FAQs)
Q1. What are the exemptions from Kenya withholding tax?
In navigating the intricacies of Kenya’s withholding tax landscape, certain transactions enjoy exemptions, fostering a more nuanced understanding of financial obligations.
These exemptions encompass:
- Dividends from Local Subsidiaries: Companies resident in Kenya are exempt from withholding tax on dividends received from local subsidiaries or associated companies where control, either direct or indirect, encompasses 12.5% or more of the voting power.
- Export-related Commissions and Fees: Marketing commissions and residue audit fees disbursed to foreign agents facilitating the export of flowers, fruits, and vegetables are exempt from withholding tax, contributing to the encouragement of international trade.
- Interest Payments to Financial Institutions: Interest payments directed towards banks and insurance companies fall under withholding tax exemptions, promoting fluid financial transactions within the banking and insurance sectors.
- Transactions with Tax Exempt Bodies: Payments made to entities enjoying tax-exempt status are exempt from withholding tax obligations, recognizing and facilitating the operations of such bodies within the Kenyan fiscal framework.
- Local Management and Professional Fees: Withholding tax exemptions apply to local management and professional fees, provided their aggregate does not surpass Sh. 24,000 within a month, offering leeway for smaller-scale transactions.
- Air Travel Commissions for Local Operators: Commissions disbursed by local air operators to overseas agents for air travel services are exempt from Kenya withholding tax, supporting the aviation industry’s international collaborations and operations.
Q2. What if I don’t pay my withholding tax in Kenya?
If the payer neglects to withhold tax, they are considered responsible for the payment, as if they were the one who earned the income.
The payment deadline becomes the date when the tax should have been sent to the Kenya Revenue Authority (KRA).
Additionally, a penalty of 5% and a monthly late payment interest of 1% will be levied on the outstanding tax amount until it is settled.
Q3. Can we pay the tax by the PAYE regime?
Workers are liable to PAYE taxes, with rates determined by individual tax brackets. Employers have the flexibility to consider allowable deductions (like mortgage interest) and reliefs (such as personal and insurance relief) in the calculation of PAYE.
Q4. Is withholding tax a final tax in Kenya?
In certain scenarios, withholding tax serves as the ultimate tax.
- When deducted for payments to non-residents without a permanent establishment in Kenya.
- For winnings, qualifying interest, qualifying dividends, and pensions paid to resident individuals.
In all other instances, withholding tax isn’t final. The taxpayer must declare income and withholding tax details during annual tax returns, settling any remaining tax balance.
Q5. What types of transactions does it apply to?
Withholding Income Tax refers to tax retained at the source.
When specific payments are made, the payer deducts tax at the relevant rate and sends it to the Commissioner on behalf of the payee.
Payments subject to withholding tax encompass various categories, such as:
- Management, professional, or training fees
- Consultancy fees, Legal fees, Audit fees
- Contractual fees
- Winnings
- Appearance at or performance to entertain
- Royalties
- Interest and deemed interest
- Dividends