Understanding Withholding Tax in Kenya
Withholding tax in Kenya is a tax deducted at the source of payment. When you receive certain types of income, the person or company paying you takes out a portion for taxes before giving you the rest.
This system helps the Kenya Revenue Authority (KRA) collect taxes efficiently. Instead of waiting for you to file and pay taxes later, the money goes directly to the government right away.
Withholding tax applies to various types of income such as:
- Management and professional fees
- Consultancy and legal fees
- Audit fees
- Training fees
The person making the payment becomes a “withholding tax agent.” This means they must deduct the correct amount and send it to the KRA.
Why does withholding tax matter to you?
When someone withholds tax from your payment, you receive credit for that amount. This reduces what you might owe when filing your annual tax return.
Withholding tax is also called a “retention tax” because the money is held back from your full payment. The rates vary depending on the type of income and whether you’re a resident or non-resident.
For businesses making payments, it’s important to understand your role as a withholding agent. You must deduct the correct amounts and submit them to the KRA on time to avoid penalties.
Applicability and Rates of Withholding Tax
In Kenya, withholding tax applies to various types of income and is collected at different rates depending on whether you’re a resident or non-resident. The tax is deducted at the source before payment is made to the recipient.
Different Categories of Withholding Tax
Withholding tax in Kenya covers several payment categories. This includes employment income, where employers must deduct tax before paying salaries using graduated scale rates.
Professional services are also subject to withholding tax. This covers consultancy fees, management fees, legal services, and audit fees.
For contractors, retention tax applies to payments for construction and related services. This ensures tax compliance in sectors where temporary work is common.
Corporate dividends and interest payments also fall under the withholding tax regime. Companies must deduct the appropriate percentage before distributing earnings to shareholders.
Digital services and royalty payments to both residents and non-residents are also covered under Kenya’s withholding tax system.
Rates for Various Types of Income
The withholding tax rates vary significantly based on the type of income and your residency status.
For Residents:
- Professional and consultancy fees: 5%
- Management and professional fees: 5%
- Interest on bank deposits: 7% (effective July 31, 2022)
- Dividends: 5%
- Royalties: 5%
For Non-Residents:
- Professional and consultancy fees: 20%
- Management fees: 20%
- Dividends: 10%
- Interest: 15%
- Royalties: 20%
Employment income has special treatment, with taxes applied according to the graduated tax scale. Your employer may consider allowable deductions like mortgage interest when calculating the withholding amount.
Corporation tax is withheld on certain transactions between companies, especially for services provided by non-resident entities.
VAT and Withholding Tax Implications
Kenya’s tax system includes Value Added Tax (VAT) and Withholding VAT mechanisms that affect businesses operating in the country. Understanding these tax obligations is essential for proper compliance and financial planning.
Understanding VAT in Kenya
VAT in Kenya is a consumption tax charged on taxable supplies at a standard rate of 16%. It applies to most goods and services sold within Kenya or imported into the country.
Some products and services qualify for zero-rating (0% VAT) while others are completely exempt from VAT. Zero-rated items allow businesses to claim input VAT, while exempt supplies don’t permit such claims.
The VAT Act requires businesses to issue electronic tax invoices for all transactions. These invoices must include specific details like the seller’s PIN, item descriptions, and the VAT amount charged.
VAT-registered businesses must file returns monthly, typically by the 20th of the following month. This is done through KRA’s iTax platform regardless of whether you conducted business that month.
Role of Withholding VAT
Withholding VAT is a tax collection mechanism where designated agents deduct 2% of the taxable value before paying suppliers. This system helps KRA collect taxes early in the business cycle.
The withheld amount is remitted directly to KRA by the appointed withholding agent. As a supplier, you’ll receive payment minus the 2% withheld amount.
Key withholding agents include:
- Government ministries and departments
- Public bodies and institutions
- Large taxpayers designated by KRA
Importantly, no VAT is withheld on exempt goods or services. Any VAT incorrectly withheld on exempt or zero-rated supplies is treated as tax paid in error and can be refunded.
When invoicing withholding agents, you should prepare for the 2% deduction. For example, on a transaction of Ksh 116 (inclusive of VAT), the agent will withhold Ksh 2.
VAT Registration and Compliance
You must register for VAT if your annual taxable turnover exceeds Ksh 5 million. Registration is done through the KRA iTax portal by submitting the required documentation.
Voluntary registration is available for businesses below the threshold. This can be beneficial if you deal with VAT-registered businesses or export goods and services.
VAT compliance requirements:
- Maintaining proper books of accounts
- Filing monthly VAT returns by the 20th of the following month
- Issuing electronic tax invoices for all transactions
- Keeping records for at least 5 years
Non-compliance with VAT obligations can result in penalties, including fines and interest on unpaid taxes. Late filing attracts a penalty of 5% of the tax due or Ksh 10,000, whichever is higher.
Regular VAT audits are conducted by KRA to ensure compliance. It’s advisable to maintain accurate records and seek professional guidance when needed.
Tax Compliance and Procedures
Meeting tax obligations in Kenya requires understanding the formal processes for filing returns and resolving disputes. Proper compliance helps taxpayers avoid penalties while ensuring they fulfill their legal responsibilities to the Kenya Revenue Authority (KRA).
Filing Tax Returns
Withholding tax returns must be submitted to the KRA by the 20th day of the month following when the tax was deducted. This deadline is strict, and missing it may result in penalties.
You need to complete the appropriate withholding tax forms, which vary depending on the type of payment made. These forms require details about both the payer and payee.
The KRA’s iTax platform allows for online submission of returns, making the process more efficient. You’ll need to register for an iTax account if you don’t already have one.
Important documents to prepare:
- Payment records
- Receipts of tax withheld
- Details of recipients
- Tax PIN numbers
Keep all records for at least five years as required by the Tax Procedures Act.
Dealing With Objections and Disputes
If you disagree with a tax assessment, you have the right to file a Notice of Objection. This must be submitted within 30 days of receiving the assessment.
Your objection should clearly state the grounds for dispute and include supporting documentation. Be specific about which aspects of the assessment you’re challenging.
The KRA will review your objection and provide a written response. During this period, maintain open communication with your assigned KRA officer.
If not satisfied with the KRA’s decision, you can appeal to the Tax Appeals Tribunal. This independent body reviews tax disputes outside the KRA system.
Tips for effective dispute resolution:
- Document everything in writing
- Respond to all KRA communications promptly
- Consider seeking professional tax advice
- Maintain a respectful, professional tone
Sector-Specific Withholding Tax Information
Kenya applies different withholding tax rates across various sectors of the economy. These sector-specific regulations help ensure tax compliance while addressing unique industry characteristics.
Withholding Tax on Imported Petroleum Products
When importing petroleum products into Kenya, a withholding tax of 3% applies to the customs value. This tax must be paid before the petroleum products can clear customs.
Importers need to register with KRA and obtain a PIN number to facilitate this process. The tax collected serves as an advance payment toward the importer’s final tax liability.
Key products affected include:
- Crude oil
- Refined petroleum
- Aviation fuel
- Diesel
- Kerosene
The Kenya Revenue Authority requires importers to submit documentation showing proper valuation of petroleum imports. These taxes must be remitted by the 20th day of the month following the transaction.
Taxation of Exportation of Services
Service exporters in Kenya face specific withholding tax considerations. When Kenyan companies provide services to foreign clients, these transactions may be exempt from withholding tax under certain conditions.
Qualifying export services include:
- Management consulting
- IT support and development
- Business process outsourcing
- Professional services (accounting, legal)
To qualify for withholding tax exemptions, you must provide documentation proving the service was consumed outside Kenya. The KRA requires proper invoicing with clear indication of the service location.
Service exporters should maintain proper records for at least seven years. This includes contracts, invoices, and proof of foreign currency payments to support their tax claims.
Housing and Development Funds
The Affordable Housing Levy requires employers to deduct 1.5% of employees’ gross monthly pay. Employers must match this contribution with another 1.5%.
These funds go to the National Housing Development Fund. This program aims to increase access to affordable housing for Kenyans.
Key housing levy information:
| Party | Contribution Rate | Maximum Monthly Contribution |
|---|---|---|
| Employee | 1.5% of gross pay | KSh 5,000 |
| Employer | 1.5% matching | KSh 5,000 |
You must remit these deductions by the 9th of the following month through the iTax platform. Failure to comply results in penalties of 2% of the unpaid amount per month.
The housing levy applies to all formal employment relationships. Self-employed individuals can make voluntary contributions to access housing benefits.
