Withholding tax is a critical aspect of the Kenyan tax system that affects both individuals and businesses. Understanding its implications can help taxpayers manage their financial obligations effectively.
In this article, we will explore the concept of withholding tax in Kenya, its rates, the parties involved, exemptions, and the process of compliance.
What is Withholding Tax?
Withholding tax is an amount withheld from payments made to individuals or businesses, which is then remitted to the Kenya Revenue Authority (KRA). This tax serves as an advance payment of income tax.
Withholding tax is applicable in various scenarios, including dividends, interest payments, and service fees.
Key Features of Withholding Tax in Kenya
Nature of Withholding Tax: Withholding tax is a form of income tax collected at the source. It ensures that tax is collected upfront, reducing the risk of tax evasion.
Types of Payments Subject to Withholding Tax:
Dividends: Companies must withhold tax when paying dividends to shareholders.
Interest Payments: Banks and financial institutions are required to withhold tax on interest earned by depositors.
Professional Fees and Service Payments: Payments to professionals (like lawyers and consultants) are subject to withholding tax.
Withholding Tax Rates in Kenya
Withholding tax rates in Kenya vary based on the type of income and whether the recipient is a resident or non-resident. Below are the key rates for different types of income:
Artists and Entertainers: Non-residents pay 20%.
Management Fees: Residents pay 5%, while non-residents pay 20%.
Professional Fees: Residents pay 5%, and non-residents pay 20%.
Training Fees (inclusive of incidental costs): Residents pay 5%, and non-residents pay 20%.
Winnings from Betting, Gaming, Prize Competitions, and Gambling: Both residents and non-residents pay 20%.
Royalties or Natural Resource Income: Residents pay 5%, while non-residents pay 20%.
Dividends: There is no withholding tax for resident companies with shareholding above 12.5%. For resident qualifying dividends and citizens of the East African Community (EAC), the rate is 5%. Non-residents pay 15%.
Equipment (Movable) Leasing: Non-residents pay 5%.
Interest (Bank): Both residents and non-residents pay 15%.
Interest (Housing Bond HBI): Residents pay 10%, while non-residents pay 15%.
Interest on Government Bearer Bonds (issued outside Kenya): Residents pay 7.5%, while non-residents pay 15%. Other bearer bonds interest is taxed at 25% for both residents and non-residents.
Bearer Bonds with Maturity of Ten Years or More: Residents pay 10%, while the rate for non-residents is not applicable.
Rent - Buildings (Immovable): Residents pay 10%, while non-residents pay 30%.
Rent - Others (except Aircraft): Non-residents pay 15%.
Pensions/Provident Schemes (Withdrawal): Residents pay between 10% and 30%, while non-residents pay 5%.
Insurance Commissions: Residents pay 5% for brokers and 10% for others; non-residents pay 20%.
Consultancy and Agency Services: Residents pay 5%, while non-residents pay 20%. Consultancy fees to EAC citizens are taxed at 15%.
Contractual Services: Residents pay 3%, and non-residents pay 20%.
Telecommunication Services/Message Transmission: Non-residents pay 5%.
Natural Resource Income: Residents pay 5%, while non-residents pay 20%.
Digital Content Monetization: Both residents and non-residents pay 20%.
Sales Promotion, Marketing, and Advertising Services: Residents pay 5%, and non-residents pay 20%.
Withholding on Rental Income Tax by Tax Agents (effective from January 1, 2024): Residents pay 7.5%, while this does not apply to non-residents.
Gains from Financial Derivatives: Non-residents pay 15%.
These rates are subject to change, and it's advisable to consult the Kenya Revenue Authority (KRA) for the latest information.
Who is Responsible for Withholding Tax?
In Kenya, the responsibility for withholding tax falls on the payer. The payer must deduct the appropriate tax amount before making the payment and remit it to the KRA within the specified timelines.
Withholding tax shall be deducted and remitted to the Commissioner within 5 working days after the deduction is made
Is Withholding Tax a Final Tax?
There are a few instances where withholding tax is a final tax. Withholding tax of is final when deducted in relation to a payment made to a non-resident person with no permanent establishment in Kenya.
With regard to payments to resident persons, withholding tax is a final tax when it relates to winnings, qualifying interest, qualifying dividend and pensions. In every other case, withholding tax is not a final tax.
The taxpayer (payee) is required to declare their income(s) and the withholding tax details when filing their annual tax returns and to pay any balance of tax due.
Compliance Process for Withholding Tax
Registration: Payers must be registered with the KRA and have a Personal Identification Number (PIN).
Deduction: The payer should calculate the withholding tax based on the applicable rate and deduct it from the payment due to the recipient.
Remittance: The deducted amount must be remitted to the KRA by the 20th day of the following month. Late remittance may attract penalties and interest.
Issuance of Withholding Tax Certificate: After remitting the tax, the payer should provide the recipient with a withholding tax certificate. This certificate can be used by the recipient to claim the tax withheld when filing their income tax return.
Exemptions from Withholding Tax
Dividends received by a company resident in Kenya from a local subsidiary or associated company in which it controls (directly or indirectly) 12.5% or more of the voting power.
Royalties, interest, management fees, professional fees, training fees, consultancy fees, agency or contractual fees paid by a Special Economic Zone developer, operator or enterprise, in the first ten (10) years of its establishment, to a non-resident person with effect from 1st July, 2023.
Marketing commissions and residue audit fees paid to non-resident agents in respect of export of flowers, fruits and vegetables.
Interest payments to financial institutions stated in the fourth schedule of the Income Tax Act.
Payments made to tax-exempt bodies.
Resident management, professional, training and contractual fees whose aggregate value is Ksh 24,000 and below in a month.
Air travel commissions paid by local air operators to non-resident agents.
Importance of Withholding Tax Compliance
Compliance with withholding tax regulations is crucial for several reasons:
Avoiding Penalties: Non-compliance can result in significant penalties, including interest on late payments.The penalty for late payment is 5% of the tax due
Maintaining Good Standing: Regular remittance and compliance contribute to a good standing with the KRA, which is essential for any business operation.
Financial Management: Understanding withholding tax helps businesses manage their finances better, ensuring they allocate sufficient funds for tax obligations.
Common Mistakes to Avoid
Incorrect Deductions: Ensure that you calculate the withholding tax correctly based on the applicable rates.
Late Remittance: Always remit the withheld tax by the deadline to avoid penalties. The penalty for late payment is 5% of the tax due
Failure to Issue Certificates: Failing to issue withholding tax certificates can lead to issues for the recipient during tax filing.
How to File Withholding Tax Returns
Filing withholding tax returns in Kenya involves the following steps:
Login to KRA Portal: Access the KRA online portal via iTax https://itax.kra.go.ke using your credentials.
Select the Withholding Tax Return Option: Choose the relevant option for filing withholding tax.
Enter Required Details: Fill in the necessary details, including the amount withheld, the recipient's PIN, and other relevant information.
Submit the Return: After reviewing the information, submit the return electronically.
Withholding Certificate: After successfully remitting the deducted amount to KRA, a Withholding Certificate shall be sent to the email registered on iTax by the taxpayer.
Frequently Asked Questions (FAQ's) About Withholding Tax in Kenya
1. What happens if I fail to remit withholding tax on time?
Late remittance may attract penalties and interest charges, leading to increased financial liabilities.
2. Can non-residents claim a refund for withholding tax?
Yes, non-residents can claim refunds based on treaties or agreements between Kenya and their home country.
3. Is there a minimum threshold for withholding tax?
Yes, certain payments may have a minimum threshold below which withholding tax does not apply. It is advisable to consult KRA for specific amounts.
4. How can I check my withholding tax compliance status?
You can check your compliance status through the KRA online portal or by contacting their customer service.
Conclusion
Withholding tax plays a significant role in the Kenyan tax system, ensuring that tax is collected efficiently and reducing the risk of evasion. Understanding the rates, compliance requirements, and exemptions is essential for both individuals and businesses.
By adhering to the regulations, taxpayers can avoid penalties and manage their tax obligations effectively. By staying informed and compliant with withholding tax regulations, you can effectively navigate the tax landscape in Kenya, ensuring your obligations are met while minimizing risks.
If you have questions about withholding tax or need assistance with compliance, our experienced team is here to help. Contact us today for a consultation to ensure you navigate the complexities of withholding tax effectively and stay compliant with Kenyan tax laws.
To learn more, visit the Kenya Revenue Authority Website.
