The June 30 deadline for filing the 2020 individual income tax returns is quickly beckoning.
For the diaspora community, there are certain challenges that they often grapple with including uncertainty on whether they should pay tax in Kenya, the applicable rate and how to mitigate double taxation. This is amplified by the fact that taxation of Kenyans in the diaspora is not as straightforward as for those who live and work in Kenya.
The complexity in taxation of these two categories of individuals is partly because for those living and working abroad, the income they earn there may or may not be subject to tax in Kenya. The tax treatment of such income is largely dependent on the nature of the income, where it is earned (source) or where the person who receives it is normally based.
Below are some context to these concepts:
As earlier mentioned, the source of the income remains an important determinant of whether the money earned abroad is subject to tax in Kenya. The “sourcing” concept is generally aimed at ensuring that the country which provides the opportunity to generate the income should have the right to tax that income.
Accrued in Kenya
Given that income earned abroad may arguably be considered not to be sourced in Kenya, it is probable that such income may not be subject to tax in Kenya.
Closely linked to the sourcing concept is a consideration as to whether the income in question was accrued in or derived from Kenya. While the term accrued or derived may have boundless interpretations, it is generally accepted to define where the dominant activities giving rise to the income in question are undertaken.
For instance, income earned by an individual who is located in Kenya from a company that is equally located in Kenya could easily be construed to be both accrued in and derived from Kenya compared to the income earned by an individual who is located in Kenya but from a company located abroad. The accrued or derived concept is a significant facet in determining whether the income from abroad is subject to tax in Kenya or not.
Another determinant is the Kenyan tax residency status of the individual. Residence taxation of income is based on the principle that individuals should contribute towards the public services provided to them by the country where they live, on all their income regardless of whether that income is earned in the country they are resident in or not.
Determination of tax residency is based on key tenets provided for in the Income Tax Act. These tenets are largely premised on the number of days one is physically present in Kenya as well as the availability of a permanent home here.
While the Income Tax Act does not expressly define a permanent home, a home or a house that is continually and unrestrictedly available to an individual could be considered a permanent home and therefore any physical presence in Kenya (even a day) within a tax year could trigger tax residency for such a person.
For an individual who is considered a tax resident in Kenya, the employment income they earn globally is subject to tax in Kenya. It is thus vital to determine whether one is resident in Kenya or not as this has a direct impact on the Kenyan tax treatment of their overseas employment income.
Double taxation is an aspect that cannot be downplayed given that most Kenyans who are abroad are likely to be paying taxes in their host countries. One would wonder why they should pay tax in Kenya as well as their host country.
There are several mitigative measures envisaged in the Income Tax Act that would reduce the instances of double taxation. First, the existence of double tax agreements (DTA) may provide for the taxation of certain incomes at reduced rates.
To sweeten the deal further, DTAs may provide a tax exemption in Kenya or a tax relief in Kenya for the taxes paid abroad.
There are a few countries that have DTAs with Kenya including its East African Community partners, the UK, South Africa, Sweden, India, Zambia and France.
In addition, the Income Tax Act allows a Kenyan citizen to offset the tax suffered abroad against their tax liability in Kenya subject to limits and attainment of certain conditions.
The implications of tax non-compliance in Kenya are quite dire. The law imposes late payment penalties, interest, fines and criminal or civil liabilities.
However, all is not gloomy for Kenyans abroad who would like to rectify past instances of tax non-compliance. The current ongoing Voluntary Tax Disclosure Programme offers an opportunity for a taxpayer to get a full remission of penalties and interest subject to attainment of various conditions.
To this end, the diaspora community needs to assess and establish their tax position and proactively initiate compliance measures aimed at rectifying past non-compliance and promoting future compliance.