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Kenya makes strides towards enhancement of tax transparency

The increased cross-border transactions due to globalization come with the risk of the authorities in the respective jurisdictions missing out on the taxes that may accrue to them through tax evasion and aggressive tax planning. One of the widely embraced measures to curb the problem is the exchange of financial information as guided by the Organization for Economic Co-operation and Development (OECD) common reporting standards (CRS). While there are various forms of exchange of information, namely, exchange upon request, spontaneous exchange and automatic exchange, the latter stood out as the expected new standard from around the year 2012. 

On 15 July 2014 the OECD council approved CRS based on automatic exchange. The CRS outlined the reporting requirements for automatic exchange of information and guidelines on the due diligence procedures in relation to reportable accounts.

Kenya has recently attained key milestones in relation to its efforts to join the global move towards enhancing tax transparency. Through the Finance Act 2021, the Tax Procedures Act 2015 was amended to introduce the CRS regime in Kenya with effect from 1 July 2021. The regime brought into effect the automatic exchange of financial information for tax purposes. Under the provisions, the reporting is to be done by all financial institutions resident in Kenya including branches of non-resident financial institutions operating in Kenya but excluding foreign branches of Kenyan financial institutions. The reporting shall be done by way of filing of returns with the Commissioner Kenya Revenue Authority (KRA). The Cabinet Secretary is yet to publish the regulations envisaged under the CRS provisions. Per the regulations issued by the South African and Nigerian revenue authorities in 2020 and 2019 respectively, some of the information to be reported under their CRS regimes include the name, address , account number, tax identification number and account balance as at a given reporting period. In relation to custodial accounts the gross interest, dividend or any other income generated in respect of the assets held in the account should be reported when paid or credited to or in relation to the account.

Further, the OECD’s update to the list of signatories to the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information ‎(the Agreement) dated 6 July 2021 indicates that Kenya has signed the agreement with an intended first information exchange date of September 2022. The multilateral agreement provides for a standardized and efficient mechanism to facilitate the automatic exchange of information between its signatories at the competent authority level. In the case of Kenya, the competent authority is the KRA. The Agreement is anchored on the Convention on Mutual Administrative Assistance in Tax Matters (the Convention) and outlines the financial information to be exchanged and when, the institutions required to report, the various reportable accounts and taxpayers covered and the due diligence procedures to be followed.

Earlier, in 8 February 2016, Kenya signed the Convention with the deposit of instruments of ratification having taken place on 22 July 2020. Under Article 1, the convention provides that the administrative assistance that parties are required to provide to each other comprise of exchange of information including participating in tax examinations abroad, assistance in recovery including measures of conservancy and service of documents.

 As at 15 July 2021, 141 jurisdictions had signed the Convention including some of the most popular offshore investment destinations such as Cayman Islands, the British Virgin Islands and Mauritius.

Like most jurisdictions, in 2016 Kenya introduced a voluntary disclosure programme on foreign income and assets under which it sought to grant tax amnesties prior to the roll-out of the CRS regime. Under the amnesty, taxpayers were expected to voluntarily declare their taxable foreign earned income for any year of income ending on or before 31 December 2017 and repatriate the same back to Kenya. In exchange, the KRA would not assess or seek to recover taxes, penalties and interest on the amounts or investigate and report the sources of the funds subject to exemptions in relation to proceeds of terrorism, poaching and drug trafficking.

Subsequently, the KRA rolled out another voluntary tax disclosure programme running for three years effective 1 January 2021 and covering a 5-year period from 1 July 2015 to 30 June 2020. Under the programme, successful applicants will be granted remission of penalties and interest to varying extents depending on the year of application. Individuals and entities that missed out on the 2016 tax amnesty may take advantage of the current programme in relation to taxable foreign income.

One of the main concerns around exchange of information is confidentiality and safeguard of the data collected and shared. While the Convention guarantees very high standards for protection of taxpayers’ personal data, generally the safeguards under national and international law are applicable. In this regard, the enactment of Data Protection Act 2019 was a step in the right direction with regard to data privacy.

As outlined in the amendment under the Tax Procedures Act, while the effective date for the CRS provisions was 1 July 2021, the Act requires the Cabinet Secretary for the National Treasury to publish regulations to provide guidelines on implementation of CRS. Once the CSR regime is fully implemented in Kenya, there will be an automatic exchange of information on reportable accounts held by Kenya resident persons in the participating jurisdictions thus such information will be accessible to KRA for purposes of ascertaining taxes due and payable in Kenya. Kenyan residents with investments and bank accounts in other CRS participating jurisdictions may be required to explain their sources of funds besides their Kenya sourced income. However, since taxation in Kenya is source based, income earned in foreign jurisdiction would generally not be taxable in Kenya save for employment income which is taxable on a world-wide basis for Kenyan residents and income taxable in Kenya which was repatriated from Kenya untaxed.

Fred Ogutu is a Tax Manager at Deloitte East Africa and he can be reached at fogutu@deloitte.co.ke. The views expressed represent those of the author and do not necessarily represent those of Deloitte.

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Fred Ogutu is a Tax Manager at Deloitte East Africa and he can be reached at fogutu@deloitte.co.ke. The views expressed represent those of the author and do not necessarily represent those of Deloitte.