Principles of Withholding Tax (WHT)
Introduction – Principles of withholding tax
WHT is an agency form of tax where a person making certain types of payments which are income subject to tax in Kenya is required to deduct tax therefrom and remit/transmit the tax deducted directly to the KRA The person who is required to withhold tax on a payment is called a payer while the person who is entitled to receive a payment which is income subject to withholding tax is the payee
NB WHT is not an additional tax. Rather, it is a payment of tax in advance on the income of the payee. Where WHT is not final tax, the tax should be claimable by the payee if the payee is resident in Kenya or is a PE of a non-resident person.
WHT achieves the following:
- Curbs tax evasion
- Reduces tax administration costs, and
- Manages a country’s cash flow 45 The Legislation.
Positive and negative impacts of WHT;
- Positive impact: Since WHT is not final tax, the withheld tax credit is utilized against payable company income tax hence reducing the income tax obligation.
- Negative impact: Withheld tax by payers impacts negatively company’s cashflows and that withheld by us, plays no positive role since the same is remittable to KRA almost immediately.
Obligation to deduct
Section 35 of the ITA provides an obligation to the payer to deduct tax on eligible payments for remission to KRA directly
Failure to deduct tax on an eligible payment and remittance of the same to KRA is an offence under the ITA and attracts penalties and interest (Ref Annex 1)
Withholding Tax Rates
|Artists and entertainers||–||–|
|Training fess (inclusive of incidental costs)||5%||20%|
|Winnings from betting and gaming (w.e.f. 1 Jan 2014)||20%||20%|
|Dividends (nil for resident shareholders with>12.5%)||5%||10%|
|Equipment (movable) Leasing||N/A||5%|
|Interest (Housing Bond ? HBI)||10%||15%|
|Interest on two ? year government bearer bonds||15%||15%|
|Other bearer bonds interest||25%||25%|
|Rent ? buildings (immovable)||12%||30%|
|Rent ? others (except aircraft)||N/A||15%|
|Pensions/provident schemes (withdrawal)||10 ? 30%||5%|
|Consultancy and agency(from 1 July 2003)||5%||20%|
|Contractual and agency (from 1 July 2003)||3%||20%|
|Telecommunication services/Message transmission||–||5%|
|Natural Resource Income (w.e.f. 01/01/2015)||5%||20%|
Tips on WHT Management
As indicated above, every tax payable is obligated to deduct withholding tax and pay the same directly to KRA.
The 5 highlighted yellow services are the most common in Kenya.
Are there tips on how to minimize WHT impact? No exact way. Remember, failure to deduct WHT is an offence and attracts penalties and interest hence it would be hard to convince payers not to withhold since it would be of no benefit to them. Their cash outflow is the same whether they withhold or not.
What Penalties are Charged on Tax Offences?
Tax offences can attract punitive penalties and interest. These include:
Offence – Failure to deduct PAYE, account for it or to submit a certificate upon request.
Penalty – Whichever is greater of, 25% of the amount of the tax involved or Ksh. 10,000.
Offence – Failure to deduct or pay Withholding Tax.
Penalty – 10% of the amount of the tax involved, up to a maximum of Kshs. 1 million.
Offence – Failure to pay Stamp Duty.
Penalty – Additional 5% of the payable duty for every quarter, from the date of the Instrument.
Offence – failure to pay Excise Duty or VAT.
Penalty – whichever is greater of, 5% of the amount of the tax due or Ksh. 10,000.
Offence – Failure to pay tax on due date.
Penalty – Additional 20% of tax involved is charged.
Offence – Failure to file annual returns by the due date.
Penalty – Additional tax equal to 5% of the normal tax, or Ksh. 10,000.
Offence – KRA PIN-related offense.