Kenya, like many sovereign states, has measures in place to ensure that multinational corporations (MNCs) pay their fair share of taxes in line with the revenues derived or accrued in Kenya.
One of these measures is the incorporation of Transfer Pricing (TP) legislation to the Income Tax Act (ITA) effective July 1, 2006. The rules under this legislation mirror the principles set in the Economic Co-operation and Development (OECD) Guidelines.
Over the years Kenya has adopted, legislated and enforced global best practice with regard to taxation. These include, but not limited to the Tax Information Exchange Agreements (TIEAs), Common Reporting Standards, due diligence procedures and record keeping requirements as set out in the common reporting standards.
TIEAs are agreements made by multiple countries to ensure the smooth exchange of financial information between various nations to determine taxable profits of multinational corporations.
Globally, tax jurisdictions are faced with the uphill task of implementing tax laws that will combat tax evasion. This challenge is especially caused by the lack of information on overseas ventures whilst running business in their countries.
Therefore, TIEAs would help in providing information on ownership of such companies including nominees and trusts. However, we should remain cognisant of the potential concerns associated with data privacy in many jurisdictions.
Due to these concerns, within the TIEAs there are provisions that prevent arbitrary information requests. A state or revenue authority needs to support their inquisition on a taxpayer in order for the information sharing to take place.
We could question the seriousness and interests of tax havens that have entered into TIEAs because in some instances such agreements are superseded by domestic legislation on confidentiality of taxpayers, turning the whole process into a wild goose chase. The Finance Bill 2021 proposes changes that give validity to multilateral agreements and treaties entered into by or on behalf of the Government of Kenya. This validation is in relation to international tax compliance, prevention of tax evasion and exchange of tax information.
The Bill, if assented as is will allow the governing of the exchange of information as stipulated in agreements or treaties.
The Finance Bill further protects taxpayers by stating that any information obtained pursuant to agreements shall not be disclosed except in accordance with the conditions specified in the agreements.
Major industry players globally are MNCs. Therefore, they directly influence the economies of many countries.
This amendment acts as a stepping-stone for Kenya into to Common Reporting Standards (CRS) regime pursuant to the country signing and depositing the required instruments under the Multilateral Convention on Mutual Administrative Assistance.
Further, the Bill introduces due diligence procedures and record keeping requirements as set out in the CRS regulations as developed by the Cabinet Secretary of Treasury. There regulations are to be followed by any financial institution that is resident in Kenya (excluding any branch located outside Kenya); or a branch of a foreign financial institution located in Kenya.
The CRS is a global initiative developed by the OECD and its objective is to enable tax authorities to obtain more information about their residents' tax affairs.
The reporting requirements under CRS include furnishing the revenue authority with all reportable accounts held, managed or administered by the reporting institution; or nil accounts if no account is held by a date to be set out under the regulations. It also prescribes anti-avoidance provisions to circumvent accurate reporting.
The penalty for non-compliance with the CRS obligations such as making false statement or omission of any information required is Sh100,000 for each false statement or omission, an imprisonment for a term not exceeding three years or both (unless reasonable effort was made to obtain information). Additionally, filling non-compliance or filing a nil information return by a financial institution is Sh1 million for each default.
These measure are in line with the current global drive to increase transparency for purposes of combatting tax evasion among other crimes. These strides will help KRA increase tax compliance and the Kenya's revenue. By introducing these changes, Kenya seeks to join the league of bigger economies who have already rolled out similar or identical measures.
Mr Nyambane is a senior tax consultant, PKF Kenya firstname.lastname@example.org
Opinions expressed in the article belong to the author and not necessarily to PKF