*DISCLAIMER*
The
notes below are adapted from the Kenyatta University, UoN and Moi University Teaching module
and the students are adviced to take keen notice of the various legal
and judicial reforms that might have been ocassioned since the module
was adapted. the laws and statutes might also have changed or been
repealed and the students are to be wary and consult the various
statutes reffered to herein
1)
Historical development
2)
Tax structure-Taxes levied in Kenya
3)
Personal and business taxation
4)
Tax assessment principles and guidelines
HISTORICAL DEVELOPMENT-COLONIZATION AND
NEED FOR TAXATION
The Berlin
conference of 1885 and 1886 were used by imperial powers to partition East
Africa among them so that for East Africa, one part, which later became Kenya
was under British sphere of influence while the other part (lower) Tanganyika
came under German sphere of influence. Zanzibar remained in the hands of Sultan
of Oman. The British part became East Africa protectorate, which had been expanded
in 1880 through the 1880 agreement by extending boundaries between British East
African protectorates across Lake Victoria to the Congo to include Uganda in the
British sphere of influence. Of particular importance is the fact that both
Germans and British administered possession through private companies with both
political and proprietary rights over this possession. The imperial British
East African company was used to administer the protectorate.IBEAC was granted
a charter with three mandates
I.
Penetrate open and administer East Africa from Coast to
Uganda
II.
Establish a safe trade route to Uganda
III. Construct
a rail road along that route
To enable the
companies to finance its activities, it was given political and economic power
to extract taxes and any other tariffs from the population in its protectorate.
The new intruders the company could not at that point in time find any
activities it could levy taxes on.1887-1888 in process of which it continued to
seek grants from British colonial government, which the British could only get
through taxing their own citizens, bewildered inhabitants of this protectorate.
In 1895, Britain declared protectorate status over East Africa and used the staff
of the company that was already in the territory to administer British rule. It
sought to recover expenses of this rule through taxing the inhabitants who were
four. Their mandate was to make East Africa self sustaining through economic
activities. By executing this mandate, they separated the Ugandan part from the
Kenyan part, which required some injection of settlers from abroad. The chief
native commissioner of that period was Sir Charles Eliot for purposes of
raising tax bases in East Africa he wrote several memos to the British
government to send over settlers who would start businesses where the natives
would be employed. The native’s salaries would then be taxed. Unfortunately,
for Sir Eliot the British decided to send settlers who were mainly old and poor.
He then turned to Europe where they wanted the Jews to come and settle in East Africa.
He also wanted Indians but the Indians could not manage to come since they
wanted to move in all villages. The settler has feared Indian competition and
this discouraged them.
Legal framework
It was laid in
1892 when the hut tax was introduced on Africans assessed on a man in relation
to the number of huts in his compound. Tax legislation came in 1903 when tax
ordinance was enacted which allowed imposition of a poll tax in 1910 which was
assed upon the whole population and was being introduced in order to force
Africans to look for employment in white settlers farm to raise the tax revenue
used as a mechanism for creating labour for the settlers farms. The rate was
three rupees per head and was raised to eight rupees in 1920.Indians and white
settlers were not paying any of these taxes. In 1922 around several police stations,
Harry Thuku and others held riots protesting against excessive taxation of
Africans. One consequence is that it became very troublesome for Africans and
they had to look for employment to pay the taxes. Africans resorted to tax
avoidance mechanisms. African boys were forced to pay taxes at 16yrs.In
connection to this state of affairs, Van Zwanenberg in his book Colonial
capitalism and labour in Kenya 1919 to 1939 he observed :-
The Tax system
was unjust because of the low level of wages in relation to the tax demands and
because the Africans received too little for their taxes. This latter fact
should be understood in relation to the indebtnes, which was a direct
consequence of government expenditure upon infrastructure.
European
settlement needed supporting services in Agriculture, veterinary and medical
fields and a police force to protect the European property and enforce
restrictions on African movement. Burden of direct and indirect taxes fell on
Africans whose taxes were restricted towards development of the Europeans.
The amendment of
the 1903 Tax ordinance in 1910, allowed for distress of property on tax defaulters.
In the default of property, it allowed for three months imprisonment and
subsequently detention of three months with hard labour.
Economic Effect
1)
Confiscation of property
2)
If no property was to be confiscated, still there was
no money to pay the tax
In 1933, the tax
ordinance was repealed and replaced by native tax and hut native tax ordinance,
which was more draconian.
Sec 8(1) allowed
hut of defaulting taxpayers to be burnt down
Zweinberg stated,
“If a hut owner cannot pay if they are destitute and posses no goods that can
be detained upon, they are expelled from their huts after 21 days when another
tax is due, the hut is seized and may be burnt
As this drew to
a close, the family becomes desperate and in one place where famine relief had
been distributed, the home of one gathering was burnt while in custody as a tax
detainee.
ADMINISTRATION OF KENYAN TAX LAW
1)
By colonial Government through district officers
2)
Through East African high commission
3)
East African service organization
4)
Kenyan Tax departments through Commissioner General
5)
K.R.A
The main
characteristic was that D.Os not trained in any field were deployed in various
capacities relied on chiefs and head men, their main aim being to force Africans
to look for employment so as to pay taxes.
In 1920, British
colonial office forced the Kenyan colonial government to tax Indians and
Europeans if forced to increase rate of Native taxes led to enactment of income
tax ordinance. It was later repealed and in its place import tax increased on wheat,
sugar and tea imported by settlers and consumed by Africans.
Subsequently
through industries to process most of these products were set up which meant a
few Europeans middle class had to be attracted to manage this industries.
Companies had to be incorporated to manage these businesses.
Nicholas
Sweinson in a book, The development of corporate capitalism in Kenya observed
that the lifespan of these companies was very short i.e. 5-9 years but between
1922-1945 companies became more stable and after world war 11, kept attracting
other nationals through James finlay and co. which then meant that the
companies were engaging in trading acts to attract tax to tax both co
operations and people who manage them. Administration had to shift from
District officers to provincial officers to professionals which led to the
setting up of the East African High Commission in 1947.
Harmonizing Tax Law in East Africa
In 1937 income
Tax ordinance had been enacted in Kenya followed in 1940 by similar ordinances
in Uganda, Tanganyika and Zanzibar, which all joined to form a single income
Tax department. In 1952, income tax ordinances were consolidated to form the
East African Tax (management) Act No 8 of 1952 of East Africa High commission.
Impact of the Act
1)
The Act evolved the rates of tax and personal
allowances to be prescribed by each of the territories
2)
Introduced taxation of companies
In 1958, another
East African income Tax (management) Act replaced the 1952 Act its major object
being to reinforce taxation on companies. It however made rates of corporate
taxation to be proportional while that of individuals was progressive.
Individuals were being taxed more than companies were thus as a tax avoidance
measure individuals would form companies hence a lower rate and level of taxation.
The other way the taxpayers used to avoid taxation was to retain dividends until
such a time when income of other shareholders was known and declared exempted.
-Income
splitting
-Dividend
stripping
The 1958 Act
allowed the commissioner to set aside any settlement or taxation aimed at tax
avoidance or reduction of tax liability
B.D.E
and Company vs. Income Tax Commissioner
Company x owned
half shares of company y where Mr. Z owned the other half shares. Company x was
in receivership while company Y was profitable and had made profits capable of
paying dividents.Mr.Z already had a large dividend income so that any profits
from company Y would be taxed at the punitive tax levels/rates.Inorder for both
company Y and Mr. to avoid paying taxes, it was agreed company X would buy half
the shares of Mr. Z after which it would then declare dividends payable to
itself which it would use to pay off its debts but not sufficiently to have it
declare profits that would be taxed on it and thereafter resell the shares to Mr.
at a lower price than that paid for purchase to enable Mr. have capital gain which was not taxable and
thereby avoid the taxes that would have been paid if profits had been declared
by company Y earlier. The commissioner resisted. On Appeal, it was Held that
the commissioner had powers to set aside Taxation aimed at avoiding Tax.
Shareholder X was deemed to have earned dividends, as it was the second shareholder.
The commissioner also had power to set aside any dissolution of companies that
had retained earnings by deeming those companies to have distributed 6o% to
shareholders thus taxing the companies at individual shareholder rate.
East African Common Services Organization
(1961-1973)
Formed in the
place of East African High Commission and provides common services to the East
African countries. In 1962, another East African Income Tax Management Act was
enacted to replace the 1958 Act. Its major aim being to increase rate of
corporate taxation while reducing rate of income tax for private companies. The
Tax regime was very complicated. In 1965, another Act was enacted to replace
the 1962 Act, which now harmonized rates at 8shillings per pound on all incomes
of corporation.
Non-taxability
of capital gains. Issue rose, what point is it known if a capital gain or
income has been made.
Eisner
vs. Macomber
It may not be
good to tax capital. Capital may be likened to a tree while income may be
likened to a fruit. Taxing capital may affect the tree that bears the fruit.
Z
co.ltd vs. Commissioner of income Tax
Issue was
whether a person makes capital gain/profit when a company authorized by its articles
to deals with land deals with land, it will be presumed to be carrying on a
trade/business in land. Commissioner is authorized to ensure that companies
keep their records in English
Each country
establishes its own income tax department
Kenya Revenue Authority
1955:
consolidates all revenue departments into a parastatal and enhances financial
independence of the parastatals by shielding it from the central government
budget inefficiency with power to collect all taxes, revenue, duties, fees,
levies, charges or other monies
POLITICAL ECONOMY OF TAXATION
Because Tax is
an intrusive act of taking property that belongs to citizens, there has evolved
a practice that tax may only be levied on the authority of law, so that they
have specific tax Act, statutes that authorize the government to levy taxes
including income tax Act, Customs and excise Act, VAT Act, Stamp duty Act, etc
and this brings the linkage between those who charge tax upon those whose Tax
is charged upon their representatives. The underlying assumption is that the
government must at least charge Tax in order for it to function
Is the government
necessary?
What role should
it play that is forcing it to need such amount of money?
Importance of Government
Manages the
public sector; Sector involving central government, local government, public
corporations, all of which together with the private sector enables the economy
too efficiently and equitably allocate resources. Because the private sector is
motivated by profit, services given may be out of reach for a majority.
Importance
of government in authorizing the public sector
1)
Helps promote competition; this is through the
regulation of the private sector which in relying on forces of supply and
demand, determines prices for both resources and finished products provided
there is always a fair market in place. Where monopolies arise, the government
promotes competition and prevents abuse of monopoly power through Outright Monopoly
Law on Anti Trust through taxation and subsidies.
2)
Provide public goods and services, defense,
adjudication over disputes, infrastructure, security, mass education, public
health etc. These are services, which though also provided for by the private
sector in varying degrees, must be consumed by everybody, and the government at
considered or reasonable prices provides them.
3)
The government also protects society from future costs
of private sector decisions. This is mainly because the private sector entities
make their decisions based on private costs and benefits analysis of production
and consumption. The effects of these decisions on the public or on future
generations are not usually brought into the question, this is where
environmental problems are created by private entities, and the government
comes in to regulate and prohibit some of the private sector decisions.
4)
Enforcement of private sector obligations: Private
entities enter into contracts and other obligations which tend to give them
assurance that the people they engage with will perform their part, but when
there is a breach, some recourse to law, through the fiduciary or recognized
arbitration mechanisms are availed. The government thus helps in encouraging
trusts by helping those who will breach regulations know what will happen to
them and helps others to enforce their rights.
5)
Redistribution of income and wealth: Private sector
deals only with those who participate in it, so that if you do not have goods
you may not be benefiting. The government steps in to enforce social welfare by
emphasizing goods and services and taxing others, which helps, bring some
parity amongst its citizens.
6) Promotion of macro-economic objectives
where at national levels, issues of unemployment,
balance of payment etc have to be coordinated by a uniform treatment done by
the government. T
His helps in
directing economic development for the whole economy and thereby for the whole
country.
Constitutional Provisions as to Public
Finance.
Sec 99-105 of
the current constitution deals with finance in chapter 7.Section 99 establishes
consolidated fund and other funds of the government of Kenya. Under Sec (1) on
revenues and other monies raised or received by Government of Kenya are paid into
and form a consolidated fund. No withdrawal may be made out of the consolidated
fund except with authority of the constitution, an Act of parliament or a vote
on account passed by parliament.
Sec 99(2)Parl
man provide for revenues or other monies received by Kenyan government to be
paid into some public fund or retained by authority that received them to
defray its expenses but no money may be withdrawn from such without authority
or under a law.
Sec100 creates a
process known as appropriation, which authorizes expenditure from the
consolidated fund. This section is responsible for making the Minister of
finance an executive
Sec 100(1)
provides for an annual budget before the National assembly each final year
estimates of revenue and expenditure of Government for the next following financial
year.
Sec 100(2) upon
approval of establishment of expenditure by National assembly an appropriation
bill shall be introduced to provide for issues from the consolidated fund of
sums necessary to meet that expenditure and appropriation of those funds for
purposes specified therein
Sec 100(3) It
allows the finance minister to lay supplementary estimate or a statement of
excess before parliament where either of two things occurs:-
If the amount
appropriated is insufficient or a need has arisen for expenditure for a purpose
for which no amount has been appropriated by that Act or where any monies have
been expended for a purpose in excess of amount appropriated to that purpose by
the appropriations Act or for a purpose to which no amount has been
appropriated by the Act
Sec 101 provides
for the authorization of expenditure in advance of appropriation .This is usually
allowed if the appropriate Act for the financial year has not come into
operation or is unlikely to come into operation at the beginning of that
financial year. Parliament may by a vote on account authorize withdrawals from
the consolidated fund provided the withdrawals do not exceed half of the
estimates of expenditure laid before the assembly.
Any monies
withdrawn on authority of a vote on account must be included under vote for
specific services for which it was withdrawn.
Section 102
provides for the establishment of a contingency fund from which the Minister of
Finance may make advances to meet urgent and unforeseen needs not otherwise
provided for in the Appropriations Act
Section 103
allows for withdrawal from the Consolidated Fund for which the government is
liable.
Section 104
provides for the remuneration of certain constitutional officers for example
judges, without the need for authority from parliament.
Section 105
creates the office of the controller and auditor general as officer in public
service with threefold duty:
1) Satisfied that any proposed
withdrawal from the Consolidated Fund is authorized
By law. If so satisfied, approve the
withdrawal.
2) Satisfied that all monies appropriated
by parliament have been applied for the
Purposes they were so appropriated
and that expenditure conforms to the authority
That governs it.
3) At least once in every year, to audit
and report on public accounts of the
Government of Kenya and several other
offices/authorities.
Should we have
general consequences- how to control those who misuse tax funds?
STRUCTURE
OF TAXATION IN KENYA.
How the
government has to decide which of the taxes to levy.
General purposes
of taxation. - Wealth of Nations (Adam Smith) provides that a good tax system
must have the following:
1)
The subjects of every state ought to contribute to and
support the government as near as
possible in proportion to their respective abilities i.e. in proportion to
revenue they respectively enjoy under the protection of that state.
2)
The tax which each individual is bound to pay ought to
be certain and not arbitral
3)
Each tax ought to be levied at the time in the manner
it is most likely to be convenient for contributors to pay it.
4)
Every tax ought to be so contrived as both to take out
of and take out of the pockets of the people as little as possible over and
above that which it brings to the public treasury of the state.
Cannons of a Good Tax System.
1) Equity/Fairness
People should pay taxes according to their
ability to pay them. Those in the same
Income bracket should pay similar taxes, and
bring fairness and equity both
Horizontally and vertically in terms of
those with higher incomes being called upon to
Pay higher taxes.
2) Certainty of taxes.
Avoid arbitrariness so that quantum and
circumstances are certain and clear to both the
Taxpayer and tax collector who help avoid
unnecessary and costly disputes.
3) Convenience of payment
Where method, manner and payment of taxes
should be convenient to the taxpayer to
Encourage him to produce more.
4) Tax Administration Cost
The cost of administering a tax should be
low for both the taxpayer and the tax
Collector so that tax yields should be lower
than that used in collecting it.
CLASSIFICATION
OF TAXES.
1) Direct taxes
2) Indirect taxes.
Direct taxes are levied on income wealth
or spending power or any combination of the three.
Indirect taxes
are levied on goods and services and may be applied by either unit or
percentage of value or at a flat rate or in any other combination of lump sum.
The relationship
between an individual tax and income of a taxpayer may also help us classify
the effect of those taxes; classified as proportional, progressive, or
regressive.
Proportional
taxes: Percentage of tax payable remains constant even as income rises.
Progressive
taxes: Percentage of income paid will increase as income rises because rates of
the taxes will be increasing progressively as income rises.
Regressive
taxes: Percentage of income paid in
taxes decreases when income rises. These taxes are usually a single figure.
Most of the
people who determine which taxes to charge may actually decide that they
themselves do not get charged or that those applicable to them are proportional
or progressive.
Governor Ronald
Reagan (as he then was) in commenting about the U. S tax structure observed,
“Once you are told the income tax will never
be greater than 2% of the income and
That only from the rich. In our lifetime
this law has grown from 31 to more than
440,000 words. We have received this
progressive tax direct from Karl Max who
Designed it as an essential of a
socialist state”
In the
proportional tax bracket, the steepest rate of increase occurs through the
middle income range where are to be found the bulk of our small businessmen,
professional people and supervising personnel, the very people whom Max said should be taxed out of the system.
At 16,000-18,000
shillings of income, a man reaches the 50% rate; the government can only
justify this bracket on a punitive basis.
There can be no
moral justification for the progressive tax, that’s why bureaucrats
Pretend that it
is proportionate taxation.
1) Direct
taxes
They are levied
on income, wealth and spending power with consequences that usually they are
referred to as direct taxes because attainment brings the taxpayer directly in
contact with the taxman. In some situations, this may not be the case.
They are usually
preferred because they help maintain horizontal equity so that those who earn
the same income are subjected to the same tax rate.
They also
reflect equity in ensuring high income earners who rely more on the state for
either the opportunities to earn that income or opportunity to protect that
income are made to pay.
Progressive tax
rates are utilized then vertical equity is achieved and the state uses the
direct taxes to redistribute income. It is amenable to lower tax avoidance
since people must earn a living.
Direct taxes
have however been criticized on grounds that they may discourage people from
working harder because if through a progressive tax rate, that is both high and
steep, the taxes take a greater percentage of income than the person who earned
it, the person will be discouraged from earning
that income.
Under what
circumstances may the progressive system be both steep and high?
Direct taxes may
encourage tax evasion by encouraging people not to report circumstances
relating to income thus resulting into a black market.
2) Indirect
taxes.
Imposed on
outlay of goods and services. They are indirect in the sense that the prices of
goods may be inclusive of tax so that in paying for the goods, the taxpayer
also pays for the tax. The burden is shifted to the consumer who may not
realize the burden.
It increases the
choices to taxpayers so that the taxpayer may choose to either spend on less
tax or choose whichever of the goods that may be attracting the taxes.
It helps in
inequitable allocation of resources so that some activities that may have an
effect on health, the environment or other public affairs may be taxed out of
existence.
Disadvantages of indirect taxes
Most indirect
taxes tend to be regressive i.e. same rates apply to all the taxpayers and the
more able to pay tend to pay less and tend to be subsidized by those who are
less able to pay hence affecting the vertical equity.
In relation to
foodstuffs, basic commodities etc, low income earners spend less income on
these commodities and in paying the same taxes, shoulder the same budget.
The indirect
taxes tend not to take into account the personal circumstances of the taxpayer.
Income tax
of business
It is divided into
three:
-Capital gains tax
-Estate/Inheritance tax
-Payroll tax
- Income tax on business
Income Tax Act
deals with tax of businesses and individuals.
Section 2
defines business as any trade, profession or vocation and every manufacture and
venture or concern in the nature of trade but excluding any form of employment.
Income tax is
then charged on all the income of the business whether resident or non-resident
which has accrued in or derived in Kenya or is deemed so.
A corporation or
other association of persons will be regarded as being resident if either the
company is incorporated in Kenya or its affairs are managed or controlled in
Kenya by the Minister through a notice in the gazette.
Income to be
taxed is that to be received or accrued through business profit, services
rendered, and income from agricultural activities, royalties, pensions or
annuities.
Foreign sourced
income is not taxable unless the company carries on business partly in Kenya
and partly outside in which case all profits of the company should be liable to
tax subject to any double taxation treaty, which may allow any taxes so paid to
be deducted.
Income tax of individuals
Taxed on
resident individuals on Kenyan sourced income, and on any foreign sourced
income for employment or services rendered. however if Kenyan individual party
carries on business in Kenya and abroad then it will be liable to tax, income
tax will be charged on income from employment services rendered, rental income,
interest pensions annuities, royalties and income from agricultural produce.
Capital gain tax
This is charged
on capital gains realized on disposal of capital assets where gains are
calculated between difference of
purchase and sale price discounted by inflation as measured by consumer
price index for the period in which asset was held.
It was abolished
on 14 June 1985 although it remains to be charged on gains realized on transfer
of property in Kenyan model on or before 14th June 1985. It is still
chargeable under the 8th schedule.
Death or estate duties.
It is charged
upon transmission of property from a deceased owner to his heirs as a form of
transfer of wealth. It helps the state to share in appreciation of assets from
the time those assets were acquired to the time of transfer.
In 1982, MP for Karachuonyo
moved a motion and an Act known as Estate Duty Abolition Act, which abolished
estate duty on transfer of property from the deceased person who died. In
Kenya, it is still charged on deaths that occurred by this date from time of
granting of letters of administration.
Land charges
Stamp duties on
any inter vivo transfers of land and the coming into effect of a registered doctrine.
Local authorities also have land rates for property read in their localities,
others in local authorities paid on transfers
Payroll Taxes
Collected by an
employer PAYE on behalf of employee. Payment for insurance, retirement,
pension, medical and other schemes handled by the employer on behalf of the
employee.
Indirect Taxes
include the following:-
1)
Sales Tax(VAT)
2)
Excise duty
3)
Customs duty
4)
Export duty
5)
Hotel accommodation Tax
6)
Catering levy
7)
Second hand motor vehicle Taxes
8)
Telecommunication Tax
9)
Air passengers Tax
10) Betting
and Gaming Taxes
Sales tax
The sales Tax
Act was introduced in 1973.It levied on Sale of manufactured goods/importation
of goods. It administered this through allowing manufacturers to add Tax on
prices of goods so that eventually they collected the Tax alongside the price.
It was easy to administer due to price control. It is charged on imports so
that importers pays much like customs duty but law did not allow importers to
levy sales tax on goods it did not prohibit it either through prices of goods
not regulated
1999. It was
changed to VAT and it was imposed on goods delivered in or imported to Kenya or
for certain services rendered in Kenya.
Section 6(4)
makes tax a liability of the person making the supply and is payable at the
time of making the supply. Under Section 5(6), on importations charged as if it
were a customs duty payable on the person who imports the goods. The person
receiving the taxable services imports the services to Kenya payable under
Section 6(6). VAT is generally calculated as a percentage of value of the
goods.
Imported goods:
Value as ascertained from customs.
Manufactured
goods: Selling price.
Tax levied at
every stage of production and distribution so that it is added to purchases of
raw materials, fuel and other capital goods and shifted to the final consumer.
Distributors are allowed to deduct input VAT.
Customs Excise Duty
Imposed on
imported goods as a barrier of the entry of those goods into the market. It is
used as a barrier because it increases the value and price of those goods thus
lowering their demand.
(Tariff
barriers) may be applied Ad Van Loren (percentage of value) assessed on CIF
of the goods if applied as specific duties assessed on net weight, size
and quantity of imported goods. Rates depend on whether goods are essential,
substituted or locally manufactured.
Excise Duty
These are taxes
imposed on sale of goods not necessarily imported or deemed addictive or widely
used by the population. Usually assessed on goods not subject to VAT including
tobacco, wines, spirits, other alcohol, soaps matches etc.
Export Duty
Charged on
exports that Kenyans make e.g. flowers,
tea, coffee. Usually charged in a progressive manner depending on the weight or
tonnage.
Accommodation Tax
Charged on all
persons who occupy or hire accommodation in hotels.
Catering Levy
Charged on
hotels and catering establishments and are generally collected and help in
maintaining staff in the industry and paid along the consumer.
Telecommunication Tax
Charged upon
hiring and use of telecommunication equipments, operators and other services affected
by the Telecommunications Commission of Kenya.
Air Passenger Transport Tax.
Charged on all
air passengers.
Betting and Gaming Tax
Betting and
Lotteries Control Act; all forms of betting, casinos and other forms of
betting.
Entertainment Tax
Charged on
nightclubs, discos etc
Video Tax
Charged on
hiring of video tapes.
PERSONAL AND BUSINESS TAXATION
Section 3(1) of
the ITA created a tax known as income tax, which shall be charged for each year
of income upon all the income of a person whether resident, or non-resident, which
occurred in or was derived in Kenya. Subsection 2 identifies the source of this
income as;
a)
Gains and
profits from:
-A business for whatever
period carried on
-Employment or services
rendered
-A right granted to
another for use or occupation of property.
b) Dividends/ Interests
c) -Pension charge or annuity
-Any withdrawals from a
registered pension fund or a registered provident fund or
A registered provident fund
or a registered individual retirement fund.
-Any withdrawals from a registered home ownership savings plan.
d) An amount deemed to be the
income of a person under the Act or rules there under
e) Gains accruing in terms of the
8th schedule which relates to accruals and
Computations of gains from
property other than investment shares.
f)
Capital gains relating to property acquired before 1st
January 1975 and transferred
Before 13th June 1985;
Section 3(1)
1) Each year of
income
2) Upon all the
income- what does income mean?
3) Who is a
person?
4) Whether
resident or non-resident. What does residency entail?
5) Which accrued
in or derived in Kenya.
Year of Income
It is
essentially the base year. A tax base is the object transaction with respect to
which a tax is charged. Since tax is charged on each year of income and a year
is a period of 12 months, the issue of timing is raised. - When within that
year is this tax due?
A taxpayer would
prefer payment of tax in arrears but the government prefers that tax be paid in
advance. Canons of a good tax structure mitigate that the government demands
tax in advance. Year of income is defined as a period of 12 months commencing
on 1st January in any year and ending on 31st December of
that year. This may cause hardships for persons whose accounting period does
not coincide with this calendar year. The government’s financial year is from 1st
July to 30th June. Section 27provides for computation of accounting
years not coinciding with calendar years.
For a company
whose accounting period does not end on 31st December, that
accounting period shall be year of income for all chargeable income of that
company.
For an
individual who makes account for his business periods shorter or longer than 12
months, then such period shall be a year shall be e year of income for all
chargeable income except employment income.
For partnerships
who calculate each partners share of profit, year of income shall be a year
which income was earned except income for employment or services rendered.
The Commissioner
is empowered to make such necessary amendments including reducing accounting
periods for years coinciding to 31st December or reducing longer
periods to 1 year.
To enable the
government to get revenue to finance acts throughout the year several measures
in the Act under Section 12 provides for installment tax since 1980 for persons
who do not pay (P.A.Y.E) on employment income, advance tax chargeable under
section 12 A for those with PSV vehicles, since 1996.
Presumptive tax
is chargeable in section 17A by those paying for any agricultural produce.
Withholding tax
under section 35. Charge and interest where anyone paying charge/ interest/
annuity or insurance commission/ a pension/ consultancy agency or contractual
fee or royalty is registered to withhold tax from the payment and remit it to
the government. The same is applied on non-resident persons where withholding
tax will be deducted from payment on any management or professional fee
alongside other sources. Section 37 provides for withholding tax for emolument
committed as P.A.Y.E for all employment income. All these deductions are
remitted to the government at the end of every month to enable the government
meet its expenditure needs.
What should one do
if income earned in tear one for services delivered is not paid in that year
but is received in year three?
In accounting,
it is solved by accrual / realization method. Accrual method is income treated
whenever received to year in which it accrued. When services are rendered in a
year, realization, treats income, and charges it to the year in which it has
been realized. The Income Tax Act favors accrual method, because section 3(1)
talks of income that accrued in or was derived from Kenya.
In charging all
the taxes, the personal rates and reliefs applicable are issued by the minister
in the Finance Bill after every Budget Day. Section 4-11 elaborates on each of
the sources.
Person
Entity being
taxed. The Act does not define a person to be a natural or individual person.
Companies as defined in section 2.
Trusts- although
some trust income is exempted from income tax, some income may be exempted.
Partnership
Section 3(3)
excludes partnerships from the definition of a person but is useful as conduits
of information relating to income and expenses of partnership as apportioned to
each of the partners for tax purposes.
Clubs may also
be persons unless three quarters of gross receipts are not from members.
Commissioner
of Income Tax vs. Law Society of Kenya
It was argued
that it was exempted from taxation. It was held on appeal that it was not since
it did not have power to refuse admission or to refuse those who qualify as
advocates deemed to be carrying on business and therefore liable to tax.
Section 21 of
the Income Tax Act allows a body of persons including those who may be getting
more than three quarter of revenue from members if they elect in writing to be
treated as carrying on a business.
Resident or Non-resident
Section 3(1)
deals with residency and is defined under section 2.
a) A resident
individual is one who has a permanent home in Kenya and in addition was
Present
in Kenya for any period in that year of income.
b) Who has no
permanent home in Kenya but was present in Kenya:
-For a
period or periods amounting to 183 days or more in aggregate in that year of
Income.
-Was
present in Kenya in that year of income and in each of the two preceding years
Of income of periods averaging more than 122
days in each year of income.
For a Company
1) A company
incorporated under the laws of Kenya
2) A company
whose management and control of affairs was exercised in Kenya in a
Particular year of income under
consideration.
3) A body, which
has been declared as a resident by the minister in the gazette.
As a tax
concept, Kenya uses residency, nationality or domicile and the significance is
that Kenyan residents pay income tax on their income from Kenya and on income
for services rendered anywhere else in the world with reprieve in section 41 of
Double Tax Relief. If worldwide income was earned in a city, where there is a
double taxation treaty
1) Ordinary
residents: Voluntarily accepted for taxation purposes.
2) Habitual residents: Regular physical presence
ending for some time.
Citizenship
refers to law by which a person is governed by birth or if a company by
incorporation while citizenship may be acquired, nationality not. Domicile refers
to a residence acquired as a final abode plus the intention to retain it
permanently.
- It may be
domicile of origin, which may be equal to citizenship because law assigns it at
Birth.
- Domicile of
choice acquired voluntarily upon one attaining legal capacity.
- Domicile by
operation of the law; assigned to those who cannot acquire domicile by
Choice.
Sir
George Arnatoglu vs. Commissioner of Income Tax
The appellant,
in 1960, had a home in Dar es Salaam and was present in Tanganyika for 249
days. In 1961, he sold his home and was in Tanganyika for 124 days. In 1962, he
had no home but was present for 62 days. In the tax assessment for 1962, he was
assessed as being resident but disputed the assessment arguing that he was not
a resident in terms of East Africa Management Act whose section 2 was similar
to Kenya’s.
He argued that
the definition of resident in the 1928 Act did not permit it to aggregate
periods of residency with periods of mere presence.
That averaging
in section 1b (2) meant that four months presence was required in each of the
relevant years.
It was held that
to be permissible under the Act, to aggregate period of residence and those of
presence in territory, period to be averaged in paragraph b (11) was the total
of days spent in territory over the three years.
“I wish to draw attention to the general
scheme of residency. An individual is defined
As residing in the territory if he in
fact does so. An individual is deemed to reside in
The territories if facts are such that
he will not normally be regarded as residing in
The territory or there would be doubt
as to whether he did so. I wish to emphasize
That the deeming provision of this
provision only comes into play if facts are such
That the individual will not normally
be regarded as residing in the territories. I also
Wish to point out that modern
legislature requires something to be deemed that of
Necessity means that it is to be
treated as a thing different from what it in fact is. If
Deeming provisions are resorted to,
then one seeks to ascertain whether a person
Who is in fact not a resident, should
be treated as one. For purposes of deeming
Provision, it is immaterial whether he
had a home in the two preceding years so long
As on the basis of averaging he was
present in each of these two years for the
Requisite period. Appeal dismissed.”
Commissioner
of Income Tax vs. Nooran
The appellant
appealed against the High Court decision that had held the respondent to have
been resident in East Africa in years of income 1962- 1965. The respondent was
born in Mombasa where he had some properties. He then moved to Tanzania where
he lived from 1932-1960. When he went to England for treatment, and for the
education of his children, he had a home in Tanga and a flat in Mombasa. In
1962-1965, he had occupied a guest home at Tanga and eventually a whole house
for intermittent period. He sold it in 1968 and finally settled in Mombasa in
the same year. He retained business and bank accounts in East Africa during the
period he was away in England. In 1964, he became a Kenyan citizen. After
living for England in 1960, he returned to East Africa on 12th December 1962 where he stayed for 54 days. In
1964, he came to East Africa for 52
days. In 1965, he came for 48 days. In 1967, he stayed for a few days. In 1968,
he settled permanently. The issue was whether he had a home in East Africa in
terms of the E. A. Act section 62 and for purposes of clarity. Residence in
territories when applied to any year of income:
-to an individual, this means that an
individual resides except for such temporary
Absences as the commission may determine to
be reasonable in any of the territories
-An
individual shall be deemed to reside in territories if he has a home in any of
the
Territories, which for at least a portion
of the year was available to him and was
Kept for purposes of his use and dwelling.
-The home did not have to be occupied for a
whole year to qualify as a home.
The fact that he
had a home in England was immaterial since a person may have one or more homes at
the same time. Appeal was dismissed.
Normally, a person will be said to be a resident by the
mere fact that the first part refers to temporary absence as the commissioner
may determine to be reasonable does not mean that it lies within the
commissioners power to exclude the first part merely by refusing to deem it unreasonable.
Other jurisdictions
base tax liability on domicile with consequences that those not domicile in the
jurisdiction may not be charged tax or may be charged a higher tax.
I R C vs. Bullock
Bullock
domiciled in Canada but had lived in England for 45 years. During that period, he
won the love and affection of a fair English woman and married her. One day he
told her that if she ever pre-deceased him, he would never return to Canada.
Before this happened, he filed income tax forms indicating that he was
domiciled in England. This was contested by the commissioner and assessed a
higher rate than that of a foreign domicile person upon the first tribunal
ruling in his favor. The commissioner appealed.
Domicile is
residence plus intention to remain permanently. Bullock domiciled in Canada and they assessed a
higher domicile rate.
Bangs
vs. Inhabitants of Brewster
B was a
shipmaster living in Brewster MA went to see oceans and sent his wife to
Orleans in Louisiana with the objective of setting up a new home in Orleans and
shifting from Brewster. Eventually, he joined her there. In the meantime,
authorities demanded tax from Bangs as a domicile of their country, which Bangs
paid under protest and filed a suit to recover the same on grounds that he had
changed domicile to Orleans.
It was held that
his application be allowed since he had sent his wife to Orleans with the
intention that he makes it his new home. That changed his domicile as
establishment of a new home and the intention to retain it permanently in
Orleans entitled him to a refund.
Cesena
Sulphur Co. vs. Nicholson
A company was
incorporated in England to take over
and work sulphur mines in a place called Cesena in Italy. Manufacture, sale and
management of the company business was done in Italy. The MD of the company was permanently
resident in Italy and registered there where three quarters of the shares were
also resident. However, the Board of Directors served in London from where it
controlled sale, order direction and management of the company. Annual General Meetings were also held in
London where dividends were also declared.
The issue was
whether the company was a resident in England to subject the whole of its
worldwide income to tax or whether it was resident in Italy. Since every act of
the company’s management was done in England, main place of management of the
company was London and they were a resident in England with consequences that all
its worldwide income was subject to English taxation.
Section 2
defines residence.
Section 4A deems
any profit of a business partly in Kenya and partly outside Kenya to be that of
a resident company.
Accrued in/ Derived from Kenya
Sec 4(a) deems
certain worldwide income to be accrued in or derived from Kenya. Trouble comes
up in the way courts have looked at it.
Sec 10 deems
certain income to have accrued in Kenya.
Sec 9 (1), (2)
also deems income from use of a ship/aircraft in Kenya ports to have accrued in
or derived from Kenya unless otherwise.
Sec 9(2) income
from business or transmitting cable or radio messages from apparatus
established in Kenya is also deemed to have accrued in or derived in Kenya.
Sec 10 touches
on payments by Kenyan based residents persons and any persons who are non residents in respect of management
/professional fees,royalties,interests,use of property in Kenya and for any
appearance or performance or any place for entertainment or sporting, then any
such payments will be deemed to have accrued in or derived from Kenya and will
be subject to a W.H.T (persons paying withholds tax from that payment and
remits it to the Government.
Esso
standard Eastern i.n.c vs. Tax commissioner
The appellant
was a neo-cooperation but had lent money to a Kenyan co-operation with rights
plus construction of an oil refinery at Mombassa and for working capital account
to loan arrangement, repayment for loan money to be made in New York in U.S
dollars that agreement had also been drawn and where money was paid to the
Kenyan Government. The appellant contested payment of tax on the interest and
the issue was whether interest on loan had accrued in or was derived from Kenya
in terms of Sec 3(1) of the Income Tax Act.
HELD: Appeal be
allowed because the words “accrued” or “derived from” were anonymous and were
the source of interest in this case was the contract made in New York and the
location of the source was New York and thus the interest neither accrued nor
was it derived from Kenya
Ec
Boucher vs. income tax division
The appellant in
1953 and 1955 settled shares in a Kenyan company in discretionary trust in favor
of his infant children by deeds executed in the US. Settler trustees and
beneficiaries were at all relevant times resident in the UK but dividends
accruing to these trusts from shares in 1951-1960 were deemed income of the appellant
under Sec24 of the East African Management Act and assessed that income on him.
The first appeal to the supreme board dismissed the matter. The second appeal
to the court of appeal (East African) was that income being captured by Sec 24
was income of beneficiaries under UK settlement and neither accrued in or was
derived from Kenya. It was held that dividends on Kenyan shares accrued as
income of the settlement on which the trustees would be assessed at standard
rates upon which after such assessment and tax being paid it was then paid to
or for the benefit of the children and should therefore not be chargeable to
tax under Sec 3 because it derives from settlement whose laws was in the UK.
Income
tax commissioner vs. Amboni establishment holdings and five others
First second and
fourth respondent were directors of the sixth respondent company while the
second respondent were executors of the will of a deceased director of the
company and the fifth respondent was managing director of the company. The
company was incorporated in Gurnsey and carried on business in Tanganyika.
Articles of association of the company provided for remuneration of directors
of an additional seven and a half % of the net profit of the company. Upon such
renumeration,the company sought to deduct as an expense the amounts paid for
directors but the commissioner assed the company by denying such deductions and
argued that the same was income and accrued in/derived from Tanganyika and was
subject to taxation. Director not resident in Tanganyika except managing
director duties fund in Gurnsey account. Although the MD was resident in
Tanganyika for some time, his work was mostly in Switzerland where his service
agreement was drawn and where he received his remuneration and neither has
he/any of the other directors remitted any of the remuneration they had
received in Tanganyika of which reason assessment was allowed. On appeal, it
was held that where directors remuneration is paid in good faith under a purely
commercial arrangrement, entered into by the company then the income tax
commissioner cannot question its quantum as expenses. This company not having
been a Tanganyika company director’s remuneration said to be derived from
Gurnsey Switzerland, which are places where to maintain principle and central
accounts, and not from Tanganyika
Concept of Income
Under Section 3,
the sources of income are given and expounded upon by section 4-12. Lord Mc
Naughten observed that income tax from him was tax but did not define income.
Eisner
vs. Macomber
This case dealt
with the issue “is stock dividends income?” Standard O. C. company of California, which had an
authorized share / capital stock of 100 million US dollars, had issued stock
amounting to 50 million US dollars, unissued stock of half its unauthorized
capital. In its trading account had surplus undivided profits invested in
plant, property and other business necessary for the cooperation amounting to
45 million dollars of which 20 million had been earned after 1913 and the
balance after that date. To adjust its capitalization, directors
resolved to issue additional shares to existing shareholders to constitute stock dividend of 50% of
outstanding stock and to account an amount equal to such issue. The new stock was
divided among stockholders and upon delivery of receipts, the respondent was
asked to pay a tax on the same assessed at the value of the new shares. He paid
the tax under protest and sued the commissioner for recovery.
A majority held
that value of shares and not income and therefore should not be taxed.
J Bitney
observed, “The fundamental relationship of capital to income has been much
discussed by economists, the former being likened to the free or land, the
lather to the fruit or crop. The former
depicted as a reservoir from springs, the lather as outlet streams to be
measured by its flow during a period. Income may be described as the gain derived from capital from labour
or from both combined provided it
is understood to include profits gained
through sale/ conversion of capital assets. A stock dividend shows that a company’s
accumulated profits have been capitalized instead of being distributed to
stockholders or being retained as surplus available for distribution in money
or in kind should the opportunity arise. Far from being a realization of
profits for the stockholder, it tends to postpone such a realization, in that
the fund represented by the new stocks has been transferred to capital and is
no longer available for actual distribution. The essential and controlling fact
is that stockholders have received nothing out of the company’s assets for
separate use and benefit. It should contain every dollar of his original
investment together with whatever accumulation resulting from his employment of
his business money in the business of the company still remains property of the company.”
Susna
Oliver and Brandy dessented.
The stockholder
received income equal to the value of stock dividends and should therefore be
taxed on the same.
Financiers
with the aid of lawyers devised long
ago two different methods by
which a corporation can without
increasing its indebtedness keep for corporate purposes accumulated profits and
yet in effect distribute these
profits amongst its shareholders.
1)
The capital stock is increased, the new stock is paid
up with accumulated profits and new shares of paid up stock are then distributed
among stockholders pro rate as dividends.
2)
Arrangements are
made for an increase in stock to be offered to stockholders prorate as per and
at the same time, payment of cash dividends
equal to the amount which the stockholder will be required to pay to the
company if he avails himself of the
right of the new stock. If stockholders take the new
stock, he may
endorse the dividends cheque
received to the corporation and it
thus appears that among
financiers and investors,
the distribution of the stock by whichever method is
called a stock dividend and that the
two methods by which accumulated
profits are legally retained for corporate purposes and at the same time distributed as dividends
are recognized to be equivalent. If stock dividends represents profits are held exempt from
taxation, then owners of the most successful businesses in
America will be able to
escape taxation on a large part of what is
actually their income and so
far as their profits are
represented by stock received as
dividends they will pat those
taxes not upon their income but only upon
the income of their income.
Old
Colony Trust Co. Vs. Commissioner
The company paid
taxes of some of its director sand the issue was whether payment of taxes of a
director was additional compensation and the income to him. It was held to be income and was taxable
because it was in consideration of the services of that employee.
Commissioner
vs. Glenshaw Glass Co.
The respondent
had earned damages which comprised additionally both exemplary damages for fraud and punitive damages
represented two thirds and it was
held that these were
also income because:
-They were an increase in the net worth
of the taxpayer
-Money received that represents those
profits was clearly taxable just like profits
They had been if they had been
earned.
E.
A. N Ltd vs. Income Tax Commissioner
The appellant
bought a plot for purposes of building a petrol station with a view to
distributing petroleum oil products from Caltex under anticipated
distributorship products. Distributor rights however refused and the
appellant sold the plot at a profit whereupon the
Commissioner assessed the profit to tax arguing that they were income to the appellant since
it had changed its business for
petroleum purposes and was now engaged
in trading activity of selling plots for
which it was liable to tax on the profits.
The appellant
appealed and it was held it be allowed since the profit was not from an
adventure in the nature of a business but one from an earlier investment.
Section 4a of
the Income Tax Act deals with taxation
of income from businesses where it
provides that where business is partly
in Kenya and partly outside Kenya, its
deemed to have accrued in Kenya and
though Section 4doesnot define business,
Section 2 does so and defines business as including any trade, profession, vocational or even manufacture adventure and concern in
the nature of trade but does not include employment.
J
Ltd vs. Income Tax Department
The appellants
company carried on insurance business but also invested in equities and
government stock and upon sale of equities and retention of government stock,
at a profit, the commissioner assessed a tax on that profit arguing that this
was income from a trading activity against which assessment the appellant
appealed. It was held that the appeal be dismissed as the appellant had been
involved in the trade of buying and selling stocks and shares.
Income
Tax Commissioner vs. Laringnatesho Ltd
The respondent
taxpayers had been incorporated to carry on a farming business but were allowed
under its objects to purchase and sell shares and stock. From 1967 onwards,
they sold shares and were not assessed to tax. In 1971, when the commissioner
assessed tax on income, earned on shares in and after 1971,the respondent
appealed to the local committee
contending that first, he was not
carrying on business of dealing in shares but
was merely realizing its initial investment for which the local committee held in his favour. The commissioner
appealed to the High Court which
dismissed the appeal arguing that
the failure by the commissioner to raise any assessment on such taxation before 1971 raised a presumption that such profits were not chargeable to tax and
that onus was on the commissioner
to show that purposes for which taxation were carried out had changed before these profits are taxed. The commissioner appealed to the court of appeal which allowed the appeal and held that the High Court ought to have
indicated in referring to findings of
the local committee whether it agreed with them or not and to have
evaluated that evidence and reached
its own conclusion and secondly, that once an assessment to income had been made on the
taxpayer, the onus of proving it was
excessive was placed by the law on the
taxpayer who was required if he disputes
an assessment to object to the same
by a notice in writing. Consequently, these
profits were taxable.
Section 8 of the
Income Tax Act gives that provision.
Bapoo
case
B lived in
Tanzania and was declared bankrupt in 1931.He was later discharged in 1941
during this period of bankruptcy, he managed his wife’s business, which had acquired
two shipwrecks, which he did in order to recover bad debts owed by owners of
the wreck.
After discharge
took over, the wires business had also began to deal in second hand machinery.
After failing to sell the shipwreck, he broke them up to sell them as scrap
metal in which he made some profits. The commissioner assessed the profits made
both from the broken up ship and from the hulks that he sold later. He appealed
the cost assessment where the high court allowed the appeal on the profits from
the sale of the hulks butt affirmed the assessment from the sale of broken up
parts of the ship. The commissioner appealed to the court of appeal of East
Africa and it was held that the commissioners appeal be allowed because
although the single taxation man ordinarily needs not to be a businessman, an
earlier case had held that in specified circumstances, a single tax can amount
to business in East Africa. It was
immaterial that the shipwreck were taken over to liquidate bad debts it being
established that the taxation were an operation or a business in carrying out a
profit making venture and were therefore taxable.
Income
tax v Sidney tatee
The respondent
bought a coffee estate, which he found unprofitable, he abandoned it and began
a quarry in the same farm. It also became unprofitable and he abandoned it. He
subdivided the land, installed sewers and roads and then advertised it for sale.
He borrowed money from a bank, which were then used in these later developments.
Later he sold plots at a profit and the commissioner assessed the profit to tax
arguing he had traded in land and the profits realized were from a business of
trading in land. He appealed against the decision and all that he had done was
to realize the capital investment which the supreme court agreed with against
which the commissioner applied to the court of appeal arguing that tax payers
as an investor in coffee estate had upon abandoning that business notionally
sold the farm to himself as a trader in land on which grounds he had installed
sewer lines and roads upon subdivision and was therefore taxable on profits. It
was Held, The respondent merely realizing earlier investment in land which he
had failed to recover at earlier
attempts at coffee, dairy farming and quarrying therefore not traded in land
and profits were not taxable
Sec 4(b) sets
out the manner of calculating the tax
Sec 4(c)
Taxation of damages and other compensation for loss. The money received under
insurance against loss of profits, then Sec 4(c) assess them in parts and such
a sum is taxed as income of the year in which it is received. It is only these
relating to loss of profits that are taxed
Modern
building ltd v Income tax
The appellant
awarded by the consent a sum of money as liquidated damages in settlement of
all claims in suit for breach of contract on account of having been supplied
with a defective machine by supplier. The commissioner assessed the whole sum
to tax. On Appeal it was held that only these damages for agreed compensation
of a sum had been agreed for unliquidated damages, capital and income and hence
the whole sum wasn’t taxable.Sec 4(d) raises the amount put as read with Sec
15(2)a
Sec 4 (d) aims
at capturing any income recovered in subsequent years when a reserve or
provision to meet any liability has been made if that recovery either releases
liability otherwise makes the reserve unnecessary.
Sec 5 Employment incomes
Gains a profit
from employment defined in Sec 5(2) to include wages, salaries and several
other allowances. The second provision excludes income for subsisting,
traveling, entertainment or other allowance that represents solely the
reimbursement to a resident of an amount expended by him wholly and exclusively
in production of his income from employment
Persons: Any
income in respect of any employment or services by him shall be deemed to be
derived from Kenya, worldwide income may then be subject to taxation.
Importance of
Section 5(2) in excluding reimbursed income in those taxpayers will have used
his sum, of money wholly and exclusively for purposes of carrying income from
employment that will be taxed.
Income received as compensation for
termination of contract of employment
Durga
dass bawa v income tax
The appellant
paid Ksh 100,000 upon termination of distributorship agency, which was written
as an exgrata payment. Thee commissioner assessed the whole sum to tax against
which he appealed. It was held that the payment was taxable.
Southern
Ireland tobacco union ltd vs. Mc Queen
The respondent
was employee of appellant whose services had been terminated. He sued the
appellant and was awarded damages for wrongful dismissal comprising four years salary.
He appealed against the award arguing that it should have been reduced by the
amount of tax payable thereon.Held, appeal be dismissed because although amount
of income tax chargeable on damages for wrongful dismissal ought to be recovered.
Award ought to be paid full award so that they pay tax on that compensation.
Justice Windham observed,
“The sole question before us is whether the word compensation in the above
paragraph can be held to include damages for damages can’t in any case be
taxable till they are recovered before and paid to the plaintiff
Liquidator
manzinde est. ltd vs. I.T commission.
The concern was
whether the appellant who had agreed to pay a sum of money to a purchasing
company in consideration of the purchasing company accepting full and complete
liability in respect of claim made by some of its employees would deduct such a
sum from its income for only and exclusively having been incurred in the
calculation of its income.
Held: The Appeal
is dismissed, as money was not a contingent liability or severance allowance
for the year of assessment.
Sec 5 (2)a
touches on loans given to employees or directors by deeming it to be a benefit
if it is less than the market rate of interest and then applies a prescribed
rate of interest
Sec 6 deals with
income from use of property gains from royalties, rent, premium or similar consideration
for use or occupation of property
Such receipts
said to be income receipts if they do not lead to relinquishing or deducting of
the capital asset itself-this would make proceeds to be capital gains, not income.
Dhanji
v I.T Comm.
The appellants
were property owners in Nairobi. They leased premises to four tenants, in
addition to rent, tenants paid some premiums loosely known as goodwill and the
commissioner assed premiums to tax and the issue was whether they were income
or capital receipts. Held to be an income receipt and therefore taxable.
Sir
Ronald Sinclair vs. Pobs
“There may be
cases where granting of a lease is in substance if not in form, a disposal of
the lessors capital investment. In
such a case, the sum representing the recoupment of this capital will not be income and profit if any
might be either a capital gain or income according to circumstances. If this judgment is thought
to work hardship to the taxpayer, income tax is such that it is useless to try
to relate it to any standard of natural justice”
By which way may
a lessor dispose off all capital investment in
a lease in such a way that
disposal is not treated as a capital gain?
D
Ltd vs. Commissioner of Income Tax.
The appellant was
a landlord of a business premises, which he let out on a long lease. Tenants
got permission to alter the premises on condition that they get them back to
how they were at the end of the lease. At the expiry of the lease, tenants
assessed cost of restoration work and paid the full value to the appellant. The
commissioner later assessed the sum so received to tax arguing that it had
exceeded expenditure actually carried out... The appellant upon unsuccessfully
appealing, applied to the High Court which held that since alterations by the
tenant had depreciated a capital asset, and payment was made to restore the
asset to income producing condition, then this payment was a capital receipt
and therefore not taxable, it being immaterial that the money had not been spent.
Section 6
targets payment on income from the use of intellectual property e.g. patents,
trademarks etc.
Income from
dividends is taxed under section 7 and although Section 3(2) b touches on
income tax and interests on dividends. Section 7 does not spell out the manner
of taxing the same.
Section 10 c
covers the same and deems interest paid by a resident person as income that has
accrued in or has been received in Kenya.
Under section 7,
any dividends received by a resident company is taxed as income of the year in
which it is payable while paragraph c touches tax on any profits realized on a
voluntary winding up of a company which are then distributed because they are
deemed to be incomes from dividends.
Subsection d and
e deem any debentures or redeemable preference shares issued by a company to
its shareholders either at no payment or at a sum less than 95% of nominal
value to be dividends valued either at nominal or redeemable value in the first
place or in the second place at excess of nominal value in the issue price in
the second place.
Consequent
issue: Where a company is deemed to have issued dividends in the circumstance,
tax will be charged on that company. In imposing tax on a company, the
commissioner will be making the company to pay tax that may be due from
shareholders because of shares received. When the company eventually, if at all
distributes dividends to the same shareholders, it would be entitled to recover
the debts paid from dividends due from each of the concerned shareholders,
unless dividends, subsequently declared unpaid are far less than those deemed
to hove been earned earlier.
The Finance Bill
1992 introduces compensation tax on dividends and requires companies to have an
account (dividend tax account) where dividends are acquired from any company it
is invested may also be entered. Section 7a
Interest income
is targeted in section 10. Interest is defined in section 2 as any amount paid
in any manner in respect of a loan, deposit, debt, claim or other right/obligation or any premium or discount by way of
interest, paid in respect of a loan, deposit, debt etc
Section 5 talks
about qualifying interests as that which has fallen due and is the aggregate
interest discount receivable by a resident individual, from a bank or other
institution duly licensed. Some institutions are exempted from 1st
schedule of Income Tax Act.
Income from
pensions and Home Ownership Plans. Section 8 provides that any pension or
annuity and any withdrawals from and payments out of a pension, provided or
individual retirement fund.
Pensions are
payments that have been saved for purposes of securing the life of workers in
retirement and this becomes a security against the risk of living long after
retirement and perhaps not able to afford the lifestyle one was accustomed to
during employment.
Accumulated
pension funds form important sources of investment capital and under section
15(2) b, I.T.A; the government encourages employees who will have formed
schemes attached to employers to deduct any amount paid into the scheme as
pension contributions on behalf of the employee. However, where contributions
are being withdrawn to be used by the employee will become realized in the
hands of the employee and then targeted for taxation with a humane face.
Section 8(4) exempts the first 150,000 Kenya shillings from taxation. Section
8(5) goes on to set out rates of exempting other pension receipts.
-First 360,000
of a lump sum from a registered pension fund.
-First 360,000
paid out of N.S.S.F
Incase of a lump
sum paid out of a home ownership plan, amount used to purchase an interest in
the plan or construction of a permanent house for occupation of depositor, read
in conjunction with the Retirement Benefits Act. Section 22 excludes a portion
representing the capital element of an annuity from the definition of income under
section 3(2).
Section 22 A
limits the operations of section 16(2) d and e with respect to deductibility of
contributions to an annuity by an employee or employee for defined
contributions defined benefits and other retirement schemes sponsored by
employees.
Section 12c Home
Ownership Plans
Exemptions, Deductions, Set offs and
Reliefs.
After
ascertaining the total income from all sources, Law is either of the view that
certain specified income might be exempted from taxation to encourage
recipients or in fear of what recipients would do to the taxman.
In addition,
between expenses carried in earning of that income, have to be deducted from
the total income because the taxpayer may have incurred his own money already
subjected to tax, which he may have expended in the earning of the total
income. Furthermore, either tax already paid, as withholding or advance tax will
need to be set off against any due tax.
Certain Relief
Shelters are granted to certain specified people in certain specified
conditions in order to reduce their tax liability to the extent of the relief.
In this way, the government tries to mitigate the effect of tax on certain
specified groups.
EXEMPTIONS
Section 13 and
14 of I.T.A.
Section 13 leads
us to the first schedule, specifies a person, organizations whose income is
exempted from tax. Effectively means, income they earn will not be subjected to
tax. Regulation 3 of the 1st schedule exempts the president, other
regulations exempt specified parastatals e.g. Tea Boards, Pyrethrum Boards etc.
Income of an
amateur or sporting association, income of a registered pension fund, schemes,
trust schemes, local authorities
Section 14
exempts from tax any interest income payable on any charge on the consolidated
fund.
DEDUCTIONS
Deduction of
funds from income under Section 35 requires any resident taxpayer to deduct
withholding Tax from income payable to non-resident persons.
Section 36
requires the deduction of withholding tax on annuities.
Section 37
requires deduction of tax from employment income (PAYE)
Deduction of
expenses from income on areas that tax payer incurred expenses in earning out
of that income.
Section 3-Gross
income may indicate the taxpayer’s status cannot necessarily be a fair
indicator of tax liability
In allowing
deductions of expenses, the law has to be carefully in distinguishing expenses
of a business nature and those of personal consumption.
Business
expenses are non-discretionary and must wholly and exclusively have been
incurred in the earning of the income. The ones of a personal nature are
discretionary and therefore not allowed to be deducted.
While Section 15
allows certain specified deductions associated with expenses incurred by taxpayers
businesses or investment activities.
Section 15
disallows all personal living and family expenses together with expenses
generally of a capital nature.
ALLOWED DEDUCTIONS
Section 15(2) as
amplified by schedule 2 paragraph a deals with allowing deductions of bad and
doubtful debts. To remain unpaid, and in allowing the deduction we are allowing
the business to continue in production on grounds that it incurred this bad and
doubtful debt as an expense of doing the business. When eventually the business
recovers the bad and doubtful debts, we tax them
Income
Tax commissioner v P ltd
The respondent had lent money on security of a
mortgage over his farm. After attempting to recover his money through a
receivership and failing, it agreed to purchase the farm and transfer it to its
subsidiary in discharge of the whole debt. The respondents share in the
subsidiary company however sold at less than the original debt and the incurred
loss on shares in subsidiary then sought to deduct the loss thereby incurred as
a bad debt, which the local committee allowed but the commissioner appealed
against.
It was held that
the commissioners appeal be allowed because there was no longer any debt due to
the respondent after date of agreement for transfer of the firm which
extinguished the debt
The respondent
that any debt still existed which had become bad because none of the guarantors
of the business had been called to pay up had not established it
The Respondent
bought a capital assent, which upon subsequent sale was now no longer
deductible as a revenue loss since this was a capital loss.
Uganda
Co. Ltd vs. Commissioner of Income Tax
The appellant
operated a business of merchants until 1950. For year of income 1951, had been
allowed to deduct 18,526 as bad debts because it continued to receive income
from Uganda in 1951, received £ 12,023 and in 1953, recovered a further £1000
which the commissioner now sought to include the two sums in income for
purposes of taxation since a reserve for bad debts had already been deducted
from the income of the company.
It was held that the appeal be dismissed because
profits from a trade which had ceased to be carried on were still liable to tax
and the fact that bad debts already provided for but now recovered did not
change their character as gains.
Robson
& Another vs. Income Tax Commissioner
The appellants
were advocates practicing in Nairobi who also doubled up as directors for
various companies. The first appellant had been instructed to incorporate a
company of which he became a director and shareholder based on which positions
he guaranteed the company to obtain an overdraft. The company went into
liquidation and the first appellant was called upon to pay up the guarantee
amounting to Ksh 800,000, which he paid to creditors. In preparing accounts for
the partnership, the appellant sought to deduct the sum from their income as bad
debts being incurred wholly in the process of production. The commissioner
disallowed the pay and they appealed.
It was held that
the appeal be allowed because:
1) The amount
was properly deductible
2) Their
deductibility had not been precluded by the Act.
Mandavia
vs. Income Tax Commissioner
The appellant
received a notice for a return of his income in 1951. He did not object to the notice
within the time specified. He furnished the return where he claimed allowance,
premiums, and bad debts. The commissioner disallowed both deductions in default
of full information in relation to insurance policy and property audited and
credited account for bad debts. At the hearing, the appellant sought an adjournment,
which was rejected, but he produced an affidavit from an accountant who said he
will be away during the hearing but had examined the account. This was rejected
and the appeal dismissed.
It was held that
failure to object in time and furnish particulars requested estopped the
appellant from raising any issues of notice on appeal because he had not
discharged the onus to discharge the assessment as the accountants affidavit
was not sufficient evidence.
Deductions under the 2nd
Schedule (Section 15 (2) (d)
These are
allowed less than six general parts:
1) Deductions in
respect of capital expenses on certain buildings
2) Deductions in
respect of capital on machinery
3) Deductions on
mining machinery
4) Deductions on
agricultural land.
5) Investment
deductions/ allowance
6) Deductions
for manufacture under bond in EPZ for shipping companies
1) Deductions in respect of capital
expenditure on certain buildings
Paragraph 1(1) 2nd schedule allows
TP to deduct any expenses utilized by them on the construction of an industrial
building to be used in a business to be carried on by TP or his lessee. This is
the deduction of the construction expenses for that building. For the building
to qualify, as an industrial one there must be some machinery in the building such
that by the time of the deduction:
-The building
will already have been constructed
-Use will be
manifested by the machinery
Income
Tax Commissioner vs. B (1973) EA 323
TP sought to
deduct expenses of alleged industrial buildings used by TP as stores with no
machinery in them, which ICT disallowed on grounds that a building without
machinery could not be exempted. It was held that allowing the commissioners
appeal that deductions was only available for an industrial building that had
machinery in it. The stores did not qualify.
TP
Ltd vs. Income Tax Commissioner (1974) EA 415
The appellant
had been allowed to operate a casino on government land for 15 years and was required
to release the land to revert to the government after that period. By that
time, he had constructed buildings and
sought to deduct cost
of construction from the gross
income on grounds that the same had been wholly and exclusively incurred in the
earning of the income and that the argument to surrender the land and buildings
to the government made the cost of construction to be an income of
capital expense. The appellant claimed that under Section 141 of the EAIT (management),
Act, which is similar to Section 128 of Kenya,’s Inct Act and which far from
empowering commissioners to allow
deductions, it allows the commissioners discretion to either abandon or
remit/compromise a tax payment under specific circumstances.
It was held that since land and buildings were a capital
asset, their surrender constituted a loss, diminution, or exhaustion and
capital was therefore not deductible
under the Section relied on which merely
gave power to the commissioners to refrain from assessing or tax did not allow deductions.
Income
Tax Commissioner vs. P Ltd
The respondents
owned an industrial building, which they leased to their subsidiary, which then
bought and installed machinery and sought to deduct its cost. The commissioner
resisted where local commissioner allowed the deduction. On appeal, it was held
that the commissioners disallowance is reinstated coz for a deduction for
machinery to be allowed but building and machinery must belong to the same TP
Deductions in respect of capital
expenditure on machinery
Allowed under paragraph
7 which is a depreciation allowance for wear and tear on machinery owned by TP
and used by his business
In dealing with
this deduction, courts are more liberal even in defining what machinery is.
Income
Tax Commissioner vs. I A Ltd (1973) EA 572
The respondent
bought furniture and installed them in its hotels, then sought to deduct costs
of the worth of furniture installed in its hotels as machinery installed in an
industrial building. The commissioner contested this arguing that the only
object that could be attached and become part/structure/industrial building
could be installable. Furniture was movable. It was held that the commissioners
appeal be dismissed because it was not necessary for the plank to be connected
with the cloth for it to be installable.
Paul’s
Bakery & Confectionary Ltd vs. Commissioner of Income Tax
The appellant
purchased machinery after obtaining a dollar domination financing from a Kenyan
bank. At the end of the year, the value of the Kenyan shilling had dropped
against the dollar, which meant TP was to pay more in foreign exchange than
what had earlier been the exchange rate. They computed increase in value of the
loan after conversion of the currencies, which reflected an exchange loss,
which they sought to deduct as a deduction under part of from the value of the
machinery that had been purchased. (The approved rate is 12 and a half %). The commissioner resisted this coz
this was not a loss/expense on machinery but the local committee rejected the commissioner’s
disallowance. An appeal was lodged by the commissioner to the High Court, which
allowed the commissioners appeal.
It was held that
the appeal be allowed coz rule 7 of the 2nd schedule a deduction in
respect of machinery used during
the year and coz the value to be put on the machinery at
the end
of the year so as to compute the
deduction was to be in Ksh calculated on the basis of the prevailing
rate of exchange at the end of the financial year. The deduction be allowed. The
local committee’s decision was to be reinstated and confirmed
Paragraph 7 gives
the various machinery and sets out the appropriate rates to be applied.
Deductions in respect of capital
expenditure on mining activities
Allowed under
Section 17 and is available for mining business where
expenditure is incurred on the search,
discovery and testing of minerals and acquisition of rights over deposition,
provision of machine and construction of
buildings necessary for mining and other
incidental expenses. The rate of
deduction is two-fifths% expressed in the year of starting and a tenth of
expenses in subsequent years.
Commissioner
of Income Tax vs. Buhemba Mines Ltd
The company had
incurred and paid costs worth Ksh 96,940 and successfully resisting a petition
for winding up. The company then sought to deduct legal costs from the total
income that they were costs for a mining company but the regional commissioner
of Income. Tax from Tanganyika disallowed the deduction. The company
successfully appealed but the commissioner made a further appeal
ISSUE: Whether legal
costs were expenses incurred wholly and exclusively in production and income of
the company in terms of Section 14 of the Income Tax Management Act
HELD: These
costs were not expenses wholly and exclusively incurred in production and
deduction was not allowed.
Deductions on capital expenditure on
agricultural land
Allowed under
paragraph 22 where expenses on construction of farm works on agricultural land
for husbandry would be allowed deductions.
Income
Tax Commissioner vs. Kagera Saw Mills
The plaintiffs
cultivated sugarcane on their land where they had a sugar mill and refinery
factory. They incurred expenses on
construction of an irrigation system but sought a deduction on the basis of the construction of farm works on agricultural land which was a 20% deduction. The
commissioner disallowed the
deduction but allowed one at 12
and a half % on the
basis of machinery, the High
Court held that irrigation system housed
diesel engine fixed pump a series of movable pipes connected to a sprinkler
network could be savored into two:
-machinery (diesel engine)
-farmworks (pipes, sprinklers)
Such that 12 and
a half %would be on the machinery and 20% on farmworks. The commissioner appealed to
the court of appeal and the
plaintiffs conceded that pump was
machinery but sought to have a
capital expenses deduction on the purchase, installation and alteration of
machinery in the sugar
mill. The commissioners
disallowed that on grounds that the TP
was engaged solely in the trade of
husbandry and agricultural land
and not into trades of
growing and refining
sugarcane as contended by TP.
Held: The commissioners
appeal be dismissed coz pipes and sprinklers were farmworks and not an integral
part of machinery. As the TP carried on to separate trades of growing and
refining sugarcane, he was entitled to deductions on machinery as applied.
Investment Deductions/ Allowances
Paragraph 24 of
schedule 2.It is essentially for the production of buildings and installation
of machinery therein. For it to be deducted, the taxpayer must own both
building and machinery. The major emphasis of this deduction is to encourage industrialization
in two major fronts.
(1) Allow deductions at a higher rate if
construction of industrial building and machinery is done out of Nairobi and
Mombasa then in the year 1999 the deduction would be at 16% of the cost of
building and machinery.
1990-75 %.The
rates for Mombasa and Nairobi are higher than other towns.
Deductions of capital expenditure on
buildings and machinery for purposes of manufacture under land
Mechanisms of
investment encouraged under customs and
excise Act for people to build industries in which they install machinery in buildings to
be bonded by customs and excise
department in terms of products they make may be meant for export so that on
being bonded can only be released
through a mechanism allowed by the customs department.
Schedule 24a of
the second schedule gives rates for Nairobi, Mombasa and other towns.
By 1992, Para
24B was introduced into the 2nd schedule to take care of deductions of expenditure on machinery for
use in the export processing zones.
When paragraph
24 B is operational, paragraphs 24 and 24A will not be available to industries under the export processing zones
Deductions with respect of shipping
companies
Paragraph 25-Ship
owners who incur expenses on the purchase of new or used ship at rates of 40%
provided only one shipping investment, deduction is allowed on any one ship
S
ltd v income tax ltd
The appellant
company bought two ships and incurred capital expenditure in refitting them to
suite their business. They sold one ship without using it but used the second ship
for which they sought to deduct expenses incurred in re-fitting it. The taxpayer
sought to deduct expenditure for the second ship, which the commissioner
disallowed. The taxpayer appealed contending that he was entitled to the
deduction but the commissioner responded arguing that for this deduction to be allowed
the cost to be deducted must be equal to the total expenditure and in this case,
the cost of refitting the ship was less than 20% of the total expenditure. The
deduction was disallowed. It could only be allowed if used by the purchaser
taxpayer and if cost of refitting the ship for the business of the taxpayer exceeds
25% of the total expenditure. Appeal was dismissed.
Paragraph 25C
deals with deductions under the 9th schedule.Specialised form and
incorporation and expenditure of petroleum companies.
Paragraph 25D
deals with assortment of deductions relating to land, timber and growing of
specified goods thereon
Section 15(2)
paragraphs C, D, F, I, J and L deal with deductions in relation to land.
Paragraph C
allows deductions by owner/occupier of farmland for any expenses incurred on
activities to prevent soil erosion
Paragraph D
allows deduction of expenditure on legal cost and stamp duty for a question of
a lease of less than 99 years.
Paragraph s
allows deductions for legal cost and other expenses incurred in relation to
issuance of security to the public.
Paragraph e:
allows deduction of capital expenditure incurred before the commencement of a
business if it is to set up that business.
Paragraph f
allows deduction of expenditure on structural alterations to premises provided
it is necessary to maintain existing rent but not for any extension to or
replacement to those structures.
Paragraph I
allows deductions of gains of an owner from sell of standing timber which was
growing on land at the time of purchase of that land.
Paragraph j
allows deductions of gain from sell of standing timber by a person whop
purchased right to fell that timber.
Section 15(2)
paragraph L allows deductions of expenditure of a capital nature by the
owner/tenant of agricultural land if it is expected to affect the clearance.
This allowance
was contested in the case of
Kiwege
and Mgude farm ltd v commissioner of income tax
The appellants purchased 3 sisal farms
/estates on which they expended 13805
pounds in clearing the land and planting sisal while on the other they expended
15584 pounds for clearing and planting sisal.Appelants sought to deduct as
expenses monies expended both on the clearing and planting of sisal and on
maintaining the sisal farm. The commissioner resisted this deductions arguing
that this paragraph only allowed deductions for money expended on clearing and
the crop. The appeal was dismissed as the taxpayer was now including cost for maintenance,
which was not deductible under this head, which limited deductions for clearing
and planting.
Rally
estate ltd v commissioner of income tax
The appellant
bought 2 sisal estate and 2 additional land adjoining them from Tanganyika
government for a 99 year lease and a concentration of 491,000 pounds designated
as the full purchase price of which 317,000 pounds was to be paid as premium,
while the balance of 174,000 pounds was to be paid in instalments.The appellant
sought to deduct 174,000 pounds as outgoings and expenses incurred by them in
production of income in terms of sec14 of the East Africa income Tax management
Act of 1952 similar to our sec 15.The commission disallowed it. On appeal, the
High court dismissed it. The court of appeal dismissed the appeal because
amounts of installments of 174,000 pounds were capital expenses and should not
be deducted as income expenses
Commissioner
of income tax v Jaffa brothers ltd
A deduction of
sh 6000 from income of the respondent tax payer was allowed by the High court
notwithstanding that it was an
inducement by the tax payer as the landlord to its tenants in a protected
tenancy to enable them leave the space for the
taxpayer to use for its business. Premises avail to the taxpayer for
generation of income
Income
tax commissioner v cotecha estates
The respondent
taxpayer bought a sugar estate but the price was not apportioned between land
and sugarcane thereon growing as crops. Two years later, he sought to deduct
the price of sugar and the value of growing sugar from its income. The
commissioner resisted. The local committee allowed that deduction but spread it
a full 100,000 over 4 years against which the commissioners appealed and it was
held because purchase of the estate was a capital expense. No amount of growing
sugarcane should be deducted as an income expense. Apportionment of 100,000
pounds over 4 years also refused as it was not permitted by law. Deductions
were only allowed in the year of income.
Miscellaneous deductions
Paragraph G: The
commissioner is allowed to allow deductions he considers just and reasonable representing
the diminution of value of any implements, utensil or similar implement that is
not machinery because machinery will have enjoyed paragraph 2 deductions
Paragraph H
allows withdrawals of subscription/annual fee paid by the taxpayer to a trade
association or club, which has made election under sec22 for its income to be
taxed
Paragraph M
allows deduction of income from a mining company
Paragraph N
allows deduction of expenditure incurred by a person for purposes of research
carried on by him or if that deduction is for-
-expended
-A sum paid to a
scientific research institution that is dully approved by the commissioner as
having the object of undertaking scientific research related to class of business
to which the business relates
Paragraph 3.Sum
paid by University, college or research institution approved by the
commissioner for scientific research related to class of business to which that
business belongs
Kenya
Meat Commission v Income Tax Commissioner
The appeal by
the taxpayer against the commissioners refusal to allow a deduction of
200,000 made by the appellant as a
donation to the Kenya National Fund
on condition that the
money be used for research
or other
work that will benefit the Kenya beef and mutton industry.
HELD: Appeal be
allowed because the donation
incurred by the taxpayer not only wholly and exclusively
for the production of its income but also for the purpose of trade carried on by the taxpayer
within the meaning of section14(2) b of the E.A.I.T.M.A now replaced by section 15(2) N of the Kenya Income Tax Act.
T
Ltd vs. Income Tax Commissioner
The appellant
carried on certain surveys including both thermal and power production. It was
disallowed on grounds that none was on scientific research. On appeal it was
held that it be partially allowed because expenditure on thermal generation
schemes and transmission lines was not on scientific
research but that on hydroelectric
was an activity in natural science and was clearly scientific research.
Paragraph P
allows deduction of expenditure on advertising and marketing.
Paragraph R
allows deduction of amount of emoluments from the employment of a non-citizen individual
under specified circumstances.
Para S allows
deduction of expenditure of a capital nature by a person on legal costs and
incidental expenses relating to issues of share, debentures or other
securities.
Interest on loans & dividends on
shares by building societies
Section 15(2)
allows deduction of dividends paid by building societies on deposits by
members.
Section 15(3)
(a) On money borrowed by the taxpayer
which was wholly and exclusively employed in production of employment income
which is chargeable to tax subject to
that amount of deduction not exceeding
investment income of that loan
which is chargeable to tax.
The above
section also allows deduction of an
amount as interest not exceeding
56,000 p.a. from monies borrowed
from registered financial institutions e.g. banks, coop societies etc If it was applied for the purchase
of residential equipment occupied by
that taxpayer
Provided a
person occupies that residential premise and only one deduction is allowed.
Paragraph C:
Partners are allowed to
deduct amount of excess of any
loss incurred on the partnership in respect
of:
-Deductions on loans realized on investment
in shares.
-Deduction of a business loss. Covered by
section 15(4) which allows deduction of a
Deficit from ascertainment of total income
for a person beginning in 1974 with limitations
On married women whose income is deemed to
be that of their husband.
Subsection (5)
allows deduction of benefits with relation to a person who succeeds to a business either under a will/intestacy
attributable to any loss incurred by the deceased in earlier years.
Section15 (7)
then as it were builds Chinese walls between specified sources of income and…
-Rights for use
and occupation of immovable property, employment of personal services
For wages, salaries and other rewards
-Employment
forming part of wife’s employment income or professional income.
-Agricultural,
pastoral, horticultural, forestry or similar acts.
-Other sources
of income chargeable to tax not falling in the above sub paragraph
SECTION 16: DEDUCTIONS NOT ALLOWED
Takes two
approaches:
-Section 16(1)
Allows specified deductions, which would otherwise not be allowed on
Condition that
some other section of the Act allows them.
Save as otherwise expressly provided for purposes of ascertaining the
total income of a person, no deduction shall be allowed.
-Section 16(2) even
those deductions allowed by any other section of the Act if they fall
On the list in Section 16(2) then they will
not be disallowed.
(a)
Expenditure of a person in maintenance
of himself or family established or for any
Other personal or domestic purpose
including
-Entertainment expenses for personal
services.
-Hotel, restaurant/catering expenses
unless incurred on meals or accommodation on
Business trips or during training
courses or work related conventions/conferences
Alternatively, meals provided for low-income
employees n employment expenses.
-Educational trips for self/relatives.
-Club fees including entrance and subscription
fees
Rosenberg
vs. U.S
The appellant
was a jewelry sales clerk who maintained no home but used his brother’s home in
Brooklyn New York to collect mail. He traveled in line of work and sought to
deduct meals and lodging expenses incurred because they were incurred while
away from home in business.
HELD: While
these deductions would be allowed if
-Reasonable and necessary
-Incurred in the pursuit of
business/ trade
-Incurred while away from home-
taxpayer must have a home.
Deductions not
allowed.
Smith
vs. Commissioner of Income Tax
Taxpayer working couple deducted babysitting expenses on grounds that since Mrs. Smith would have been unable to leave her work, nurse maid
fees should be regarded as a
business expense.
Dismissed.
Childcare was a basic fixation and it was a mistake to allow a nursemaids fees
to be deducted as being essential. Then all expenditure will require to be
deducted yet they are personal expenses, which are not allowed.
Commissioner
of Income Tax vs. John Gray
The respondent
paid money to his estranged wife. The
Legal Committee allowed deductions on the money. The respondent appealed and it was allowed because he was not paying
money as alimony nor allowance pursuant to a written agreement. Since the
effect of allowing deduction was that, same amount, would be income in the
hands of the recipient and then taxed there. This was not the case. Deduction not
allowed.
1958 Act: Education and childcare allowed to taxpayers
who meet certain conditions.
B.
A. Shah vs. Income Tax Commissioner
The appellant
educated his bro 23 years in University, his sister 21 years in Art School. He
sought a child allowance deducted from income coz he was taking care of
children.
ISSUE: Whether
those were his children/whether, the term children included bros and sisters
Or included ones own offspring.
HELD: The term
child in section 52 did not input age but any person with relation of
Illegitimate, adopted, or child. The
bro & sister did not meet this condition hence
Deductions did not qualify.
Rasiklal
vs. Income Tax Commissioner
Section 44 of
the income tax management Act of 1958 claimed deductions because of his
brother-19yrs but living with his parents in India. The argument was that Sec
44 allowed a taxpayer who expended money on children by virtue of a custom of
community to which the taxpayer belonged. He argued that his parents not being
able to maintain their children these were in his custody according to custom.
It was held that since parent had abdicated responsibility to the respondent
and custom was that older children assume responsibility, they were in the
hands of the taxpayer. It was not relevant that they were not his.
(b). Section 16
disallows expenditure recoverable under an insurance contract.
(c) .Income tax
paid on income unless it is in another country
(d) Contribution
to pensions/provident funds that are not operating nationally.
(e) Premiums
paid under annuity contracts.
(f). Expenditure
by a non-resident/one without a permanent resident in Kenya.
(g) Was incurred by a business not carried on
with view to profit.
(h) Expenses for hiring a non-commercial vehicle
after 18th June 1976.
(i) Interest
paid by companies if it either exceeds 3 times of revenue reserves or paid up
capital of all shareholders of capital or sum of all loans incurred 1by the
company by 16 June 1968
(k) Any payment
for rent, hire or other payments unless solely for the use of an asset or whole
some is income in the hands of the recipient.
(l) Expenses
disallowed in the absence of section 7(3), Section 15(2) a, Section 19 and
Section 19(4)
RELIEF
Relief in
Section 29,30,31,32,33(I.T.A).But subsequently the relief in section 31 and 32 were repealed so that we now have personal relief in Section 30 and insurance relief in Section 33.In
Sections 40,41 and 42,the Act had made
provision for double taxation relief.
Personal Relief
Allowed under
Section 30 at the rate determined under the third schedule, which sets rates of
relief. Presently set at 1162 shillings per month, which accumulates to 13942
shillings per year. The effect of this relief is that after total income has
been declared, allowable deductions deducted, and the applicable rate of tax applied,
whatever amount of tax due from the taxpayer is reduced by the amount of
personal relief. Relief is from net tax payable hence, it has more economic
value than a deduction.
Where a taxpayer
comes to a country or leaves in the course of the year, reliefs is restricted
to dates he was either in the country or alive.
Insurance relief (Sec 33)
Calculated at the
rate of 15% of premium paid under an insurance policy either on the tax payers
life or that of his wife/child or it secures a capital sum payable in Kenya
shilling (annuity) or on educational policy for a minimum of 10 years relating
to a term of a life of an education policy begins on 1st January
2003.It had been repealed in 1996 and re-introduced in 2003.
Double taxation relief (Section 41)
Sub Section 1
empowers the finance minister to make double tax treaties with other countries,
provide relief fro-double tax of income tax imposed either by laws of that
country to apply in Kenya or vice versa. The minister must lay it before
parliament and give notice thereof in the Kenya gazette
Section 42
allows the commissioner of income tax to give a tax credit under special
circumstances with a treaty/agreement, which the taxpayer may be required to
pay on income. Section 43 limits time of claiming a tax credit to 6 years.
SET OFF OF TAXES
Here the
deduction of amount of set off from tax due section 39, any tax deducted as VAT
or PAYE or which already borne by a trustee or administrator of estate shall be
deemed to have been paid and received by the commissioner and will be set off
from tax charged on that person.
Section 39: A
person who has paid provisional tax upon provisional assessment will set off
from final tax due.
Section 39A
allows set off of import duty paid under Customs and Excise Act for capital
goods which qualify for depreciation or wear and tear, deductions under 2nd
schedule so that apart from deducting amount of depreciation under the 2nd
schedule, a person is allowed to reduce tax payable by amount of customs paid.
The Act makes
certain provisions
Section 17 sets
out how to determine the income of farmers
Section 18 sets
out how to determine the income of non-resident persons.
Section 19 sets
out how to determine the income of insurance companies.
Section 20 sets out how to determine the
income of unit trusts
Section 21 sets
out how to determine the income of members of clubs and trade associates
Section 22 sets
out how to determine the income of purchased annuities saved for
retirement schemes
Section 28 sets
out how to determine the income of a business that has ceased to trade.
TAX AVOIDANCE
The art of
dodging tax without actually breaking the law or lawfully carrying out of
taxation to missing tax liability. Tax avoidance is said to be legal if it does
not break the law.
Contrasted
with tax evasion-non payment of
due tax that
law charges on ones income.Legislture
may proceed to seal loopholes that give a tax avoidance opportunity while tax payers look
for opportunities within law that limit payment of taxes.
Reactions have
been varied. The judiciary tends to be friendly if the taxpayer has not
stretched the law to engage in tax avoidance.
Lord Sumnre in I.R.C
v Executors observed the
highest authorities have always
recognized that subject is
entitled so to arrange his affairs as
not to attract taxes imposed by
the crown so far as he can do so
within the law and that he may legitimately claim advantage of any terms or omissions he can find in his favor in the taxing statutes in so doing, neither
has a liability nor incurs claims.
Levin
v I.R.C
His majesty subjects are free if they
can, to make their own arrangements
so that their cases may fall
outside the scope of taxing Acts, they incur no legal penalties and no moral censure
if having considered lines drawn by legislature for imposition of taxes
they make it their business to work outside them
Anti-Avoidance Legislation
Because tax
avoidance is a struggle but legislation and ingenious taxpayers on the other
hand, legislature seeks through the introduction of provisions that impose tax
to ensure that objective of raising revenue for the government is achieved and
thus blocks potential loopholes that may be used for tax avoidance.
This may take
any of the following three forms
- May take specific provisions
- May impose specific ant-avoidance provisions
- May use general anti-avoidance provisions
1. Specific provisions
The legislature
may impose tax in certain circumstances
or upon certain taxations whether or not
there is a motive for tax avoidance. It will not give exceptions. It thereby
casts a net so wide that every conceivable taxpayer is caught and perfectly
innocent taxations are subject to tax.
2. Specific anti-avoidance provisions
Law may after
imposing a tax under certain circumstances may aim at specific taxation that
may be entered into for purposes of tax avoidance. Provisions tend to cancel
tax advantages in certain taxations and this cast a duty on courts that interpret
this kind of statutes to consider the taxpayer and whether acts amount to tax
avoidance or give him/her a tax advantage.
Depending on
statutory definitions of tax advantage,
the taxation must be one where if it were
carried out in one way, there would be a liability to pay either tax or
a greater amount of tax than if carried
out in any other way.
Lord Upjohn in I.R.C
vs. .Brebner .However circumscribed circumstances under which a tax
advantage may bee removed by saying, “When the question of carrying out a
general commercial taxation as this was and reviewed the fact that there were
two ways of carrying it out.
1) Paying the
maximum amount of tax
2) Paying more
or much less tax
It would be quite wrong s an unnecessary through inference
that in adopting another course, one of the main object is for
purposes of the section, avoidance of tax. No commercial man
in his right senses will carry out a commercial transaction except a…
3) General anti-avoidance provisions
Seeks to nullify
tax avoidance in general and in England have been rejected as a mechanism of
tax laws- insisted to have specific anti avoidance provisions. In the
Commonwealth countries, this is what the British exported and it is what most
tax laws have for tax avoidance statutes.
Lord Denning in Newton
vs. Commissioner of Taxation (Australia)
The directors of
a company increased the capital and simultaneously made a capital payment to
shareholders out of undistributed profits. Was this arrangement to avoid tax?
It was held that this arrangement was to avoid tax and it was therefore set
aside.
In order to
bring an argument within this section, you must be able to predicate by looking
avert acts by which it was implemented in such a way as to avoid tax
If you cannot so
predicate. You have to acknowledge that taxation is capable of reference to
ordinary or family dealings and as such, they do not fall under this section.
Mancin
vs. I.R.C
The appellant
leased land to trustees upon which wheat was planted. Trustees were to hold the
land for one year, cultivate it at a nominal rent. Under trust, any income that
was to arise was to be held on trust for the benefit of appellant’s wife and
children for which he did a separate trusts.Appelant employed by trustee to plant,
harvest and sell what crop whose proceeds he accounted to trustees. He paid for
the labor and expenses in return. The bulk of the .NET profit was distributed
to the wife for benefit of the children. This continued for three years and the
effect was to reduce appellant’s income, which trust, settled on wife and
children from which the wife and the children claimed allowances and paid tax
at owners rates.
Under general
aanti-avoidancce provision, the commissioner sought to set aside taxation and
hence appealed.Held, dismissing appeal by taxpayer, scheme was advised for sole
purpose of escaping liability on substantial part of taxpayers income.
TAX AVOIDANCE IN KENYA
The
general anti avoidance provision adapted the commonwealth trend. Section 23
empowers the Commissioner of Income Tax to adjust any taxation designed to
avoid tax liability in any way that counteracts that avoidance.
The
commissioner has power to suspend any taxation carried out in any in any
provision of the Act and which tax avoidance intentions on the part of taxpayer,
which he may counteract by adjusting the taxation
Section
24 deals with dividend stripping. This empowers the commissioner where a
company has not declared dividends to direct any undistributed dividends to be
deemed as distributed and have the company pay tax on undistributed dividends
at individual taxpayer’s rates.
Section
25(a) income stripping
Settlement
of income on children and other person’s settlement enable commissioner to deem
settled income. If a child is below 19 years, settlement is deemed valid
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