1. Presentation by: CPA Robert Riitho ICPAK Cooperative Societies Seminar
Nakuru 4th July 2018

2. Presentation outline Taxation Environment Taxation of Cooperatives
Filing of tax returns - Income Tax Returns, Withholding VAT, Excise Tax
Dispute resolution
Emerging issues – Finance Bill, Income Tax Bill and High Court Rulings

3. Taxation Environment Frequent Changes in Laws
Transparency : Internet, Regulatory Authorities, Itax
Aggressive Assessment & Enforcement by KRA

4. Taxation of Cooperatives
Section 19 A of the Income Tax Act
Categorised into 3:
Designated primary Cooperatives
Designated Secondary Cooperatives
Credit and Saving Cooperative Societies
Primary Cooperative – As per Cooperative Act and Income Tax Act, membership limited to individuals.

5. Taxation of Cooperatives
Section 19A does not apply to cooperatives ;
which has been exempted from all the provisions of the Co-operative Societies Act, Cap. 490.
Deemed by Commissioner in his opinion, to be a body carrying on a business for its own profit.
A cooperative registered under the Companies Act – For Example New KCC
These will be taxed as normal business

6. Income Chargeable to Tax Sec 3(1) and 3(2) of ITA
gains or profits from business and royalty
(b)
dividends or interest
(c)
a pension, charge or annuity, withdrawals of schemes
(d)
Rental income
(e)
Agricultural income
(f)
an amount deemed to be the income of a person
(g)
Capital gains
(h)
Income from disposal of immovable property(gain is more than 50%)
(i)
A natural resource income

7. Taxation of Normal Business
Adjusting the accounting profit with non-allowable expense and deducting allowable expenses
Allowable expenses (deductible) are covered under Section 15 of the Income Tax Act : Expenses incurred in furtherance of Business.
Non – allowable expenses are covered under Section 16 of the Income Tax Act : Expenses not incurred in furtherance of business

8. Income Tax Act- Non-Allowable Expenses (Sec. 16)
Expenses not incurred in furtherance of Business
Payment of taxes, penalties, fines
Expenses of personal nature, for self, family, domestic
Expenditure recoverable from insurance contracts
Contribution to a registered pension scheme in excess of Kshs. 20,000 per year.
Expenditure of capital nature

9. Income Tax Act- Allowable Expenses (Sec. 15)
Section 15 of Income Tax Act - expenses incurred in furtherance of Business
Bad Debts
Cash donation to Charitable organization
Expenditure of capital nature incurred with prior approval of cabinet secretary, on construction of a public school, hospital, road or similar infrastructure.
Expenditure incurred in sponsoring sports, with prior approval of the cabinet secretary
Clubs and Subscription paid by employer on behalf of an employee

10. Taxation of Primary Cooperatives
These are co-op societies whose members are individuals. Many of the farmers co-op societies fall under this category.
Section 19A (3) states
“In the case of every designated primary society the income on which tax should be charged shall be its total income for the year of income, deducting there from an amount equal to the aggregate of bonuses and dividends declared for that year and distributed by it to its members in money or an order to pay money.”

11. Taxation of Primary Cooperatives
Details
KShs.
Total Income
xxx
Less: Dividends and bonuses
(xxx)
Taxable surplus
Tax on 30%
Primary Cooperatives can pay dividend or bonus from retained reserves
Any distribution of dividend or bonus will reduce the tax liability. They are encouraged to pay out dividends.

12. Taxation of Secondary Cooperatives
Sec 19A (2) of Income Tax Act.
These are co-op societies whose members are not individuals but the designated primary co-op societies.
Therefore they act as umbrella bodies of unions for primary co-op societies. Examples are KPCU
Taxed as Designate Primary Co-op Societies however the aggregate of bonuses and dividends declared and distributed shall in no case exceed that of the total income of the society for that year of income.

13. Taxation of Secondary Cooperatives
Details
KShs.
Total Income
xxx
Less: Dividends and bonuses
(xxx)
Taxable surplus
Tax on 30%
Dividends and bonus must be paid out of the current year income.

14. Taxation of Credit & Savings Cooperative Societies (SACCOs)
Section 19A (4) states, “in the case of a designated primary society which is registered and carries on business as a SACCO its total income for any year of income shall be deemed to be the aggregate of;
50% of its gross income from interest other than interest from its members. (Interest income)
Its gross income from any right granted for the use or occupation of any property (rental income)
The gains chargeable to tax under sec 3(2)(f) i.e. deemed income. (Capital Gains)
Any other income excluding royalties chargeable to tax under this Act not falling within a, b and c above ascertained in accordance with the provisions of this Act.” (Business income).

15. Taxation of SACCOs Details KShs. 1.
50% of the gross income earned from interest other than interest from its members.
XXX 2.
100% of the gross income from rent 3.
Capital gains where they form part of business income 4.
Other income chargeable to tax ( Loan appraisal fees, Commision )
Total Taxable Income
Less: Deductible expenses against the taxable income – Need for apportioning
(xxx)
Adjusted taxable income
Tax 30%

16. Specified Sources of Income (S.15(7)(e))
Summary
Details
Rent income
Rights granted for use or occupation of immovable property
Personal income
Employment income/ self employment
Wife's employment income/ wife's self-employment income
Farming income
Agricultural, pastoral, horticultural, forestry or similar activities
Pension
Surplus funds to an employer in respect of registered pension or registered provident funds
Extractive sector
Income of a licensee from one licence area or a contractor from one contract area as determined in accordance with the Ninth Schedule.
Other business income
Other sources of income chargeable to tax under section 3 (2) (a) not falling within subparagraph (i), (ii), (iii) or (iv) of this paragraph

17. Tax Rates Corporate (Resident) 30% Corporate (Non- Resident) 37.5%
KShs.
Corporate (Resident)
30%
Corporate (Non- Resident)
37.5%

18. Tax payments and Returns

19. Instalment Taxes- Determination
Current Year Basis
Sec 12 (2) (a)};
the amount equal to the tax that would be payable by that person if his total income for the current year was an amount equal to his instalment income; or
Prior Year Basis
{Sec 12 (2) (b)}
The amount specified in the preceding year assessment multiplied by one hundred and ten percent.

20. Late Payment and Filing
Filing Self Assessment Return Late - penalty is 5% of the tax balance or Kshs. 10,000 whichever is higher.
Late payment of tax balance attracts 20% on the tax due and thereafter interest at the rate of 1% per month
Penalty for underpayment of instalment tax is 20% of the difference between the amount of instalment tax payable and the instalment tax actually paid
The general penalty for offences is a fine not exceeding Kshs.100,000 or imprisonment for a term not exceeding six months or both (S.107)

21. Contentious Issues
Excessive Powers of the Commissioner can deem a cooperative to be a company.
FOSA Income – Taxable income as per the Case of Muramati District Tea Growers SACCO (2015).
Membership – Saccos with corporate membership, the Income Tax Act defines a cooperative as one made of individual members.
Allocation of Expenses between taxable and non taxable income – No method of allocation of expenses in the Act

22. Contentious issues
A debt shall be considered to have become bad if it is proved to the
satisfaction of the Commissioner to be uncollectable per LN No. 37 (2011).
creditor loses contractual right via a court order;
no form of collateral is realisable or proceeds from collateral unable to cover the entire debt;
debtor adjudged insolvent by a court of law;
cost of collecting the debt exceeds the debt itself; or
Efforts to collect the debt abandoned for another reasonable cause.
Deductible as an expense if incurred in normal business course

23. Excise Tax
Introduced on “other fees” charged by financial institutions vide Finance Act, 2012 from 9 January 2013 and applicable to SACCOs registered under the Sacco Societies Act, 2008
‘’other fees’’ defined to include any fees, charges or commissions charged by financial institution but excludes interest and insurance premiums.
Rate is 10% and is payable by 20th of the month following deduction.
Late payment penalty: Higher of 5% of the tax payable or kshs. 20,000 and 1% interest per month on unpaid amount.

24. VAT
Cooperatives are financial institutions and financials services are exempt from VAT. Other incomes such as rent vatable.
Threshold for registration is KShs. 5M or more in 12 months.
Registration and other formalities being done on-line, including VAT Returns.
If registered file monthly VAT returns by 20th of the subsequent month.
Late payment penalty: Higher of 5% of the tax payable or kshs. 20,000 and 1% interest per month on unpaid amount.

25. Withholding Tax
Withholding tax” is deducted on specific payments in accordance with the provision of the Income Tax Act.
The payer acts as an agent for KRA
Withholding tax is an advance tax but can be a final tax in other cases.
A certificate of withholding tax to be issued to the person on whom tax has been withheld to facilitate claims of advance tax.
With migration to iTax, claim of WHT is only possible if the tax deducted is remitted through the online system by the payer

26. Withholding Tax on: Royalties Agency and contractual fees Dividends
Common Payments subject to WHT
Royalties
Dividends
Interest
Commission
Management, professional and Training fees
Agency and contractual fees

27. Withholding tax rates Description Residence Status Residents Non-
Dividends 5%
10%
Commission
Others ( Insurance is 5%)
20%
Interest
- Housing Bonds
15%
- Other sources and Deemed
Rent
30%
Lease of Equipment -
Royalties,management, professional, Training
Contractual 3%
Pension
0- 30%

28. Withholding tax Double Tax Treaty Rates
Payee Resident in
Dividends
Interest
Royalties
Management & Professional Fees %
Canada 10 15
Denmark 20
France 12
Germany
India
17.5
Norway
Sweden
South Africa
U.K
12.5
Zambia

29. Tax Disputes & Resolution
Tax decision
Objection
Objection decision
Notice of Intention to Appeal
Filing appeal to TAT
Filing appeal to High Court
Filing to
Court of
Appeal

30. Tax Disputes – Objections
Timeliness – Submit Objection to KRA within 30 days of receiving tax demand/assessment.
State the grounds of objection rest objection.
Objection decision can be appealed by issuing to KRA notice of intention to Appeal with 30 days of th decision.
File Appeals Documents with TAT within 14 after filing the notice of Intention to Appeal.
Fee payable at the Tax Appeals Tribunal is Kshs.20,000
Appeals from TAT can be High Court, Court of Appeal, Supreme Court

31. Tax Disputes – ADR Constitution of Kenya Revenue statutes
Alternative Dispute Resolution is supported by:
Constitution of Kenya
Revenue statutes
The Tax Appeals Tribunal Act
Benefits of ADR
Expedite process of dispute resolution
Decrease cost of dispute resolution associated with litigation
Enhance and manage relationships

32. Emerging Issues - Finance Bill
Employment Act
National Housing Development Fund (NHDF) introduced
Employer contributions – 0.5% employee’s gross emoluments
Employee contributions – 0.5% gross earnings to a maximum of KShs 5,000 (01 October 2018)
Tax amnesty
Amnesty returns extended to 30th June 2019
Covers year of income ending December 2017
Repatriated funds excluded from provisions of Proceeds of Crime and Anti-Money Laundering Act (01 July 2018)

33. Emerging Issues - Finance Bill
Excise Duty
Description
Current rates
Proposed
(Robin Hood Tax)Money transferred by banks, money transfer agencies and other financial institutions, above KShs 500,000.
0.05
Motor vehicles of tariff no and (private passenger vehicles of cc rating exceeding and 3000 for diesel and petrol respectively)
20%
30%
Effective Date
1. July 2018

34. Emerging Issues - Finance Bill
Tax Procedure Act
Obligations of a tax representative
Where a taxpayer has more than one tax representative, each tax representative shall be responsible for the tax obligation for which the tax representative has been appointed.
Interest
Late payment interest increased from 1% o 2%

35. Emerging Issues - Finance Bill
Tax Procedure Act
Penalties
Late return filing penalty - 5% of tax payable or KShs 2,000 in relation to an individual
Late submission penalty for VAT and Excise duty at the rate of 5% of tax payable subject to a minimum of KShs. 10,000
Late submission penalty for incorporated entities at the rate of 5% of tax payable subject to a minimum of KShs. 20,000
Late tax payment penalty 20%
Late filing penalty not to apply where extension to file a return has been sought
Waiver exceeding KShs. 1,500,000 to be approved by the CS (Effective 01 July 2018)

36. Emerging Issues - Finance Bill
Proceeds of Crime and Anti- Money Laundering Act
Enhanced due diligence measures on relationships and transactions originating from higher risk countries
Include SASRA as one of the supervisory bodies to be monitoring money laundry (01 October 2018)
Tax Appeals Tribunal Act
To align with the TPA; time taken out for ADR to be excluded from time for dispute resolution.
Encourage use of alternative dispute mechanisms to resolve tax disputes

37. Emerging Issues – Income Tax Bill, 2018
Taxation of income from cooperatives
Designate Primary and Secondary Co-op Societies to be taxed on the aggregate of bonuses and dividends declared and distributed shall in no case exceed that of the total income of the society for that year of income.

38. Emerging Issues – Income Tax Bill 2018
Taxation of income from SACCOs

39. Emerging Issues – Income Tax Bill, 2018
Losses

40. Emerging Issues – Income Tax Bill, 2018
Tax Rates

41. Emerging Issues – Income Tax Bill, 2018
Tax Rates

42. Emerging Issues – Income Tax Bill, 2018
Dividends

43. Emerging issues - Income Tax Bill, 2018
Withholding tax on accruals

44. Emerging Issues - Income Tax Bill, 2018
Capital allowances
Description
Current rates
Proposed
Commercial buildings
25%
10% p.a
Hotel buildings
10%
60%
Petroleum gas storage facilities
150%
Educational buildings
50%
Hospital buildings
Nil
100%
Hospital equipment
Restriction for Non-Commercial Vehicles
KES 2M
KES 3M
Investment deduction on Manufacturing outside Nairobi, Mombasa and Kisumu

45. Emerging Issues - Income Tax Bill, 2018
WHAT IS NEXT
Treasury will amend the DRAFT Bill and take it to Parliament for discussion
Lobbying through Parliament
The new Income Tax Act is expected within the FY

46. Emerging issues - High Court Ruling – Tax Procedure Act
High Court declared Sec 44(1) & (2), 60 (1) & (3) and 59 (4) of TPA as unconstitutional
S 44 (1) & (2) applies to seizure of goods whose owner whose owner the commissioner believes has not paid or will not pay value added taxes and excise duty.
S 60 (1) empowers KRA to have full access to a premise, documents, data storage for the purpose of administering tax law. S 60 (3) empowers the commissioner to seize documents and storage device and require the owner to answer questions.
S59 (4) empowers the commissioner to obtain documents including electronic, regardless of any law on privilege or public interest or contractual duty of confidentiality

47. Q & A Sessions CPA - ROBERT RIITHO ERNST & YOUNG
Telephone Contacts: