1. University of Eastern Africa Baraton Presentation on: Analysis of the Government Income Tax Laws, their meaning, application,ethical and International consideration relating to business entities. Presenters: Stanslous N. Keya (Reg. skeyst0931) : Freda Akoth (Reg. sagifr1011)

2. Income Tax
Taxation of Income tax In kenya is govern by the provision of Income Tax Act (cap.470) enacted in 1974.
The commissioner of Domestic Income Tax is mandated to assess, collect and account for the tax.

3. Scope of Income Tax
Income tax is a tax imposed on income(sec 3(11) of the Income Tax Act,
from employment, business,rent, pension,investment and any other
income deemed to be liable for tax.
Any person who has income liable to tax must have a personal income
Indentification number(PIN),generated through KRA online services.
The law requires that certain transactions can not be carried out without
a PIN eg clearance of goods within customes services department,
Installation of water,telephone, electricity meters etc.

4. Income Exempted from Income Tax
Incom me of the president of kenya derived from salaries and allowances paid to him from public funds.
Income of parastatal bodies
Income of Agricultural society
Income of any Local Authoritya
Income of a registered pension scheme
Income of a registered Trust Fund
Income of a registered Home ownership saving plan
Interest on savings a/c held by post Bank
The allowances payable to judges and other constitutional office holders.
Interest upto shs 300,000 earned on housing Development Bonds. The balance is subjected to withholding tax of only 10% which is a final tax.
Income from gov’t securities received by a non resident person.
Dividend received by a company that holds 25% or more of the voting rights of the paying company (previously it was 12.5% upto Dec 2008)

5. RETURNS A person who is chargeable to tax must complete
and submit to the Commissioner of Income Tax a
self assessment annual return on the dates
specified below;
a)Individuals (employes,sole proprietors),
partnerships on or before 30th June of the
following year.
b)Corporate bodies(limited companies ,Trust etc)
on or before the last day of the sixth month
after the end of the accounting year.

6. Married woman Income
Income of a married woman shall be deemed to be the
income the Husband. However following the amendment of
the Act through a finance Bill of 2006, a married woman can
now file her own returns and pay her Taxes in respect to
wifes Employment income,wife’s professional income and
wife’s self employment income.
W.e.f from 1° January, 2009 wife’s self employment income
includes Income from Dividends, interest and rent income.

7. Income of Incapacitated person:
Sec 46 of the income tax Act provides that, income of an incapacited person shall be assessed and tax thereon charged on his trustees, guardians in the same manner and to the same extend as that of capacitated person.
Income of Deceased person:
Sec 48(1) of the Income Tax Act, provides that the Income accrued and received prior to the date of his death, which would, but for his death have been assessed and charged tax on him for the year of income , Shall be assessed and charged tax to his exacutor or administrator

8. Method of tax collection
Tax is collected through various method, the principal ones being;
PAYE – held at source by the employer from employees salaries
Withholding Tax-This is a method whereby, on Agency basis, the
payer of certain incomes deducts tax at source from payments due to certain payees and then remit the tax so deducted to the Commissioner, DomesticTaxes Department. Withholding Tax is mainly
subjected to payment made to irregular earners and non-payroll earners eg by persons in receipt of dividends, Interest income, professional fees, Contractual fees, Royalty etc.
Advance Tax- Collected from those with public service vehicles,commercial vehicles,drivers and conductors of psv
Instalment Tax-Installments spread evenly at 25% of the tax due,
- Payable on or before th~20th day of the 4th, 6th, 9th, and 12th mon~~s for all Taxpayers except those in theAgricultural sector,whose installments are 75% in the
9th month and 25% in the 12th month.

9. Cont’ of tax collection methods
Value Tax-This is atax levied on value added to the cost of goods and services supplied in the country. It is at the rate of 16% currently.
Corporate tax- This is a tax levied on incomes earned by corporate bodies. Currently it’s at the rate of 30% on resident companies and 37.5% on non residents.
Excise duty- This is a tax levied on locally manufactured goods and services.
Custom duty- This is a tax levied on all imports in the country.

10. Employment income Taxable Employment Benefits
All benefits are taxable at the higher of cost of providing the benefit and the fair market value.

11. Saloons and Estates Pickups or Panel Vans cc Shs. p.a. cc Shs. p.a.
a) Motor vehicles
Taxed at the higher of 2% p.m. of the initial cost of the vehicle and the rates prescribed below:
Saloons and Estates Pickups or Panel Vans
cc Shs. p.a. cc Shs. p.a.
Upto – , upto ,200
, over ,400
,600
1751 – , Landrovers & Landcruisers 86,400
,200
Over ,800
Leased and hired vehicles are taxed at the cost of hiring or leasing the vehicle. Where there is restricted use, the Commissioner may determine a
lower rate based on usage.

12. illustration
Mr keah was provided with a company vehicle of 2000cc whose cost was 2m. Determine the taxable benefit?
Solution
on cc rating(2000cc) ,400
24/100*2m ,000 the higher= 480,000

13. (b) Housing Director 15% of total income
Whole-time service director: Higher of 15% of total employment
income or rent paid
Agricultural employee 10% of total employment income
Other employees (including whole-time service director)
15% of total employment income or rent paid, whichever is higher
Rental recovered from an employee is deducted in calculating
housing benefit.

14. (c) Domestic benefits
Benefits including staff meals, club subscriptions, house helps,security guards,water, security, electricity etc. are taxable at the higher of cost or fair market value.
The Commissioner has prescribed the value of benefits where the cost to the employer is difficult to ascertain. The prescribed rates are:
Telephone (incl. mobile) 30% of cost to employer
Furniture 1% of cost to employer
Water(where provided communally) 500pm(200 for agriculture employees)
Electricity(where provided communally) 1500pm(900 for agriculture employees)

15. (d) Employee loans
Loans made prior to 11th Jun 1998 are taxed on the employee at the difference between the interest charged to the employee and the lower of the prescribed interest rate (15%) or the market eg the low interest benefit is computed as follows;
= amount of loan *(prescribe interest rate-interest rate charged)
Loans granted after 11th Jun 1998 are subject to Fringe Benefit Tax payable by the employer at the resident corporate tax rate on the difference between the market interest rate and the interest paid by the employee

16. Pension and Provident Fund Deductable contributions to registered funds in respect of employees is the lower of 30% of pensionable income, actual contribution or Shs. 240,000 p.a. From 1st Jul 2004, employees of tax exempt bodies are to be taxed on contributions in excess of the permitted limits that such bodies make on the behalf of employees to retirement benefit schemes

17. Tax exempt lump sum withdrawals from a:
Registered pension fund - Shs. 48,000 for each year of
pensionable service subject to a maximum of Shs. 480,000.
Registered provident fund - Shs. 48,000 for each year of
pensionable service subject to a maximum of Shs. 480,000
Registered fund payable to the estate of a deceased employee -a maximum of Shs. 1.4 million

18. Tax free employment benefits
Medical services provided to a full-time employee and a whole-time service director (holding less than 5% shares).
Medical benefits provided to a non-whole-time service director subject to a maximum value of Shs. 1 million (w.e.f. 1st Jan 2006).
Education fees of an employee’s dependants or relatives, if taxed on the employer.
Education fees paid by an educational institution for low income employee’s dependants attending the institution.
International passage cost for non-citizen employee recruited outside Kenya(exp on transport and translocation).
Non-cash benefits not exceeding Shs. 36,000 p.a.
Shs. 2,000 per day towards subsistence and traveling allowance forperson working outside usual place of work.
Meals for low-income employees subject to conditions approved by the Commissioner (w.e.f.) 1st Jan 2008).

19. Tax free income
Disabled persons- Kshs 150,000 per month, further Tax deduction Kshs
50,000
Pensioners: Persons above the age of 65 years. Others Kshs 25,000/ m

20. Individual Income Tax Rates(PAYE)
Taxable Income Shs. p.a Rate% CumulativeTax Shs.p.a.
Years 2005/6/7/8/9/10
, ,196
121, , ,432
236, , ,414
351, , ,142
Over 466,

21. Reliefs Years 2008 - 2010 Kshs. Per annum per Month
Personal relief , ,162
Mortgage interest relief on
owner occupied property (for purchase
or improvement) - maximum , ,500
Home ownership savings plan , ,000
(For first 10 years. Interest earned on
deposits of up to Shs. 3 million exempt)
Life, health and education insurance relief
- 15% of premium to a maximum of , ,000

22. illustration
Mr Allexanda is an employee of ABC ltd earned the following income in the year 2010
i)Basic salary 1.35m p.a(PAYE 230,000)
ii) He was provided with accomodation in congo near kawangware which was rented by the co. For shs per month. The market value of the house was shs.20,000 per month. He contributed 4% of his basic salary towards rent.
iii) He was given a car of 3600 cc which had a cost of 1.8m. It’s current mkt value is 1m.
iv) The co. Paid on his behalf his mortgate repayment of sh40,000 per month of which is sh 18,000 p.m was interest in respect to the loan he had obtained from the bank to obtain his residential house.
v) During the year the co. Paid his hospital bills of sh300,000 and the employee’s contribution of shs.100,000 towards his medical bill.The company had a medical scheme for junior staff only.
Required
compute his taxable income and tax payable for the year
N/b where a medical scheme is discriminatory, the employees who benefit are taxed on the benefit, while non discriminatory medical schemes, are not taxable benefits.

23. solution Basic salary 1,350,000 Benefits: House(w1) 330,000
Car on cc =172800
or 24/100*1.8m = higher
Medical bills
Loan
Contribution
Actual
or set limit lower
Taxable Income
workings
House benefit
15%* = higher
or mkt value 20000*12=240000
Actual 30000*12=
Less own contribution 4%* = (54000)
330,000

24. Tax payable Taxable Income Shs. p.a. Rate% CumulativeTax Shs.p.a.
Years 2005/6/7/8/9/10
, ,196
121, , ,432
236, , ,414
351, , ,142 *
Tax payable

25. Ethical issues relating to businessBy
FREDAH AKOTH

26. Ethical issues relating to business
Ethics refers to well founded standards of right and wrong that prescribes what humans ought to do, usually in terms of rights, obligation, benefits to society, fairness or specific virtues.
It also refers to the study and development of one’s ethical standards

27. Ethical issues in Business
There are various ethical issues in business, but unfortunately there are no perfect measurements for all these ethical issues. Some of the common ethical issues involved in businesses are as follows

28. Ethical issues in Business contd
Bribing powerful officials in order to get bids and tenders or bribing competitor employees to get informational leaks
Gender discrimination at work places, employee harassment, minority community participation, working conditions and child labor

29. Ethical issues in Business contd
Business practices involving sourcing of materials, quality of inputs in production, compromising on certain aspects like product quality, safety
Omitting the details of the side effects of the usage of products
Forcing employees to work below minimum wages, violation of workers rights and not complying with health, safety and environmental standards

30. Ethical issues for the tax practitioner
In taxation, there are various ethical issues relating to potential conflicts arising from the various aspects of tax practitioners’ role. They are as follows:

31. The Practitioner as Advisor
His role is to help taxpayer to create transactions and develop facts. This places her in a position where it is necessary to satisfy the client’s desires to minimize the tax burden while at the same time considering the rights of third parties, the public and particularly the tax system when devising a strategy for the client

32. Ethical Prohibitions Concerning Recommendations
The nature of prohibited transactions is such that extreme cases (those clearly fraudulent or clearly supportable) are much easier to recognize than transactions falling somewhere in between. Statutory provisions, which impose civil and criminal penalties for activities such as assisting in the preparation of false documents, regulate actions easily identifiable as noncompliant.

33. Ethical Prohibitions Concerning Recommendations cont
Most transactions falling into the planning area are not fraudulent, yet there is some doubt as to whether the matters will withstand factual and legal analysis. Professional ethical standards are helpful to the practitioner in determining the "realistic possibility" of the factual scales tipping toward the client's position.

34. Ethical Standards in the Tax Planning Context
In the tax planning context, the tax practitioner ought to observe an even higher level of ethics than is required by various bodies. For example, communicating with the client regarding subsequent developments that may affect advice previously given is certainly an important step.

35. Ethical Standards in the Tax Planning Context
Advice based on an existing situation should be tempered with precautionary language to the effect that advice may later change if there are changes in the underlying facts and/or relevant authorities.

36. Ethical standards in the tax planning context
In this context, the practitioners ought to observe an even higher level of ethics than is required in other bodies’ e.g. When communicating with clients regarding other developments that may affect advice previously given.

37. Ethical standards in the tax planning context contd
Also advice based on existing situation should be handled with precautionary language as it may later change if there are changes in the underlying facts/or relevant authorities

38. Practitioners’ obligation with respect to factual and legal bases for advice
This is to provide the client with a competent representation of the law relating to the facts of the case, while exercising due diligence with respect to communications with the client. The practitioner is to determine the client’s potential liability for the substantial understatement penalty

39. Extent of Research required in rendering Advice
A practitioner needs enough technical knowledge and skill to reasonably expect to complete services rendered with professional competence. However, civil tort actions have been historically more effective in delineating competency than have the professionally standards in defining incompetent or inadequate tax planning.

40. Imposed limitations on research
At times the client and practitioner may agree to limit the amount of research to be done but the practitioner is required to do enough research to form an intelligent and informed judgment on the issues at hand.
This process requires the agreement to be reduced to final writing that communicates that the effect is appropriate.

41. Duty to ascertain facts provided by the client
Practitioner does not need to independently verify facts given by a client or third parties if such information is relied upon in good faith

42. Duty to ascertain facts provided by the client contd
In case he discovers inconsistencies or inadequacies in the information supplied, then reasonable inquiries should be made e.g. inspecting the client’s prior years returns when feasible as well as verifying information from third party pass through entities

43. Practitioner obligations concerning plan implementation
He is allowed to assist in the implementation of procedures or plans. However he should not be considered obligated to perform additional services if they are not specified in the engagement letter

44. Practitioner obligation with respect to transaction documentation
In transaction documentation, the practitioner is confronted with ethical issues in deciding whether or not facts created in the document are in accordance with the standards governing his conduct.
Since it is subjective, it is difficult to prove the motive conclusively

45. Practitioner obligation with respect to transaction documentation contd
A practitioner should not create or be involved with the creation of false or misleading information. If the client is unable to commit to measures that provide sufficient evidence of intent, then it is difficult to prove his intent

46. Practitioner obligation with respect to transaction documentation contd
The practitioner should not falsify the dates surrounding the transaction even when timing issues are essential to the tax treatment of transaction
Also it is not advisable for the practitioner to provide blank documentation to the taxpayer with the intent of allowing the tax payer to ‘fill in the dates later ‘

47. Ethical basis of taxation
Taxation is justified because of the following reasons:
Progressive taxes can be used to reduce economic inequality in a society
In democratic governments, it’s the society as a whole who decides on how the tax system should be organized. This is well illustrated by the American Revolution slogan ‘NO TAXATION WITHOUT REPRESENTATION’

48. Ethical basis of taxation contd
It is the general obligation of citizens to obey the law and support in establishing institutions
The conservative believe that tax makes people not to think that the government is costless to them as it would make them demand more government services

49. Ethical basis of taxation contd
The social democrats on the other hand favor high levels of taxation to fund public provision of a wide range of services such as health care and education
Libertarians recommend a minimal level of taxation in order to minimize the protection of liberty.

50. Ethical basis of taxation contd
They fund activities that are necessary and beneficial to society
Finally business tax is justified on the grounds that commercial activities involve use of publicly established and maintained economic infrastructure

51. International relations relating to business entities
Most legal jurisdictions specify forms of ownership that a business can take, creating a body of commercial law for each type e.g
There are laws governing treatment of labor,anti discimination laws,minimum wage laws, workers compensation laws etc

52. The major factors affecting how a business is organized are usually:
organizing
The major factors affecting how a business is organized are usually:
The size and scope of business. A business that wishes to raise money on a stock market will be required to adopt a specific legal form to do so.
Commercial law- most commercial transactions are governed by a very detailed and well established body of rules that have evolved over a very long period of time.
Capital- more laws come into play when businesses need to raise money. A highly complex set of laws and regulations overn the offer and sale of investment securities

53. The major factors affecting how a business is organized are usually contd
Intellectual property- needs protection from competitors for the company to stay profitable. They require patents or copyrights or preservation of trade secrets.

54. i) www.income _tax_overview/www.kra.go.ke
References :
i) _tax_overview/
ii)N.A.Saleemi, ‘Taxation simplified’Saleemi publication ltd.
iii)
iv) business.com/accounting/methods-standards-generally accepted acounting/ html