“You don’t pay taxes-they take taxes.”
Tax planning is the process of arranging your affairs in a way that reduces your tax exposure and liability, legally. Various incentives are offered to the taxpayers, especially in sectors where the government wants to boost growth.
There are various ways in which a taxpayer can comply with the tax laws while taking advantage of saving opportunities.
1.VOLUNTARY TAX DISCLOSURE PROGRAMME
The Voluntary Tax Disclosure Programme(VTDP) was designed to assist taxpayers to achieve tax compliance, by allowing them to voluntarily declare their historical tax liabilities to the KRA and settle the principal tax.
The taxpayer will then obtain, under certain conditions, the benefit of not having to pay the resulting penalties and interest.
The VTDP shall run for three years, from 1 January 2021 to 31 December 2023.
All taxpayers qualify for the VTDP, provided that:
i. The tax liabilities were, accrued by the taxpayer within, 5 years before 1 July 2020. i.e. 1 July 2015 to 1 July 2020;
ii. The taxpayer is not under audit or investigation and is not a party to ongoing litigation in respect of the tax liabilities or any matter relating to the tax liabilities; and
iii. The taxpayer has not been notified of a pending audit or investigation by the Commissioner.
Taxpayers who apply for the VTDP will qualify for relief in respect of:
i. Penalties and interest; and
ii. Shall not be prosecuted for the tax liabilities disclosed.
For the relief to apply, the taxpayer will first be required to settle the principal tax liabilities, as the benefit is only available for penalties and interest.
Taxpayers who opt for the VTDP will be entitled to:
i. 100% waiver, if the principal tax is disclosed and paid within the calendar year 2021;
ii. 50% waiver, if the principal tax is disclosed and paid within the calendar year 2022; and
iii. 25% waiver, if the principal tax is disclosed and paid within the calendar year 2023.
No waiver of the penalties and interest will be available if the principal tax is paid after the third year.
Taxpayers who opt to take up the VTDP are required to do so by way of application to the Commissioner in the prescribed form via the iTax platform.
The agreement with the Commissioner constitutes a waiver by the taxpayer of their rights to seek any other remedy; including the right to appeal concerning the taxes, penalties, and interest remitted to the Commissioner.
The relief from payment of penalties and interest and prosecution shall be withdrawn by the Commissioner where:
i. the Commissioner discovers that the taxpayer failed, to disclose material facts in respect of the relief before the expiry of the agreement entered into with the taxpayer; or
ii. the taxpayer fails to meet the terms of the agreement entered into with the Commissioner.
In such instances, the Commissioner may issue an assessment in respect of the tax liabilities, penalties, and interest or prosecute the taxpayer.
2. CONTRIBUTION TO A REGISTERED RETIREMENT BENEFIT SCHEME
a) When contributing /during employment;
An employee’s contribution to any registered defined benefit fund or defined contribution fund is an admissible deduction in arriving at the employee’s taxable pay of the month.
The employee’s deductible contribution is the lesser of:
i. 30% of pensionable pay.
ii. Employee’s actual contribution
iii. Kshs.20,000 per month
The tax-deductible contribution is currently set at a maximum of Kshs 20,000 per month (Kshs. 240,000 per annum).
b) On retirement;
1) Upon retirement and where the individual desires to receive his retirement savings as a lump sum. A sum of Kshs 60,000 per full year worked and subject to a maximum of Kshs 600,000 is deductible from the lump sum.
The balance is taxed under applicable tax bands for individual income.
2) Members of pension schemes, or members of an individual retirement scheme who opt to use their retirement savings to purchase an annuity (which will generate a periodic pension), will enjoy tax benefit on:
i) The first Kshs 300,000 of the total pensions or retirement annuities received annually are tax exempt.
ii) Personal relief is applied to reduce the taxable income.
3) Pensions for persons over 65 years are wholly tax-exempt.
3. INSURANCE RELIEF
Individuals are entitled to relief of 15% of premiums paid on life insurance policies, education (with a maturity of at least 10 years), or health policies taken out for oneself or a spouse or child.
This combined relief is subject to a maximum of Kshs 60,000 per year.
4. MORTGAGE INTEREST DEDUCTION
Interest incurred on personal mortgages is deductible from gross income before arriving at taxable income, subject to a limit of Kshs 25,000 per month or Kshs 300,000 per annum.
5. CONTRIBUTIONS TO AFFORDABLE HOUSING SCHEME
The Income Tax Act provides benefits for contributions to registered affordable housing schemes, designed and established to enable savings for the purchase of residences.
This can be deducted from gross income, at the rate of 15% of contributions; up to a maximum of Kshs 9,000 per month or Kshs 108,000 per annum.
6. INDIVIDUAL INVESTMENT IN VARIOUS ASSETS to AVOID TAXES ON GAINS
The tax exemption exists where the acquisition and disposal of assets is not a business activity carried on under the guise of personal investments.
You can access this exemption by investing in Unit Trusts or other Collective Investment Schemes such as mutual funds.
Such investment vehicles are subject only to withholding tax on dividends and interest income that they receive, with subsequent distributions from such entities to members being tax-exempt.
7. ESTABLISHMENT OF CHARITABLE TRUSTS OR FOUNDATIONS
Section 10 of the First Schedule of the Income Tax Act provides that; the income of an institution, body of persons or irrevocable trust, of a public character, established solely for poverty alleviation or distress of the public, or the advancement of religion or education, all for public benefit, shall be tax-exempt. While Section 13 provides that the income of a registered trust is exempt from income tax.
Further, contributions made to a tax-exempt entity are exempt from tax and this might attract more donors to contribute to the entity.
8. CHARITABLE DONATIONS
Donations to charitable organizations that hold a tax exemption certificate are tax-deductible.
9. REMUNERATION THROUGH NON-CASH BENEFITS
Where the value of a benefit, advantage, or facility is Kshs. 3,000 per month or Kshs. 36,000 per annum, then that benefit is not subject to tax.
10. REMUNERATION THROUGH MEALS
An employer can provide meals to employees and limit the cost of these meals to the tax-free amount of KShs 4,000 per month (KShs 48,000 per annum).
11. REMUNERATION BY WAY OF SHARES
Remuneration by way of stock options or restricted stock is not common in Kenya. However, a few companies have established Employee Share Ownership Schemes (ESOPs) under which they grant stock options to employees.
Such remuneration is taxable at the earlier of; the date when the option vests on the employee and the date of exercise of the options (for an ESOP),or, at the end of the period of restriction under a restricted stock scheme.
This creates a possible tax exemption of capital gains for any increase in the value of the shares, from the date the shares vest (and are taxed) to the date of the actual exercise of the options.
In conclusion, it is wise engage a tax expert to help you plan your tax according to you current circumstances. Good tax planning can be a great boost in wealth creation!