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​These are some of the insights from last week’s webinar on taxation planning.

​For most people Tax is the largest simple expenditure on their income. It is, therefore, important to ensure that in undertaking their personal financial planning, you understand the various taxes that you pay and find ways and means of ensuring that you pay the least amount of taxes legally.

​ The main types of taxes levied on income and investments include:

​i. Income tax, this is a tax levied on a graduated scale on any income earned. The rate varies up to a maximum of 30% of the income;

​ii. Corporate Tax: This is the tax charged on all the corporates net income after deducting all the company expenses. It varies from 10% all the way to 30% depending on the type of corporate and where, when they were established and if they shares have been listed in exchange recently. The tax is paid in four installments based on the company’s previous year’s performance;

​iii. Turnover Tax: This is levied to small companies with turnover of between Kshs. 1 mn and Kshs 50 mn. They are pretty straightforward and they are 1% of the total turnover. This was recently introduced to help increase the rate of compliance;

​iv. Withholding tax: This is tax charged on consultancy fees and on investment income. For consultancy fees, the tax is 5% of the fees, for dividend income the tax is 5% and for most fixed income instruments the tax is 15%;

​v. Capital Gains Tax: This is tax on the capital gains on either shares or property and it is charged as one is selling to realize the overall gain. The tax is usually at 5% of the capital gains;

​vi. Value Added Tax: This is a tax on the goods and services you consumed. The rate for most goods stands at 16%;

​vii. Excise duty: Similar to VAT, this is charged on goods and services manufactured and imported into Kenya. It is targeted towards luxuries such as bottled water, soft drinks, cigarettes, alcohol and motor vehicles.

​viii. Stamp duty: this is the tax levied as one is registering land into their name. It is charged depending on the location of the land and it is either 2% or 4%.

​Given that tax is such wide-reaching expense and that for some of them it might be difficult to plan around, the key thing becomes how do we plan for that which we have control over. Some of the key considerations while tax planning include:

​i. The source of the income that you have: if for example you are employed it is not easy to avoid the Income tax but if in business you can choose not to draw a salary from your business and distribute your income as dividends;

​ii. The corporate structure of the business: if you’re running your investments separate from you, then the choice of the corporate structure eg Partnership, Sole proprietorship or company determines the tax that one ends up paying and so ensuring this is well thought out is of utmost importance;

​iii. Registration jurisdiction:  Knowing the right country to register the company that you are using for investment is key as local companies are charged lower taxes than foreign companies. If you choose foreign country, ensure you favour those with double- taxation treaties with Kenya as the tax rates are lower.

​iv. Capital Structure: One can either fund their businesses using debt or equity. The interest on debt is an allowable expense so lowers the overall taxable income, however for foreign companies the taxing authority puts into account thin capitalization to ensure that one does not have a company running to high on debt to reduce tax payable

​v. Tax allowable investments: Taking advantage of the tax allowable investments such as contribution to pensions schemes and life investments to help ensure that one is reducing the amount of taxable income.

​ All in all, given that tax plays such a crucial part in getting the overall net return we need to look at it as we make any investment decision for example if you want to invest in the government bond, better to invest in the infrastructure bonds as they are tax exempt and they amplify the return with the 15% tax shield. Ensuring that you understand the tax administration to avoid penalties is another big thing as this also reducing the amount of money you lose to the taxman. When structuring your business and/or investments it is always good to speak to a tax expert and we can connect you to some.

​ In case you have any queries or need a more in-depth explanation on anything here, reach out to us at liz@elizabethnkukuu.com. We also offer advisory services on these issues to corporates and individuals.

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