People and companies typically use tax minimisation methods to scale back their tax burden and maximise earnings. ILLUSTRATION | SHUTTERSTOCK

The tough financial circumstances in Kenya have pushed everybody, together with the federal government and the non-public sector, to be uptight with their cash. Everybody needs to earn more money and spend much less. That’s true of taxes.

People and companies typically use tax minimisation methods to scale back their tax burden and maximise earnings.

Whereas tax avoidance is authorized, some view it as unethical, calling for everybody to pay their fair proportion of taxes.

For Kenya Income Authority (KRA), tax avoidance and tax evasion are two sides of the identical coin. The tax company has grow to be more and more subtle in its try and detect and pursue tax avoidance circumstances.

So, ought to corporations and people make use of authorized tax minimisation methods?

What’s tax avoidance?

That is the usage of authorized strategies to minimise the quantity of revenue tax paid by a person or enterprise, both by claiming as many deductions or credit as it’s allowed or prioritising investments with tax benefits such tax-free infrastructure bonds.

What’s the distinction between tax avoidance and tax evasion?

Tax evasion is utilizing unlawful strategies to scale back tax obligations.

For instance, people or companies could report decrease revenue or increased bills resulting in decreased or no revenue, which attracts much less revenue tax.

Tax evasion additionally contains the smuggling of products, underneath declaration or non-declaration of revenue, tax fraud, dishonest tax reporting, and overstating deductions.

Andrew Warambo, a senior affiliate within the tax apply at Dentons Hamilton Harrison & Mathews, a regulation agency, says that with tax evasion, a person or firm refuses to pay taxes after the legal responsibility has crystalised.

For instance, an employer deducts pay as you earn (PAYE) from staff however doesn’t remit it to KRA. “There isn’t any context the place tax evasion could be authorized,” stated Mr Warambo.

In tax avoidance, an employer can resolve that, relatively than make use of everlasting staff for whom he has to pay PAYE at a price as excessive as 30 %, he “as an alternative, can construction the enterprise in such a means that he will get companies solely from unbiased contractors for whom he pays solely withholding tax,” added Mr Warambo.

Learn: 90 % of corporations didn’t pay company taxes

Are there some types of tax avoidance which can be unlawful?

Typically, there’s a skinny line between tax avoidance and tax evasion. Relying on which facet they discover themselves on, tax specialists disagree on whether or not all types of tax avoidance or tax planning are authorized.

What does the taxman say?

The Kenya Income Authority (KRA) says that the Tax Procedures Act defines tax avoidance as “a transaction or a scheme designed to keep away from legal responsibility to pay tax underneath any tax regulation.”

“The Act additional permits the Commissioner to impose a penalty equal to double the quantity of tax that may have been averted have been a taxpayer discovered to have engaged in any tax avoidance scheme.”

However Nikhil Hira, a tax skilled, says it isn’t simple to show the illegality of tax avoidance.

“Tax avoidance is mostly the place a taxpayer enters right into a scheme, say of restructuring or reorganisation, with the only intention of avoiding tax,” stated Mr Hira.

What are some types of tax avoidance?

In tax avoidance, the person or enterprise makes use of tax planning, revenue shifting, use of branches in jurisdictions with decrease tax charges and utilisation of tax incentives to scale back their tax invoice.

The commonest means for multinational firms (MNCs) to keep away from paying taxes is through the use of Base Erosion and Revenue Shifting (BEPS) schemes.

The Organisation for Financial Company and Improvement (OECD), a membership for principally wealthy nations however which additionally contains Kenya, says BEPS “are tax avoidance methods that exploit gaps and mismatches in tax guidelines, artificially shifting earnings to low or no-tax areas.”

These jurisdictions with low company revenue tax (CIT) are generally known as tax havens. They embrace nations just like the Cayman Islands, Eire, and Mauritius.

Cash shifted might be royalty fee for mental property or curiosity fee on a debt. The cash is also a dividend fee, which attracts a decrease withholding tax within the tax haven.

What’s probably the most outstanding case of tax avoidance in Kenya?

The ‘Pandora Papers’, an investigation primarily based on the leak of some 11.9 million paperwork from 14 monetary companies corporations worldwide, revealed how the worldwide elite used offshore tax havens to cover belongings price lots of of hundreds of thousands of {dollars}.

Retired President Uhuru Kenyatta and 6 relations have been linked to a community of offshore corporations.

In line with the paperwork, Mr Kenyatta, his mom, sisters and brother used foundations and corporations in tax havens, together with Panama, to carry belongings price greater than $30 million for many years.

The usage of secretive trusts and foundations in low-tax jurisdictions is usually seen as an effort to keep away from paying taxes.

How has Kenya tried to handle the issue of tax avoidance?

Within the Finance Act, 2021, the federal government tried to seal loopholes exploited by corporations to keep away from taxes.

The Act launched a brand new rule the place curiosity on debt to a associated firm or third get together that exceeds 30 % of the earnings earlier than curiosity, taxes, depreciation and amortisation (EBITDA) can be subjected to revenue tax.

Holding corporations of multinationals should additionally disclose to KRA the place their earnings, gross sales and belongings are situated and taxes paid to allow the taxman to conduct audits and switch pricing assessments on transactions between linked corporations.

→ [email protected]