National Treasury Cabinet Secretary Henry Rotich, November 8, 2016. FILE | PHOTO | NMG
By Toddy Thairu
Summary
- Two main contentious issues surrounding the Kenyan tax amnesty have emerged.
- The first contentious issue relates to which foreign income is covered under the amnesty and thus supposed to be disclosed.
- The second issue is whether compelling repatriation of foreign-held assets is the best approach to ensure re-investment into Kenya
He
followed that up with an invitation to tax professionals and industry
players to a stakeholders’ briefing to make an input in fulfilment of
the constitutional requirement for public participation.
When
Treasury secretary Henry Rotich first introduced the subject of tax
amnesty in his 2016 Budget Speech, the objective was clear: To spur
re-investment in Kenya and encourage compliance by taxpayers with
investments and assets held outside Kenya.
During the
stakeholders’ briefing, the government made it clear that it aims to
achieve two main objectives from this process: (1) subjecting to tax in
Kenya, foreign earned income, and (2) compelling physical repatriation
of foreign held assets.
The consensus between the
Kenya Revenue Authority (KRA) and stakeholders at the briefing was that
it would be in Kenya’s best interest for this amnesty to be successful.
The
KRA referred to two recent successful tax amnesties administered by
India and Indonesia as benchmarks. In Indonesia, for example, the 2016
tax amnesty saw Indonesians declare foreign assets worth about $368
billion held at home and abroad.
Two main contentious
issues surrounding the Kenyan tax amnesty have, however, emerged. How
the government tackles these issues will determine the success or
failure of this amnesty.
The first contentious issue relates to which foreign
income is covered under the amnesty and thus supposed to be disclosed,
while the second issue is whether compelling repatriation of
foreign-held assets is the best approach to ensure re-investment into
Kenya.
With regards to the covered income, the amnesty
guidelines have defined income to include all foreign-sourced income
that would be taxable in Kenya had it been earned in Kenya.
Through
this, the amnesty is essentially looking to net all foreign income
unless that foreign income qualifies as exempt income in Kenya.
The
first and indeed major challenge that arises is that this definition
contradicts the provisions of Section 3(1) of the Kenyan Income Tax Act
(ITA).
Section 3(1) provides that income tax is only
applicable on income accrued in or derived from Kenya — making it a
source-based taxation regime.
Thus, under the ITA, the
only foreign incomes that are taxable in Kenya are foreign employment
income earned by a person who is tax resident in Kenya and foreign
income earned by a business that is carried on partly in Kenya and
partly outside Kenya.
This means that income such as
rental, investment or capital gains earned in foreign jurisdictions is
by law not taxable in Kenya.
The pertinent question
then is why the amnesty guidelines require declaration of all foreign
income. To better understand the quagmire, it is important to consider
the definition of the word amnesty.
This refers to an
undertaking by the authorities to take no action against specified
offences during a certain period. It has also been defined as a
sovereign act of pardon and oblivion for past acts, granted by a
government to all persons who have been guilty of a crime or a violation
of the law.
It is clear from these definitions that
an amnesty is mainly granted to pardon past offences, in the hope of
securing future voluntary compliance.
With regard to
taxation of foreign income in Kenya, an offence is committed under the
ITA if a resident individual fails to declare foreign employment income
or a resident business fails to declare foreign income from its business
that is carried on partly in and outside Kenya.
Therefore
a person who has, for example, earned foreign rental, investment or
capital gains does not commit an offence by not declaring these incomes
in Kenya.
Ideally, such a person does not need to rely
on the amnesty as they have not committed any offence in the first
place. Such a person is also not obliged to disclose that foreign income
in Kenya, since at any rate, it is not income subject to tax in Kenya.
The
amnesty guidelines, however, allude to the fact that all persons who
earned foreign income, whether having committed a non-declaration
offence or not, are required to declare this income under the amnesty.
Granted, an honest and compliant taxpayer may still end up declaring all
their foreign income under the amnesty, that is, whether taxable in
Kenya or not. But the question is whether mere declaration of
non-taxable foreign income does make it taxable in Kenya.
My
view is that it does not. The only way that these foreign incomes can
become taxable is if Kenya changes its taxation system and adopts a
universal residence-based system such as that of the US.
Even
if this change were to occur, the effect would not be applied
retrospectively and hence the amnesty would not be necessary to persons
who have foreign income that is not taxable in Kenya and therefore, who
have not committed any offence.
Without this change,
the declaration of non-taxable foreign income under the tax amnesty is a
moot, and perhaps, academic point.
The second
contentious issue is with regard to repatriation of foreign-held assets.
Under the amnesty guidelines, the KRA is looking to make it mandatory
for Kenyan residents to physically repatriate foreign held assets. While
the government’s intention to spur re-investment into the country is
noble, its approach of compulsory repatriation may not work in the long
run.
One of the challenges that compulsory
repatriation would face relates to physical property held abroad. Such
assets would need to be liquidated in order to repatriate them.
While
one may argue that offshore markets are better developed and hence
efficient to facilitate quick liquidation, a sale of physical assets and
repatriation within nine months would likely be a distress sale in
order to take advantage of the amnesty deadline of December 31, 2017.
Secondly, without foreign exchange controls in Kenya, compulsory
repatriation is not foolproof. This is because an investor may easily
repatriate cash one day as required and the next day, he re-invests the
same cash abroad.
It is, however, important to note
that hard currency inflows that would come into Kenya as a result of
forced repatriation would, at the very least, result in a surge of the
forex reserves and possibly a strengthening of the shilling.
This may also be the reason why the government is looking to make repatriation compulsory.
During
the stakeholders briefing, the KRA repeatedly referred to the recent
Indonesia and India tax amnesties as its benchmark. It is important to
note that both India and Indonesia maintain a residence-based tax
system.
This means that residents of these countries
are required to account for tax on their worldwide income, irrespective
of where such income is earned.
With such a tax system, an amnesty to declare foreign-held income and assets which are taxable in these countries makes sense.
In addition, the Indonesia and India tax amnesties made repatriation of foreign-held assets optional.
However,
declaration of foreign-held assets was compulsory in order to qualify
for the amnesty on income generated by the foreign-held assets. It is no
doubt one of the reasons why these particular amnesties were
successful.
This means that for Kenya’s tax amnesty on
foreign incomes and assets to be successful, the government may need to
change the tax system from a source-based system to a residence-based
system. Perhaps with the current Income Tax Act review, this is the time
to adopt such a change.
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