All taxpayers have an inherent desire to minimise the amount of
taxes they pay. This could be informed by
two main factors: First, tax is an involuntary mandatory contribution sanctioned by the state and secondly the experiences of wastage and embezzlement of public resources, especially in developing economies.
two main factors: First, tax is an involuntary mandatory contribution sanctioned by the state and secondly the experiences of wastage and embezzlement of public resources, especially in developing economies.
Unlike
the conventional tax avoidance concept, tax planning not only deals with
reduction of tax liability but also deferring payments within the
confines of the law. Deferment of tax payment leads to better management
of cash flows. There are several ways through which taxpayers can
conduct their affairs in order to reduce or defer tax liabilities to a
future period:
Claim of capital allowances: Capital
allowances are an exception to the general rule of non-deductibility of
capital expenditure for tax purposes.
Capital
allowances include wear and tear deduction on machinery, software
deduction, investment deduction, industrial building deduction and
commercial building deduction and they range between five and 150 per
cent of the cost of the asset. Taxpayers should ensure that they
properly claim capital allowances where applicable to reduce their tax
liability.
Deduction of all allowable deductions: Taxpayers should be keen
to ensure that all expenses relating to generation of their incomes have
been properly claimed. Under-claiming of expenses leads to higher tax
liabilities while over-claiming of expenses leads to additional
assessments and penalties.
Claim of tax reliefs: There
are several tax reliefs available under the Kenyan tax legislation. They
include personal relief, insurance relief, mortgage relief and relief
under double tax agreements. Tax reliefs reduce the income tax payable.
Issuance
of proforma invoices: proforma invoices are ordinarily issued instead
of tax invoices. Proforma invoices aid in the management of cash flows
in respect of value-added tax (VAT).
The VAT is due at
the earlier issue of invoice or the date of the payment or supply.
Therefore, issuance of a document reference number allows the taxpayer
to effectively request for payment without triggering VAT liability on
the payment requested and as a result, a timing advantage is created.
Preferential
residential income tax regime: There are several preferential tax
regimes which include: The simplified residential rental income of 10
per cent on the gross rental income earned from residential properties,
15 per cent corporation tax for developers who put up more than 400 low
cost housing and lower corporation tax rates for listed companies.
Proper
documentation: Kenya has adopted a self-declaration tax regime. The
upshot of this regime is that the burden of proving that no taxes are
due lies with the taxpayer. Proper documentation enables a taxpayer to
easily discharge the burden of proof to the right standards. The lack of
proper documentation leads to penalties as well as additional
assessments by the Kenya Revenue Authority (KRA).
Observance
of filing and payment timelines: The tax statutes have imposed heavy
penalties and interest for late filing of returns and payment of taxes.
These penalties can be avoided through timely filing and payment of
taxes. Taxpayers can include the due dates for the periodic taxes such
as VAT and withholding tax on their calendar planners to avoid
forgetting.
Engaging the services of tax professionals:
Tax law is technical in nature and in most times, it is important to
engage the services of a professional in interpreting its application.
In
addition to the engagement of tax professionals, the taxpayer can also
apply for a private ruling from the KRA on the interpretation of various
provisions. Private rulings are binding on KRA but not on the
taxpayers.
In conclusion, taxpayers should avoid
shortcuts in tax matters due to the serious pecuniary or criminal
liability which may arise in the long run.
Samuel Kioko Musyimi is a senior tax associate at KN Law LLP.
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