Taxation of Extractives Industry in Kenya - RSM Ashvir

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Taxation of Extractive Industries

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in accordance with the Ninth Schedule.

Taxation of Extractive Industries © RSM Ashvir

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Taxation of Extractive Industries

Presented by: Ashif Kassam

General Definitions

• A resident person in relation to a body corporate means: – that the body is a company incorporated in Kenya; – that the management and control of the affairs of the body was

exercised in Kenya; or – that the body has been declared by the Minister by notice in the

Gazette to be resident in Kenya.


General Principles in Taxation of Extractive Industries • Charge to Tax - Income tax shall be charged for each year of

income upon all the income of a person, whether resident or non-resident, which is accrued or was derived from Kenya.

• Taxation of a licensee (mining rights including prospecting and extraction), contractor (exploration, and development, production and transportation of petroleum and natural gas up to point of export or into a refinery but excludes refining) or a subcontractor (any person supplying services to a contractor or a licensee excluding an employee) shall be in accordance with the Ninth Schedule.

• Geothermal operations to be taxed similarly to mining operations

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excluding immovable property (royalties etc).


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Tax Rate and Basis of Taxation for Extractive Industries

• Extractive industries taxed in accordance with the Act, subject to

modifications in the 9th Schedule. • Other parts of the Act therefore apply fully • Where there is any inconsistency with the Schedule and the Act, the

Schedule shall prevail.

Tax Rates % rate Licensee that is a company and a contractor operating through a resident company (9th Sch 2 (3) & 3rd Sch Head B 2(a) / 9th Sch 7 (3)(a))

30%

Non-resident company having a permanent establishment (9th Sch 7 (3)(b))

37.5%


Taxation - Specified Sources of Income - S 15 7(e)

• Specified Sources - Gains or profits from one specified source shall be computed separately from the gains or profits from another specified source and separately from any other income of that person.

• Loss may only be deducted from the gains or profits derived from

the same specified source in the following year.


Taxation of Non-Specified Sources • Rent. • Surplus funds withdrawn or refunded to an employer in respect of

registered pension or provident funds. • Income of a licensee from one license area or a contractor from

one contract area as determined in accordance with the Ninth Schedule

• Other sources of income chargeable under 3 (2) (a) not falling under sources above. This covers gains or profits from a business i.e. trading, manufacturing, disposal of a mining or petroleum right or interest, rights granted for use or occupation of property

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the consideration for the disposal reduced by the cost of the interest.


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Taxation of Non-Specified Sources • Other income which is taxable separately:

– Dividend or interest. – The net gain derived on the disposal of an interest in a person, if the

interest derives 20% or more of its value, directly or indirectly, from immovable property in Kenya.

– A natural resource income. – Any other income deemed under the Act or rules made under the Act.


Hedging Transactions - Specified Sources • Hedging transaction means a transaction entered into by a

licensee or a contractor to manage commodity risks.

• Heading transactions shall be treated as a specified source of

income, unless the hedging transaction was entered into by a licensee or a contractor that has an annual turnover of less than Shs 10 million, and was approved by the Commissioner.


Farm-outs and Their Tax Implications

• Net gain derived on the disposal of an interest, if the interest derives 20% or more of its value, directly or indirectly, from immovable property in Kenya is deemed to be income accrued in or derived

from Kenya.

• Immovable property means a right, an interest in a petroleum agreement, mining information or petroleum information.

• Net gain in relation to the disposal of an interest in a person means

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– The consideration given by the transferee for the interest wholly or partly includes the transferee undertaking some or all of the work commitments of the licensee or contractor under the right of agreement.

• Consideration - the total amount received or receivable for the

disposal, including the fair market value of any amount in kind determined at the time of disposal.

• Cost - means the total consideration given for the acquisition of the

interest, right, or information, including the fair market value of any amount given in kind determined at the time the amount is given.


Farm-outs and Their Tax Implications • Farm-out agreement arises when:

– A licensee or a contractor enters into a farm-out agreement with a person (“transferee”) for the transfer of an interest.

• The consideration received by the licensee or the contractor for the interest shall not include the value of any work undertaken by the transferee on behalf of the licensee or the contractor.



• If the transfer is deferred until the transferee completes some or all of the work commitments, than:

– The amount in money payable under the agreement before the transfer of the interest shall become taxable in the year of income in which the amount is payable; and

– The value of work undertaken by the transferee on behalf of the licensee or the contractor shall be excluded in the consideration.

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Licensee - a person who has been granted a mining right.


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• The net gain to be included in income chargeable to tax is:

– If the interest derives more than 50% of its value directly or indirectly from immovable property in Kenya - the full amount of the net gain.

– If the interest derives less than 20% of its value, directly or indirectly,

from immovable property in Kenya - no liability to tax.

– If the interest derives between 20% and 50% of its value directly or indirectly from immovable property in Kenya - the net gain shall be prorated based on the value of the interest derived directly or indirectly from the immovable property in Kenya to the total value of the interest.


Farm-outs and Their Tax Implications • A licensee or a contractor shall immediately notify the Commissioner,

in writing, if there is a 10% or more change in the underlying ownership.

• Underlying ownership - an interest in the person held directly or

indirectly through an interposed person or persons, by an individual or by a person not ultimately owned by the individual.

• The licensee or the contractor is liable, as an agent of the non-

resident person, for any tax payable under this Act by the non- resident in respect of the disposal.


Taxation of Mining Operations Mining operations - authorised operations undertaken under a

mining right. Mining right - prospecting right or an extraction right. Prospecting right - :

A right to prospect for minerals granted under the Mining Act. An authority or right to search for geothermal resources granted

under the Geothermal Resources Act. Licence area - area that is subject of a mining right.

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Taxation of Mining Operations Mineral - a geological substance whether in solid, liquid or gaseous

income shall be allowed in priority to the later years.


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form occurring naturally in or on the earth or in or under water, in mine waster or tailings and includes the minerals specified in the First Schedule but does not include petroleum, hydrocarbons, gases or groundwater.

Based on the above, minerals like diatomite, gypsum, anhydrite,

sulphur, dolomite, kaolin, limestone, sodium or potassium compounds which were excluded under the definition of minerals under the ITA are now included.

Minerals still excluded include common clay, murram, sand,

sandstone, gravel, brine and bauxite. Taxation of Extractive Industries © RSM Ashvir

Taxation of Mining Operations - Treatment of Losses

A loss in relation to mining operations in a licence area for a year of income arises if: The total deductions of a licensee in respect of the mining operations

undertaken in the licence area during that year of income exceed the

Total income derived from such operations in the area for the year.


Taxation of Mining Operations - Treatment of Losses A deduction for expenditure incurred by a licensee in a license area

during a year of income shall only be allowed against the income derived from the license area during that year.

A loss suffered in a license area for a year of income shall be carried forward and allowed as a deduction against the income of a licensee from the licensed area in the following year of income.

Any loss not extinguished shall be carried forward to the next following year until the loss is fully deducted or the mining operations in the license area cease.

Where there are multiple year losses, the loss of the earliest year of

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If:

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A licensee ceases mining operations under a mining right in a license

area; and Has unutilised losses which have not been extinguished; The licensee may elect to write to the Commissioner to treat the loss in

relation to another license area in which the licensee undertakes mining operations if the area covered by the second-mentioned license area falls wholly within the area covered by the first-mentioned license area.



If: A licensee ceases mining operations under a mining right in a license

area and has a loss in relation to that license area for that year of income and does not carry mining operations in another license area, he may elect by notice in writing to treat the loss against the income of the previous year of income from that license area.

Carry back of unutilised losses limited to 3 years of income from the year of income in which the loss arose.


Taxation of Mining Operations - Prospecting Expenditure

Prospecting expenditure means expenditure incurred in undertaking

operations authorised under a prospecting right, other than social infrastructure expenditure or expenditure to which Part II of the Second Schedule applies, and includes expenditure incurred in acquiring: An interest in a prospecting right from the Government or under a

farm-out agreement. Prospecting information from the Government or under a farm-out

agreement.


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Taxation of Mining Operations - Prospecting Expenditure

Social infrastructure expenditure means capital expenditure incurred

by a licensee on the construction of a public school, hospital, road or any other social infrastructure.

Such infrastructure requires prior approval from the Cabinet Secretary, National Treasury.


Taxation of Mining Operations - Prospecting Expenditure Prospecting expenditure allowed as deduction in the year of income

in which it is incurred.

Where:

An interest in a mining right or information is disposed, the cost of which has been deducted as a prospecting expenditure;

Or where the prospecting expenditure claimed is subsequently recovered;

The disposal consideration or the amount recovered is charged to tax under 3 (2)(a)(i) as a gain or profit from business in the year of disposal or recovery.


Wear and Tear Deduction - Sch 2 Part II / 9th Sch 4 (3)

Nature Rate 100% deduction allowed for machinery first used to undertake operations under a prospecting rightClass I: Tractors, combine harvesters, heavy earth-moving equipment and such other heavy self-propelling machines of a similar nature as the Commissioner in his discretion, having regard to the likely usage and depreciation, in any particular case may agree (lorries over 3 tonnes included by practice) Class II: Computers and peripheral computer hardware, calculators, copiers and duplicating machines

100% (wef

1st Jan 2015)

100%

(wef 1st Jan 2015)


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Wear and Tear Deduction - Sch 2 Part II / 9th Sch 4 (3)


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Nature Rate

Class III: Other self propelling vehicles, including aircrafts 15 (1) / (6) - Where capital expenditure is in excess of Shs 2 million (wef 1st

Jan 2006) in respect of a road vehicle, other than a commercial vehicle or a vehicle used by a person whose main business is that of hire or sale of vehicles and such vehicles are used exclusively for hire or stock-in-trade, the expenditure shall be restricted to Shs 2 million

100% (wef

1st Jan 2015)

Class IV: All other machinery including ships (by practice, also includes furniture, fittings and office)

100% (wef

1st Jan 2015)


Taxation of Mining Operations - Extraction Expenditure

Extraction expenditure means capital expenditure incurred by a licensee when undertaking operations authorised under an extraction

right, other than social infrastructure expenditure or expenditure to which Part II of the Second Schedule applies, and includes expenditure whenever incurred in acquiring: An interest in a mining right other than that incurred as prospecting

expenditure. Mining information other than that incurred as prospecting expenditure. A right to extract minerals granted under the Mining Act. A right to extract geothermal resources granted under the Geothermal

Resources Act.



Commencement of Commercial Production means the first 30 day consecutive days during which the average level of production during 25 highest production days during the 30 day period reaches the level as determined by the CS for Mining.

Written down value in relation to an interest in a mining right or

information of a licensee means the cost of the right or information reduced by the deduction allowed to the licensee.

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Extraction expenditure is deductible equally in the year of income in

which it is incurred and the next four subsequent years, and the total amount deducted shall not exceed the expenditure.

Where the expenditure is incurred before the commencement of

production, it shall be deemed to incur at the commencement of commercial production.

Where commercial production starts mid-year, the amount of deductible expenditure shall be prorated based on the number of

days during which commercial production took place during the year

divided by the total number of days in that year. Taxation of Extractive Industries © RSM Ashvir

Taxation of Mining Operations - Extraction Expenditure Where an interest in a mining right or information is disposed, the

cost of which has been deducted as an extraction expenditure: No deduction shall be allowed in the year of disposal; and Where the consideration received exceeds the written down value, the

excess shall be charged to tax as under 3 (2)(a)(i) as a gain or profit from business in the year of disposal; or

Where the written down value exceeds the consideration received, the excess shall be allowed as a deduction in the year of disposal.

Where the licensee recovers or recoups an amount deducted as

extraction expenditure, the amount recovered or recouped shall be charged to tax as under 3 (2)(a)(i) as a gain or profit from business in the year of disposal.


Taxation of Mining Operations - Rehabilitation Expenditure

Approved rehabilitation plan means a plan for the rehabilitation of a mine site approved by the CS for Mining.

Rehabilitation fund means a fund or account required to be

established under a mining right to provide for the future payment of remedial work to the license area and which is jointly managed by the CS for mining and the licensee.

A contribution made by the licensee to a rehabilitation fund in

accordance with an approved rehabilitation plan shall be allowed as a deduction for the year of income in which the contribution was made.

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Taxation of Mining Operations - Rehabilitation Expenditure

– Total income derived from such operations in the area for the year.


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Any amount accumulated or withdrawn for the rehabilitation fund to

meet expenditure incurred under an approved rehabilitation plan shall be exempt from tax. Any amount returned to the licensee shall be charged to tax as under 3 (2)(a)(i) in the year of withdrawal.

Where an expenditure is made by a licensee using funds other than

those made directly or indirectly from the rehabilitation fund, such expenditure shall be allowed as a deduction in the year of income in which the expenditure is made.

Any surplus remaining in the rehabilitation fund at the time of

completion of the rehabilitation shall be charged to tax under 3 (2)(a)(i) in the year in which the rehabilitation is complete.


Taxation of Petroleum Operations • Contractor - a person with whom the Government has concluded a

petroleum agreement and includes any successor or assignee of the person.

• Where more than one person has signed a petroleum agreement,

each person shall be considered as a contractor for the purposes of this Schedule.

• Contract area - the area that is the subject of a petroleum agreement

and, if any part of that area is relinquished pursuant to the agreement, contract area means the contract area that was originally

granted. Taxation of Extractive Industries © RSM Ashvir

Taxation of Petroleum Operations - Treatment of Losses

• A loss in relation to petroleum operations in a contract area for a year of income arises if:

– The total deductions of a contractor in respect of the contract operations undertaken in the contract area during that year of income

exceed the

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Taxation of Petroleum Operations - Treatment of Losses

viability; or – Any other work that is necessarily connected with the above activities.


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• A deduction for expenditure incurred by a contractor in a contract area

during a year of income shall only be allowed against the income derived from the contract area during that year.

• A loss suffered in a contract area for a year of income shall be carried

forward and allowed as a deduction against the income of a contractor from the contract area in the following year of income.

• Any loss not extinguished shall be carried forward to the next following

year until the loss is fully deducted or the petroleum operations in the contract area cease.

• Where there are multiple year losses, the loss of the earliest year of

income shall be allowed in priority to the later years. Taxation of Extractive Industries © RSM Ashvir

Taxation of Petroleum Operations - Treatment of Losses • If:

– A contractor ceases petroleum operations and has a loss in relation to that contract area for that year of income, he may elect by notice in writing to treat the loss against the income of the previous year of income from that contract area.

– Carry back of unutilised losses limited to 3 years of income from the

year of income in which the loss arose.


Taxation of Petroleum Operations - Exploration Expenditure • Exploration operations - work authorised under a petroleum

agreement in the search for petroleum prior to the approval of a development plan and includes:

– Geological, geophysical, and geochemical surveys and analysis; – Ariel mapping; – Investigation of subsurface geology; – Stratigraphic tests; – The drilling of wells to test a geological feature and assess commercial

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Taxation of Petroleum Operations - Exploration Expenditure

agreement.


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• Exploration expenditure - expenditure incurred in undertaking

exploration operations authorised under a petroleum agreement,

other than social infrastructure or expenditure to which Part II of the Second Schedule applies, and includes expenditure incurred in acquiring:

– An interest in a petroleum agreement from the Government or under a farm-out agreement; or

– Petroleum information relating to exploration operations from the Government under a farm-out agreement.


Taxation of Petroleum Operations - Exploration Expenditure • Exploration expenditure shall be allowed as deduction in the year of

income in which it is incurred.

• Where:

– An interest in a petroleum agreement or information is disposed, the cost of which has been deducted as a exploration expenditure;

– Or where the exploration expenditure claimed is subsequently recovered;

– The disposal consideration or the amount recovered shall be charged to tax as under 3 (2)(a)(i) as a gain or profit from business in the year of disposal or recovery.


Taxation of Petroleum Operations - Development Expenditure

• Development expenditure - capital expenditure incurred when undertaking operations authorised under a development plan, other

than social infrastructure or expenditure to which Part II of the Second Schedule applies, and includes expenditure whenever incurred in acquiring:

– An interest in a petroleum agreement other than incurred as exploration expenditure.

– Petroleum information other than that incurred as exploration expenditure.

• Development plan - a plan prepared and adopted under a petroleum

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business in the year of disposal. Taxation of Extractive Industries © RSM Ashvir

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• Commencement of Commercial Production means the first day of

commercial production as determined under the petroleum agreement.

• Written down value - cost of the interest or information reduced by

the deduction allowed to the contractor.



• Development expenditure is deductible equally in the year of income in which it is incurred and the next four subsequent years, and the total amount deducted shall not exceed the expenditure.

• Where the expenditure is incurred before the commencement of

commercial production, it shall be deemed to incur at the commencement of commercial production.

• Where commercial production starts mid-year, the amount of deductible expenditure shall be prorated based on the number of

days during which commercial production took place during the year

divided by the total number of days in that year. Taxation of Extractive Industries © RSM Ashvir


• Where an interest in a petroleum agreement or information is disposed, the cost of which has been deducted as a development expenditure:

– No deduction shall be allowed in the year of disposal; and – Where the consideration received exceeds the written down value, the

excess shall be charged to tax as under 3 (2)(a)(i) as a gain or profit from business in the year of disposal; or

– Where the written down value exceeds the consideration received, the excess shall be allowed as a deduction in the year of disposal.

• Where the contractor recovers or recoups an amount deducted as development expenditure, the amount recovered or recouped shall be charged to tax as under 3 (2)(a)(i) as a gain or profit from

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Taxation of Petroleum Operations - Decommissioning Expenditure

• Approved decommissioning plan means a plan for the rehabilitation of


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a mine site as approved by CS.

• 9th Sch 11 (1) - A transfer made by the contractor to an escrow

account in accordance with an approved decommissioning plan to finance expenditure expected to be incurred by the contractor in the abandonment or decommissioning of the petroleum operations shall be allowed as a deduction for the year of income in which the contribution was made.


Taxation of Mining Operations - Rehabilitation Expenditure • Any amount accumulated or withdrawn form the escrow account to

meet expenditure incurred under an approved decommissioning plan shall be exempt from tax. Any amount returned to the contractor shall be charged to tax as under 3 (2)(a)(i) in the year of withdrawal.

• Where an expenditure under an approved decommissioning plan is made by a contractor using funds other than those made directly or indirectly from the escrow account, such expenditure shall be allowed as a deduction in the year of income in which the expenditure is made.

• Any surplus remaining in the escrow account at the completion of the decommissioning of the contract area shall be charged to tax under 3 (2)(a)(i) in the year in which the rehabilitation is complete.


Taxation of Petroleum Operations - Paid-on-Behalf

• Where the Government receives a portion of profit oil inclusive of taxes payable by the contractor under this Act, then such taxes will be limited to the petroleum operations and shall exclude:

– Any tax payable on any gain made by the contractor or any other person on a disposal, directly or indirectly, of any interest in the petroleum agreement; or

– Any tax that the contractor is liable under the Act to deduct from a payment made by the contractor.

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Taxation of Extractive Industries - Allowable Expenditure

• Other allowable expenses under the Act:

– All expenditure (subject to certain restrictions) which is wholly and

exclusively incurred in the production of that income.

– Expenses incurred prior to the commencement of business where these would have been deductible if incurred after the date of commencement (deductible on the date on which the business commenced).

– Legal fees and stamp duty incurred in connection with an acquisition

of a lease not exceeding ninety-nine years for premises used or to be used for business.


Taxation of Extractive Industries - Allowable Expenditure • Other allowable expenses under the Act:

– An entrance fee or annual subscription paid to a taxable trade association.

– Club subscriptions paid by an employer on behalf of an employee (provided taxed on the employee as a benefit).

– Sums contributed by an employer to a national retirement benefit scheme created by a written law.

– Expenditure, which the Commissioner considers just and reasonable, incurred on advertising and promoting (whether directly or indirectly)

goods and services provided by that business. – Operating and finance lease payments paid by the lessee under a

lease contract where the title of the asset leased always remains with

the lessor.


Taxation of Extractive Industries - Allowable Expenditure

• Other allowable expenses under the Act:

– Donations made, subject to certain conditions, to a charitable organisation registered or exempt from registration under the Societies Act or the Non-Governmental Organisations Co-ordination Act, 1990, and whose income is exempt from tax under the Income Tax Act, or to any project approved by CS Treasury.

– Approved capital expenditure by the CS Treasury on the construction of

a public school, hospital, road or similar social infrastructure.

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• Where the Government of Kenya has a DTA with a Government of

another country, the amount of WHT deducted shall be the lower of the amount specified under the 3rd Sch Head B Paragraphs 3 and 5

or the amount specified in the DTA.

Taxation of Extractive Industries - Disallowable Expenditure • The following expenses are specifically disallowed:

– Non-business and personal expenses (expenses not wholly and exclusively incurred in the production of income).

– Personal or domestic expenditure including: – Personal entertainment. – Hotel and restaurant expenses other than those incurred on business

trips, training courses and seminars, and meals provided to employees on business premises.

– Vacation trip expenses except passage for a non-citizen expatriate staff. – Educational fees for an employee’s dependents or relatives. – Club fees (entrance and subscriptions) except club subscriptions paid

by an employer on behalf of an employee.

– Expenditure or loss which is recoverable under an insurance contract or indemnity.

– All donations with the exception of those specified above. Taxation of Extractive Industries © RSM Ashvir

Withholding Tax • “Management and professional fees” means a payment made to a

person, other than a payment made to an employee by his employer, as a consideration for managerial, technical, agency, contractual, professional or consultancy services however calculated.

• “Consultancy fees” means payments made to any persons for acting

in an advisory capacity or providing services on a consultancy basis.

• “Agency fees” means payments made to a person for acting on

behalf of another person or groups of persons, or on behalf of the Government and excludes payments made by an agent on behalf of a principal when such payments are recoverable.


Withholding Tax • “Training fees” means a payment made in respect of a business or

users of training services designed to improve the work practices and efficiency of an organisation, and includes any payment in respect of incidental costs associated with provision of such services.

• “Contractual fees” in the context of “management and professional

fees” shall mean payment for work done in respect of building, civil or engineering works.


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Withholding Tax on Gross Amount Upon Payment * Indicates Final Tax

Resident

Non- resident

Royalties and Natural Resource Income 5% 20%*

Dividends NB: i) 3rd Sch 3 (d) - Rate of dividend paid to citizens of East African Community Partner States is 5% / ii) 7 (3) - Not final tax for resident specified financial institutions

5%*

10%*

Dividends paid to companies having 12.5% or more voting power

Exempt 10%*


Resident

Non- resident

Contractual fees 3% 12.5%*

Management, professional or training fees i) For some reason, training fee has not been covered in 34 (2) meaning that tax deducted at source for non-residents is not final tax. ii) For residents, tax to be deducted where the aggregate value is Shs 24,000 or more in a month.

5% 12.5%/ 20% (for training)*

Withholding Tax • “Royalty" means a payment made as a consideration for the use of or the

right to use (a) the copyright of a literary, artistic or scientific work; or (b) a cinematograph film, including film or tape for radio or television broadcasting; or (c) a patent, trade mark, design or model, plan, formula or process; or (d) any industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific equipment or experience, and gains derived from the sale or exchange of any right or property giving rise to that royalty. • Natural Resource Income means:

– An amount including a premium or such other like amount paid as a consideration for the right to take minerals or a living or non-living resource from land or sea.

– An amount calculated in whole or in part by reference to the quantity or value of minerals or a living or non-living resource taken from land or sea.



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Resident

Non- resident

Rent, premium or similar consideration for the use or occupation of immovable property (land & buildings)

-

30%*

Rent, premium or similar consideration for the use of property other than immovable property except aircraft, aircraft engines, locomotives or rolling stock (equipment hire)

-

15%*


Resident

Non- resident

Interest (including Government bearer bonds of at least 2 years duration)

i) 3rd Sch Head B 3(j) -12.5% in respect of any interest deductible under paragraph 5(2)(g) of the 9th Sch.

15%

15%*

Deemed interest on interest free loans in respect of thin capitalisation

i) While deemed interest is included in S 10 and S 35, it has not been included in 34 (2)(e) meaning that such amount deducted is not final tax.

-

15%*



Taxation of Subcontractors

• Subcontractor - a person supplying services other than a person supplying services as an employee to:

– A licensee in respect of mining operations undertaken by the licensee.

– A contractor in respect of petroleum operations undertaken by the contractor.

• A non-resident subcontractor means a subcontractor that is not a

resident and includes a subcontractor that is a foreign government or foreign government body.

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a branch, an office, a factory, a workshop, and a mine, an oil and gas well, a quarry or any other place of extraction of natural resources, a building site or a construction or installation project which has existed for six months or more where that person wholly or partly carried on business.


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• A non-resident sub-contractor who derives a fee for the provision of services (service fee) to a licensee or contractor in respect of mining or petroleum operations shall be liable to pay non-resident withholding tax rate on the gross amount of the service fee as follows, which shall be final tax in Kenya:

– Fee paid by a contractor - 5.625% (37.5% at an assumed margin of 15%).

– Fee paid by a licensee - 20%.



• Withholding tax is not applicable if the subcontractor provides services through a permanent establishment in Kenya, in which case it shall be income accrued in or derived from Kenya and

assessed on him.

• The onus of deducting the withholding tax is on the licensee or the contractor paying the service fee to the non-resident and the withholding tax is deductible at the earlier of when the account of the non-resident subcontractor is credited with the service fee or the time the actual fee is paid.

• The due date for payment and filing of the withholding tax returns

are the same as for other withholding tax requirements. Taxation of Extractive Industries © RSM Ashvir

Business with Non-Resident Persons

• A permanent establishment in relation to a person means a fixed place of business and includes a place of management,

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person. • The income earned by a PE in Kenya shall be computed disregarding any

foreign exchange loss or gain with respect to net assets or liabilities purportedly established between the permanent establishment in Kenya and the non-resident.

• Non-resident person includes both the head office and other offices of the non-resident. Taxation of Extractive Industries © RSM Ashvir

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Business with Non-Resident Persons • The Income Tax Act empowers the Commissioner to adjust profits accruing

to a Kenyan resident where such a person enters into transactions with a related non-resident or through a PE and the transactions are such that that they produce either no profits or less than the ordinary profits which might be

• Where a resident person or a person having a PE in Kenya makes a

payment to another person and the payment is incurred in the production of income accrued in or derived from Kenya or in connection with a business carried on or to be carried on, in whole or part in Kenya, the amount thereof shall be deemed to be income which is accrued in or was derived from Kenya.

• The provision shall not apply to a payment made or purported to be made by a PE of a non-resident person to that non-resident.

• Non-resident person shall include both the head office and other offices of the non-resident person.

• Applies in respect of management or professional or training fees; royalty or natural resource income; interest and deemed interest; use of property; and net gain the disposal of a mining / petroleum asset.



• Where a non-resident person carries on a business in Kenya which consists of manufacturing, growing, mining, producing, or harvesting, whether from land or from water, a product or produce, and sells or utilises outside Kenya that product or produce in a business carried on by him outside Kenya, the gains or profits for the Kenya business for tax purposes shall be such amount as would accrue if that product or produce would have fetched if it had been sold wholesale to the best advantage.


expected to accrue to the resident person if the transactions had been conducted by independent persons dealing at arm’s length.

• The income earned by a PE shall be computed disregarding any expenditure incurred in respect of interest, royalties, management or professional fees paid or purported to be paid by the PE to a non-resident

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• For the purpose of ascertaining taxable profits for a business carried on in

Kenya, no deductions shall be allowed in respect of expenditure incurred outside Kenya by a non-resident person other than expenditure which the

Commissioner determines that adequate consideration has been given. In particular, no deduction shall be allowed for:

– Remuneration for services rendered by non-resident directors (other than whole time service directors) who have a controlling interest

unless the amount is less than Shs 150,000. – Only those reasonable executive and general administrative expenses

incurred outside Kenya by that person which the Commissioner determines just and reasonable.


Anti-Avoidance Provisions • Where the main purpose or one of the main purposes for which a

transaction was effected was the avoidance or reduction of liability to tax for a year of income or that the main benefit which might have been expected to accrue from the transaction in the 3 years immediately following the completion thereof was the avoidance or reduction of liability to tax, the Commissioner may direct that such adjustments be made as he considers appropriate to counteract the avoidance or reduction of liability to tax which could otherwise be effected by the transaction.

• The Commissioner may: – Charge tax to persons who, but for the adjustments, would not ne

charged to the same. – Charge a greater amount of tax that would be charged but for the

adjustments. Taxation of Extractive Industries © RSM Ashvir

Anti-Avoidance Provisions - DTAs • Where an arrangement exempts or excludes from tax income

derived from Kenya or the arrangement results in reduction in the rate of Kenyan tax, then such benefit shall not be available unless 50% or more of the underlying ownership of that person resident in the other contracting state is held by an individual or individuals who are residents of the other contracting state.

• Not applicable if the in case of a company listed in a stock exchange in that other contracting state

• Person includes an individual, company, partnership, trust, government or similar body or association.

• Underlying Ownership in relation to a person means an interest in the person held directly, or indirectly through an interposed person or persons, by an individual or by a person not ultimately owned by the individual.


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Anti-Avoidance Provisions - Information to the Commissioner

• To notify the Commissioner the following changes within 30 days of

occurrence: – Place of business, trading name or contact address – 10% or more of the shareholding – Beneficial ownership in case of nominee ownership – Full identity and address of the settlors and beneficiaries of the trust – Identity and address of all the partners – On cessation or sale of business, all the relevant information regarding

liquidation or details of new ownership.


Avoidance of Tax by Non-Distribution of Dividends

• Where the Commissioner is of the opinion that a company has not distributed to its shareholders as dividends within a reasonable period (not exceeding 12 months from the end of the accounting period) that part of income which could have been distributed without prejudice to the requirements of the company’s business, he may direct that such excess be treated for tax purposes, on a date 12 months after the end of the accounting period, as having been distributed as dividends to the shareholders.

• Where such profits are subsequently distributed, a shareholder shall

be excluded in computing his total income.


Thin Capitalisation Definitions “Loans” includes loans, overdrafts ordinary trade debts, overdrawn

current accounts or any form of indebtedness in respect of which a company is paying a financial charge, interest, discount or premium.

“Deemed interest” means interest deemed on an interest-free loan provided or secured by the non-resident person calculated using the average 91-day Treasury Bill rate.

“Revenue reserves” includes accumulated losses. “Control” in the case of a body corporate, unless defined in its

constitution, means the holding of 25% or more of the capital or the voting rights.

A bank or a financial institution licenced under the Banking Act isexempt from this provision. Taxation of Extractive Industries © RSM Ashvir

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Thin Capitalisation Arise where a company incorporated in Kenya is controlled by a

non-resident person alone or together with 4 or fewer other persons.

Interest payments are restricted in proportion to the extent that the highest amount of loans held by the company at any time during the year of income exceed two times the sum of the revenue reserves and the issued and paid up capital of that company.

In addition, any foreign exchange loss on loans from controlling parties is also deferred for tax purposes.

Deemed interest to be levied on interest free loans from controlling parties. Withholding tax is payable on the deemed interest, and both the deemed interest and the withholding tax paid thereon are not deductible for tax purposes.


VAT • Taxable supplies (goods and services), excluding motor vehicles,

imported or purchased for direct and exclusive use by geothermal, oil or mining prospecting or exploration companies subject to recommendation by the respective CSs.


Custom - EAC CMA • Exemption from duty goods including motor vehicles and aircraft,

imported or purchased by any company which has been granted an oil exploration or oil prospecting licence in accordance with a

production sharing contract with the Government of Kenya and in accordance with the provisions of the Petroleum (Exploration and Production) Act.

• Exempt from duty machinery imported to be used in oil, gas and geothermal exploration including machinery and inputs, but not including motor vehicles, imported by a licensed company for direct and exclusive use in oil, gas or geothermal exploration and development upon recommendation by the Ministry of Finance

• The above provision does not extend to service providers who are not oil exploring companies and no specific provisions for mining companies.


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Custom - EAC CMA • Temporary importation exemption - A person does not have to pay

duty for temporary importation provided he furnishes a temporary importation bond to cover the equipment for the temporary usage.

The imported items need to be exported back within 12 months or a short period agreed on. KRA has to approve of the temporary usage importation.

• Goods shall be deemed to be entered for home consumption when they have been declared for use in a Partner State, other than temporary use, and the provisions of paragraph (a) have been fulfilled.

• Subject to the provisions of the Customs laws, goods imported in accordance with this section for a temporary use or purpose only shall be exempt from liability to import duties.


Custom - EAC CMA • Goods shall not be exempt from liability to import duties under this

section unless the proper officer has given permission for such importation; and the proper officer shall not give such permission:

– Unless he or she is satisfied that the goods are imported for temporary use or purpose only; and

– Unless the owner thereof has deposited, or given security for, the amount of the import duty to which the goods would otherwise be liable.

• Where the proper officer gives permission for the importation of any goods under this section, he or she may impose such conditions as the proper officer deems fit and such goods shall be exported within such period, not exceeding twelve months from the date of importation, as is consistent with the purpose for which the goods are imported.


Custom - EAC CMA • The Commissioner may, where he or she deems fit, allow a further

period as is consist with the purpose for which the goods are imported.

• Where the conditions of the importation of goods have been complied with then, on the exportation of the goods any deposit or security given shall be refunded or discharged, as the case may be.

• Where the conditions of the importation of the goods have been contravened then the goods shall become liable to duty, as from the date of their importation and the owner shall be required to pay duty and on payment of the duty any deposit given shall be brought into account or, if security was given, security shall be discharged.


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Custom - EAC CMA • Save where goods are allowed to remain in a Partner State:

– An importer who fails to export temporarily imported goods at the end of the period specified; or

– A person who sells, alters or re-places or otherwise modifies the goods or part thereof; commits an offence and is liable, on conviction, to a fine equal to 25% of the dutiable value and any goods which are the subject of the offence, shall be liable to forfeiture.

• The Council may, by notice in the Gazette, declare that the goods

specified in the notice shall not be imported in accordance with this section, or declare that the goods may be imported subject to proportion of duty.


CAVEAT

This slide presentation has been prepared for general guidance only, and does not constitute professional advice. You should not act upon the information contained in these slides without obtaining specific professional advice. Accordingly, RSM Ashvir, its associates and its employees and agents accept no liability, and disclaim all responsibility, for the consequences of anyone acting, or refraining from acting, in reliance on the information contained in these slides or for any decision based on it, or for any consequential, special or similar damages even if advised of the possibility of such damages.

The guidance reflects our interpretation of the tax legislation in Kenya and is not binding on the tax authorities. Consequently, the guidance should not be considered as an assurance that the tax authorities will agree with it.

RSM Ashvir is a member firm of RSM, a global network of accounting and consulting firms. RSM does not offer professional services in its own name. Each member firm of RSM is a legally separate and independent national firm and is not a member of one international partnership, and member firms are not legal partners with each other. One member firm is not responsible for the services or acts of any other member firm.

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Kenya

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FOR FUTHER INFORMATION PLEASE CONTACT:

2nd Floor, Ralli House, Nyerere Avenue P.O. Box 87227, 80100 Mombasa, Kenya Tel: +254 41 2311778 Fax: +254 41 2222397 E-mail: [email protected] Contact: Lina Ratansi (Managing Partner)

1st Floor, Reliance Centre, Woodvale Grove, Westlands P.O. Box 349, 00606 Nairobi, Kenya Tel: +254 20 4451747/8/9 Fax: +254 20 4451773/4 E-mail: [email protected] Contact: Ashif Kassam (Executive Chairman)

Nairobi Office 16th Floor, Golden Jubilee Towers, Ohio Street P.O. Box 79586 Dar es Salaam, Tanzania Tel: +255 22 2137314/15 Fax: + 255 22 2137316 Email: [email protected] Contact: Lina Ratansi (Group Chief Executive)

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Uganda Office Mombasa Office

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Taxation of Extractives Industry in Kenya - RSM Ashvir

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