Without the right information, mistakes can be made. And unfortunately this can be costly for businesses.
- Wrong choice of structure when registering
- Underestimation of income or tax evasion
- Delay or failure to file tax returns
- Lack of proper accounting records
- Not registering as a taxpayer
See also: Kenya EOR
Wrong choice of structure when registering
First, identifying your business structure is very important, what do I mean? Defining if your business is a sole proprietorship, a limited liability company or a branch of a foreign company is crucial. This will determine the future procedures for the business in relation to Kenyan taxation.
When setting up a business, it is important to keep all official documents safe. Companies obviously have legal obligations, but some of these obligations depend on the category of activity.
For example, small and micro businesses owned by Kenyan residents with an annual turnover of less than KES 5 million are required to pay a presumptive tax. In addition, the tax is paid once a year upon acquisition or renewal of a business permit or license. The rate is currently 15% of the business permit or license fee. The penalty is 5% of the tax due, as stated in the Tax Procedures Act of 2015.
Understatement of income or tax evasion
Another big mistake would be trying to evade taxes. It seems obvious but as the old adage goes, you can’t avoid “death and taxes.” Tax evasion is the deliberate or illegal act of not paying or underpaying taxes.
Taxation in Kenya is straightforward: a person will be guilty of an offence if, without reasonable cause, he or she makes an incorrect tax return by omitting or understating any income that should have been declared. Sometimes this can even happen by oversight or carelessness, so be careful … KRA has become tougher in such cases lately.
Here are some examples of tax evasion. These include not paying the correct income taxes when a company understates the value of its imported goods. Failure to deduct withholding taxes: when KRA appoints entities to withhold taxes and then remit them on time. Misstatement of expenses in that a company falsified financial statements or expenses in order to pay less tax.
Late or no tax return
This is the failure to pay taxes to the appropriate authority on time.
Businesses are imposed to pay several types of taxes. Of particular note is the income tax, PAYE (Pay as You Earn), which is levied monthly on employees. Value Added Tax (VAT) must be paid by the 20th of each month. A business must comply with all these tax regulations to be in compliance with the tax authorities.
All Kenyan companies will be required to file an annual corporate tax return with the Kenya Revenue Authority. As mentioned in the first paragraph, the tax rate will vary depending on whether you are a subsidiary or a branch office.
Lack of proper accounting records
It seems like the most basic thing, right? Accounting is the process of recording all financial transactions made by a business. Otherwise, your account balances will not match and you will not be able to close your books.
Accounting can make or break a business, which is why it is very crucial to a business. Because every operation of a business is kept in it. From determining profits, generating reports that can help determine future investments and processing payroll.
You will need to prepare financial reports, most of them in real time. The backlog caused by inaccurate accounting results in a company facing heavy penalties when it’s time to go through your annual audit to file and pay your company’s corporate taxes.
Not registering as a taxpayer
Let’s say you open a small business in Kenya. That means you won’t apply for a business license or register the business with the Registrar of Companies at the outset. And then later, it may be too late…
Individuals and businesses need a PIN certificate for several administrative processes. In Kenya, a Tax Compliance Certificate (TCC) is required to acquire tenders from the government. All documents are closely related to each other.
A little tip: in case a company has employees who work on a contractual basis. And are not permanently based in Kenya. The company must ensure that at the time the contract expires. Therefore, upon the employee’s departure, the company must ensure that a zero tax return is filed with KRA to avoid any penalties.
In addition, it is important to note that if the employee(s) plan to return to the country, the company must ensure the de-registration of the PIN code, while if the employee leaves the company permanently, the company must ensure that he/she requests the cancellation of the PIN code. Failure to do so would result in the penalty highlighted above.
Conclusion
As we know, taxation in Kenya is constantly changing and it can sometimes be a bit difficult to keep up with it. For example, with Covid19 earlier this year, President Kenyatta approved an Act of Parliament. The Tax Laws (Amendment) Act 2020 which made various changes to the existing tax laws in Kenya.