Proactive Measures to ensure tax compliance in your organization

 Did you know that June 20th (sometimes 21st and 22nd depending on the year), is the longest day of the year? It is the day with the most daylight hours in the Northern Hemisphere and this year, June solstice will fall on June 21st. Yes, you will be staying in the office more than usual on this day! Apart from June giving us the longest day of the year, this month also happens to be Kenya’s tax month. Toward the end of this month, individuals and companies alike rush to ensure they are tax compliant so as to escape the penalties that occur when one is non-compliant. As a HR professional, it is your responsibility to know when and how to file organization related taxes. This way, you will be able to help your company avoid financial and compliance challenges. All in all, we recognize that tax season can be overwhelming for you and that is why our company, ElevateHR, is in the business of making your tax compliant processes seamless!  In this article, we will examine how organizations can ensure that they remain tax compliant.

What companies need to do in order to be tax-compliant

The type of tax you file depends on the nature of your organization. Below, we will look at the different types of taxes that companies in Kenya are required to file by law; 

 1) Pay As You Earn (PAYE)

Every month, PAYE is deducted from an employee’s salary based on the current individual income tax rates. This is a deduction that you include when processing payroll. KRA requires that the deduction be made on or before the 9th day of the following month.

To file for PAYE, an employee can submit their returns online through the iTax portal. If your company or partnership doesn't have any PAYE amount to remit, they are still required to file a NIL return using the iTax system.

As their HR, you can advise them to make the payment for PAYE by filing their PAYE return, and then generating a payment slip online through the iTax portal. They can then proceed to make the payment at any of the banks appointed by KRA. 

As the HR, you are required to ensure that every employee in your organization is tax compliant during payroll processing.

2)  Corporation tax

Corporate Tax is a type of income tax imposed on various entities, including Limited companies, Trusts, and Co-operatives, based on their annual income.

If your company happens to be a foreign organization operating in Kenya or you have a branch in Kenya then your company is liable to pay Corporation Tax only on the income they generate within the country.

The rates, however, do vary based on whether your company is local or foreign (resident or non-resident). Resident entities are taxed at a rate of 30 percent while non-resident companies are taxed at a rate of 37.5 percent. 

How can you file for corporation tax?

You can file Corporation Tax online using the iTax portal by submitting an Income Tax Company Return (IT2C Form) no later than six months after the end of your company’s accounting period.

This is what we mean, if your company's accounting period is from January 1st to December 31st, then you have until June 30th of the following year to file your Income Tax - Company Return. Filing after six months will result in your company incurring a penalty.

The Company Return will then cover your fiscal year, the 12-month period chosen by your company to prepare its financial statements.

To pay Corporation Tax, generate a payment slip through iTax and make the payment at any of the banks designated by KRA.

It is important to note that if the projected annual tax liability exceeds Ksh. 40,000, it is possible to make installment payments via iTax. This is referred to as Installment Tax.

Let’s take a look at how you can ensure your company is liable by paying installment tax.

3) Installment Tax

Installment tax is a payment made by corporations who have a tax liability (tax debt owed to a government) for a particular year that equals or exceeds Ksh. 40,000.

Installment Tax is a form of advanced payment made in four equal installments. It is paid prior to the end of the income year and before the business accounts are prepared to determine the actual tax liability.

The calculation of Installment Tax can be done in either of the following ways:

• Prior year basis: The prior year's tax payments are multiplied by 110%.
• Current year basis: This method applies to new companies or those that have shifted from losses to profitability. It involves estimating the current year's profit and the corresponding tax liability.

The rate of taxation for Installment Tax follows this schedule:

• 25% payment by the 20th day of the 4th month.
• 25% payment by the 20th day of the 6th month.
• 25% payment by the 20th day of the 9th month.
• 25% payment by the 20th day of the 12th month.

If you are a HR at a company in the Agricultural Sector then you should know that 75% of the total installment tax (the first three installments combined) is paid by the 20th day of the 9th month, and the remaining 25% is paid by the 20th day of the 12th month.

Also, once the business accounts are prepared and the actual tax liability is determined, any remaining tax payable must be paid on or before the last day of the 4th month following the end of the income year or accounting period.

4) Withholding Tax (WHT)

Withholding Tax is a form of tax retention where the payer of specific types of income is required to deduct tax at the source from the payments made and remit the deducted amount to the KRA. 

Examples of income that is subject to Withholding Tax include; 

• Management or professional fees (this includes, consultants, agents and contractors)
• Commissions
• Dividends
•  Royalties
• Pensions
• Interest 
• Rent that is received by non-residents
• Winnings from betting and gaming 

The percentage of tax deducted varies based on the type of income received. Additionally, the percentages differ depending on whether the recipient is a resident or non-resident of Kenya.

Below are the prevailing WHT rates based on whether an individual is a resident or non-resident; 

Comparison of Prevailing WHT Rates for Resident and Non-Resident Individuals in Kenya

Table demonstrating; prevailing WHT rates based on whether an individual is a resident or non-resident in Kenya

 

It is important to note that there are exemptions when it comes to WHT; 

• Dividends received by a Kenyan resident company from a domestic subsidiary or associated company over which it has direct or indirect control of 12.5% or more of the voting power.
• Commissions for marketing and residual audit fees paid to foreign agents involved in exporting flowers, fruits, and vegetables.
• Interest payments made to banks and insurance companies.
• Payments made to tax-exempt organizations.
• Local management and professional fees that, when combined, amount to less than Ksh 24,000 per month.
• Air travel commissions paid by domestic airlines to overseas agents.

How can you pay WHT?

To pay Withholding Tax, you can use the iTax portal. Then you can proceed to generate a payment slip through iTax and submit it, along with the tax amount owed, at any of the banks authorized by KRA.

Once the Withholding Tax payment is completed successfully, both the Withholder (payer) and the Withholdee (recipient) will receive a withholding certificate via email.

The above information will help you keep your organization tax compliant. However, this can be a tedious task as it requires a lot of time and diligence. Additionally, tax laws change from time to time and if you are not aware of these changes you can find yourself suffering penalties for a measly oversight. Also, as your company expands to other regions, you need to be aware of the country’s tax laws to avoid penalties. 

Now let’s see how ElevateHR can make tax season a breeze for you! How ElevateHR can help you remain tax compliant

ElevateHR is a cloud-based HR platform that is dedicated to serving the African market on all matters HR. One of the solutions we provide for HR professionals is the payroll software. 

By using our software you will be able to; 

• Access an automated and seamless process of managing statutory deductions such as PAYE. 
• Pay your taxes on time and accurately such that you do not attract penalties. 
• Invest the time and energy you could have been using on meeting statutory obligations on other HR tasks, a factor that boosts productivity among employees.
• Receive a statutory report with details of all the tax payments made to KRA on behalf of the company. 

ElevateHR’s payroll software can save you this hussle of paying all the taxes your company is liable for by automating this entire process for you. 

Automate your tax compliance process by requesting a demo of the payroll software today!