Kenya is stepping up its efforts to join global tax transparent jurisdictions in connection with the exchange of information on foreign accounts for tax purposes. On 5 December, 2019, Kenya ratified the Convention on Mutual Administrative Assistance in Tax Matters (the Convention) which had been signed on 8 February, 2016. By 27 November 2019, 135 countries had signed the Convention, including most of the off-shore jurisdictions.
Kenya is expected to imminently sign the Common Reporting Standards Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (the CRS Agreement). The Common Reporting Standards (CRS) set out the rules governing the automatic exchange of financial account information in tax matters developed by the OECD to tackle tax evasion and improve tax transparency and compliance.
The CRS Agreement sets out the financial account information to be exchanged, the financial institutions required to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions to ensure maximum compliance. It also specifies the details of what information will be exchanged and when.
As Kenya will implement the multilateral framework agreement, Kenya will avoid the need to conclude bilateral agreements between exchanging jurisdictions. Kenya will be required to provide a list of jurisdictions with respect to which it intends to exchange information and prepare domestic legislative procedures to implement the CRS. It is likely to include the many offshore jurisdictions which are well recognised in terms of holding bank accounts for foreign customers. These would include the Channel Islands, Singapore, Switzerland and UAE, the Caribbean Islands and others.
In this regard, Kenya is expected to pass new laws to implement the CRS regime. These new laws will include: reporting obligations for local financial institutions to provide information regarding reportable accounts to the Kenya Revenue Authority (the KRA), the reporting and due diligence procedures required to fully implement CRS and confidentiality and personal data protection safeguards to ensure that personal data is used for the intended purposes under CRS. The recent enactment of the Data Protection Act, 2019 is a step in the right direction in relation to confidentiality matters.
Impact of the Convention and the CRS Agreement
Once the CRS Agreement is signed and the relevant domestic laws are put in place to implement the CRS, the KRA will receive information with respect to income received abroad by persons who are tax residents in Kenya.
With the ratification of the Convention and the imminent signing of the CRS Agreement, each participating offshore jurisdiction which holds bank accounts of Kenyan tax resident persons will voluntarily disclose the information to the KRA and, in addition, the KRA will have the right to request foreign jurisdictions to disclose information relating to Kenyan tax resident persons. Since Kenya applies a source-based taxation system, income earned from foreign sources- although reportable under CRS, would not be expected to be automatically taxable in Kenya, save for employment income (which is taxed on a worldwide basis for Kenyan tax resident persons) and taxable income which was repatriated from Kenya without payment of tax.
The Kenyan tax amnesty
Globally, a number of jurisdictions introduced voluntary disclosure programs and granted tax amnesties prior to commencement of the exchange of information under the CRS, which provided an opportunity for tax residents to declare income and assets held abroad. Notably, in 2016, Kenya introduced a tax amnesty on foreign income and assets. Kenyan tax resident persons were granted an opportunity to take the tax amnesty by voluntarily declaring any foreign income. Following the expiry of the amnesty and the imminent implementation of the CRS, the KRA is expected to take advantage of CRS to identify non-compliant Kenyan tax residents with regard to foreign income.
Where a taxpayer had not taken the amnesty on taxable foreign income on which tax had not been paid, the KRA may demand for the unpaid taxes and in addition impose penalties and interest with respect of unpaid taxes. However, taxpayers who had taken advantage of the tax amnesty and fully complied with the requirements set out under the tax amnesty are in a good position, since they would be fully protected from investigations by the KRA in relation to their foreign assets and income, once such information is shared with the KRA by foreign revenue authorities.
Some of the challenges likely to arise from the implementation of the CRS include potential delays by the Government in putting in place the required infrastructure to ensure compliance with the Convention and the CRS Agreement under which there are strict obligations relating to data collection, storage and reporting mechanisms and safeguards which Kenya would be required to comply with, prior to commencing the exchange of information.
The ratification of the Convention signifies Kenya's resolve in joining the global tax transparent jurisdictions as far as the exchange of tax information is concerned. Kenyan tax resident persons holding foreign bank accounts should carefully take note of the following:
- Once CRS is fully implemented, the KRA will automatically obtain information from foreign tax authorities in relation to Kenyan tax resident persons holding foreign bank accounts.
- We expect pressure internationally for financial institutions to verify the actual tax residency of account holders and to implement internal controls to ensure tax residency is not abused.
- There is need for tax payers to review their tax affairs to ensure that they are tax compliant with the required tax filing and payment obligations. With the increased pressure on the Government to enhance tax collections, we expect the KRA to use CRS as one of the avenues of increasing tax revenue collection.
We will continue to monitor the developments relating to the CRS and provide further updates once the CRS Agreement is signed and the relevant domestic laws are enacted to fully operationalise the CRS.
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