INTRODUCTION TO TAX PLANNING
True North is a composite business consultancy firm committed to offering business solutions to our clients in matters of tax and operations, walking with them in navigating the Government bureaucracy and enabling them to get their True North.
Recognizing that we are currently living in a very fluid period that is greatly impacted by the operating environment, changes in technology, and an unpredictable tax regime, the team behind True North came together to develop a suite of solutions to help our clients be well anchored to withstand the storms that may present in the course of their business.
The major factors responsible for much of the uncertainties confronting businesses in Kenya today may be identified as follows:
- Annual changes in tax laws.
- Shifts in revenue mobilization strategies with changes in Government.
- Disruptions arising from compulsory use of IT compliance platforms for a tax-paying public that is deficient in IT or computer world.
- Ever-changing IT software and hardware requiring constant upgrades in skill sets.
- A politically aware Gen-Z which is threatening to upset the way things work in Government.
- Global shifts in geopolitics with a profound impact on business in Kenya and the world.
Faced with this kind of scenario, it becomes critically important for businesses to plan for, establish, and stay focused on their True North as a matter of survival. Tax planning therefore becomes a natural starting point in strategy to help build an operational structure with a promise for growth and profit sustainability.
Granted, there are many legislative initiatives that have a bearing on business operations in Kenya. These may be summarized as Exchequer revenue laws, Appropriation in Aid, County Revenue laws, and many other laws which require businesses to comply with.
The focus of this write-up is on exchequer revenue laws. These are Income Tax, Value Added Tax, Domestic Excise Tax, Customs, and Import Excise Duty.
Tax Planning: A Strategic Approach to Financial Efficiency
Introduction
A question that appears to generate surprisingly little debate in Kenya is the scope for legally mitigating taxes payable by individuals and corporate entities. Quite apart from the right of taxpayers to arrange their affairs so as to minimize taxes payable, tax planning is bound to gain increasing significance with the ever greater aggressiveness and sophistication of the Kenya Revenue Authority and other tax collecting bodies.
The trend of increased aggressiveness and sophistication in tools and methods is occurring against a backdrop of a public policy of domestic sources being the primary sources of revenues for budgetary purposes. This results in governmental pressure on tax collecting agencies to improve their revenue collection performance.
The result of this trend is the more stringent enforcement of taxation laws. Many individuals and corporate entities who in the past did not pay due taxes on any or all of their income are now having to do so or face severe consequences. The same scenario is playing out with regard to Customs and Excise duties as well as Value Added Tax.
The introduction and implementation, despite spirited resistance, of Electronic Tax Registers for businesses is just one tool for effecting greater compliance with tax laws. With the imperative for massively greater public spending to achieve developmental goals, this overall trend of stringent tax law enforcement can be expected to continue (assuming of course continuity in the governmental policy referred to above).
Tax planning is a crucial aspect of financial management that helps individuals and businesses minimize tax liability while ensuring compliance with tax laws. By implementing effective tax planning strategies, taxpayers can legally reduce their tax burden and, in effect, optimize business results. Suffice to note that a business which is operating as such is primed to deliver financial results which reinforce shareholder value.
Tax Planning Goals
What is the goal of tax planning generally? It involves analyzing your financial situation to pay the lowest legal amount of tax. Typically, this means maintaining a certain tax bracket to reduce the amount of taxes to be paid.
Proper tax planning can achieve the following goals:
- Reduce the current year’s tax liability.
- Defer the current year’s tax liability to future years, thereby increasing the availability of cash for investment, business, or personal needs.
- Reduce any potential future years’ tax liabilities.
- Maximize the tax savings from allowable deductions.
- Maximize tax savings by taking advantage of available tax credits.
- Maximize the amount of wealth that stays in your family.
- Minimize capital gains tax.
- Avoid penalties for underpayment of estimated taxes.
- Manage your cash flow by projecting when tax payments will be required.
- Minimize potential future estate taxes to maximize the amount left to your beneficiaries and/or charities (rather than the government).
- Maximize the amount of money you will have available to fund your children’s education as well as your retirement.
Understanding Tax Planning
Tax planning involves analyzing financial situations and structuring transactions to achieve tax efficiency. It includes various strategies such as income deferral, deductions maximization, and investment in tax-efficient instruments. Effective tax planning ensures that taxpayers take advantage of all available tax reliefs, exemptions, and deductions provided under the law.
Types of Tax Planning
- Short-Term Tax Planning – This involves year-end strategies to reduce taxable income, such as making charitable donations or deferring income to the next financial year.
- Long-Term Tax Planning – This focuses on long-term strategies such as retirement savings, estate planning, and investment in tax-advantaged assets.
- Permissive Tax Planning – Utilizes legal provisions like tax exemptions and deductions to minimize tax liability.
- Purposive Tax Planning – Focuses on structuring investments and expenses in a way that minimizes tax burden while achieving growth and financial goals.
Key Tax Planning Strategies
- Income Splitting: Distributing income among family members to take advantage of lower tax brackets.
- Tax-Advantaged Investments: Investing in government-approved schemes that offer tax exemptions or deferrals.
- Maximizing Deductions and Credits: Keeping records of deductible expenses such as medical bills, education fees, and charitable donations.
- Retirement Planning: Contributing to pension schemes or retirement accounts to benefit from tax deferrals.
- Business Structuring: Choosing the right business structure (e.g., sole proprietorship, partnership, or corporation) to optimize tax efficiency.
Importance of Tax Planning
- Reduces Tax Liability – Proper tax planning minimizes the amount of taxes payable.
- Ensures Compliance – Helps taxpayers meet legal requirements and avoid penalties.
- Improves Cash Flow – Efficient tax management allows better allocation of financial resources.
- Encourages Investment – Tax incentives encourage businesses and individuals to invest in productive assets.
- Facilitates Retirement Planning – Ensures financial security in later years through tax-efficient retirement contributions.
Conclusion
Tax planning is an essential financial tool that enables individuals and businesses to manage their tax obligations effectively. By adopting strategic tax planning measures, taxpayers can optimize their financial resources while complying with tax laws.
Engaging with tax professionals can further enhance tax efficiency and ensure adherence to regulatory requirements. At True North, we are committed to bringing out our combined experience of many years at KRA for the benefit of our clients.
TAX EXEMPTIONS IN KENYA: A SYNOPSIS
The subject of tax exemption in Kenya continues to attract great attention from various stakeholders. This is largely guided by their particular interest. To the government, the main concern is how exemption from payment of tax affects revenue inflows, encourage provision of necessary services the government is constrained to achieve from its resources, achieve specific economic and social goals with broad developmental impact,
Legal Forms.
These organizations may be formed under different laws, the main ones being;
- The Public Benefits Organizations ACT
- The Societies ACT
- The Trust ACT
- Company limited by guarantee without a share capital
- Community Based Organizations registered under PBO ACT
- Certificate of Exemption from Registration (particularly for International Charity Organizations with a permanent establishment or Regional Headquarters in Kenya)
- Any other law currently in force in Kenya
Exemption from Tax
Under the Income Tax ACT, exemption from payment of Income Tax is provided for in Sections 13 and 14 of the Income Tax ACT, CAP 470 LAWS OF KENYA.
Paragraph 10 of the first schedule to the Income Tax ACT states that the income of an institution, body of persons, or irrevocable trust, of a public character established solely for the purposes of the relief of the poverty or distress of the public, or for the advancement of religion or education:
The first schedule to the income tax act further lists such incomes and/or persons whose income is exempt from tax subject to satisfaction of the conditions specific to any of the income or person seeking for exemption.
Thirteenth schedule to the Income Tax ACT further lists exempt persons in tandem with Sections 13 and 14. The exemptions listed herein upon gazzettement by the Minister as per sections 13 and 14 and paragraphs 1 and 2 of the first schedule.
Exemptions covered under paragraph 10 of the first schedule to the Income Tax ACT, CAP 470 LAWS OF KENYA.
Paragraph 10 covers a broad range of persons in the religious, educational, social and environmental sectors of the society.
Basic conditions for consideration for exemption are:
- Type or form of legal person
- Character – public
- Targeted on the relief of poverty or distress of the public, advancement of religion or education;
- Must be established in Kenya or have the regional headquarters in Kenya
- The Commissioner is satisfied that the income is to be expended either in Kenya or in circumstances in which the expenditure of that income is for purposes which result in the benefit of the residents of Kenya:
- PUBLIC BENEFITS ORGANIZATION ACT, 2013 became operational through the publication of Legal Notice No 78 on 14th May 2024.
- Paragraph 1 of the second schedule to the PBO ACT, 2013 espouses a benefit for PBOs to be granted Income Tax Exemption from;
- income tax on income received from membership subscriptions and any donations or grants;
- income tax on income acquired from the active conduct of income producing activities if the income is wholly used to support the public benefit purposes for which the organization was established;
- tax on interest and dividends on investments and gains earned on assets or the sale of assets; stamp duty;
- court fees.
The definition of “public benefit activity” according to the PBO ACT is an activity that supports or promotes public benefit by enhancing or promoting the economic, environmental, social or cultural development or protecting the environment or lobbying or advocating on issues of general public interest or the interest or well-being of the general public or a category of individuals or organizations;
Requirements needed in applying for Exemption
To facilitate the process of exemption, KRA has developed a checklist against which those seeking to be confirmed exempt should endeavor to satisfy by the time they make an application for exemption. Once these are met, KRA is then able to move internal processes to confirm that the applicant merits exemption status.
| S/NO | REQUREMENT | YES | NO | N/A | Remarks |
| 1. | Letter of application for income tax status | ||||
| 2. | Certificate of registration | ||||
| 3. | Copy of the constitution and a proper Dissolution clause (where applicable) | ||||
| 4. | Copy of PIN | ||||
| 5. | Copy of expired exemption cert (where applicable) | ||||
| 6. | Letter from government official / county official | ||||
| 7. | Photos of activities undertaken | ||||
| 8. | Annual Returns- | ||||
| 9. | Audited accounts | ||||
| 10. | Bank statements | ||||
| 11. | Physical Inspection Report | ||||
| 12. | Note of interview | ||||
When an application has been made and evaluated to satisfy the checklist and the Commissioner is satisfied that the organization merits exemption, the Commissioner shall cause a Certificate of Exemption be issued to the Organization as the case may be. The exemption Certificate is valid for 5 years from the date of issue or such other date if the case was for renewal of exemption status
