With the continued growth in the diaspora remittances for investments into the Country comes the focus of the Kenya Revenue Authority (KRA) on the diaspora tax compliance levels.
A survey report released in December 2021 by the CBK indicates that more than 40% of 2021 diaspora remittances amounts went to investment in real estate and payment of mortgages. According to the survey, the diaspora community remitted about KES 427.6 billion ($3.718 billion) in 2021. Of what significance is tax compliance by the diaspora community regarding real estate investments?
Kenyans abroad seldom see the need to comply with the local taxes mainly because they usually visit home but briefly and have no active in-person engagements in Kenya. Others remain non-compliant for lack of knowledge of the abiding tax compliance obligations on their part.
Tax noncompliance in Kenya currently has grave consequences, ranging from late payment penalties and interest to civil or criminal charges. A repercussion of noncompliance worth considering is the impact on one’s investments at home. As it is currently, the purchase of real estate (immovable property), requires clearance from the KRA.
For the registration of real estate here, the KRA Personal Identification Number (PIN) is a mandatory requirement. We have seen instances where a buyer of property is compelled to settle unexpected tax liabilities before concluding a land transfer process. Additionally, an acquirer of immovable property in Kenya has an obligation to pay stamp duty, payable only by registered taxpayers. For a successful acquisition of property, tax compliance, therefore, is vital.
To aggravate it further, the KRA also has powers to attach, as security, land or buildings to the taxes owing from an owner of such property. The Finance Bill 2022 now proposes to extend this to all registrable property. This provision restrains the defaulting taxpayer from the disposal, mortgage, or charge on the property until the tax due is settled.
Yet, tax compliance in Kenya for the diaspora community remains to be a challenge for several reasons. The uncertainty of whether Kenyans abroad should pay taxes in Kenya, the applicable rates and double taxation complexities are largely responsible for this widespread noncompliance. And the fact that, depending on various circumstances, Kenyans abroad may or may not be liable to taxes in Kenya has added to the confusion.
According to the survey, most Kenyans abroad are employed, making the matter even more complicated.
The taxation of diaspora employment income is dependent on the nature of the income in question; in which country it was earned/sourced; and where the earner is normally based. It is a global best practice in tax laws that the country which provides the opportunity for the economic activity should have the taxing rights on the incomes therefrom.
If a person works for an entity in Kenya and lives here, the taxation of his income is straightforward. However, where a person lives abroad but may be working for an entity abroad or even in Kenya, a complexity is presented. As such, the question of where the income was derived from or accrued in also comes to play. If it is established that the income accrued in or was derived from Kenya, the same is taxable in Kenya.
The last variable in determining whether an income should be taxed in Kenya is the tax residency status of the person. This concept is underpinned by the tenet that individuals should give their fair share of contribution towards the provision of public goods and services of the country in which they live, whether they earned incomes therefrom or not.
Tax residency status is a function of the duration of one’s stay in Kenya and the existence of a permanent home. According to the law, if you were present in Kenya for more than six months or if you were present for even one day and have a permanent home in Kenya, your employment income earned anywhere in the world would be taxable here. As such, by the 30th of June each year, you are expected to file your annual tax returns and pay taxes due in Kenya. The taxes due can, however, be reduced by any federal taxes paid elsewhere, subject to certain conditions.
The diaspora community should, therefore, endeavor to comply with the local tax laws for smooth investment activities here. Where one is uncertain of their tax obligation in Kenya, the help of a competent tax consultant may be sought.
