It is an issue in any number of emerging economies: how to balance efforts to recover the value of taxable assets and earnings held overseas with a fair and effective taxation code at home, as well as compliance with international standards. This is particularly true in Kenya, where many wealthy residents may have significant assets and earnings overseas dating back decades. As part of the 2016 Finance Act, the government announced plans to offer a tax amnesty for those who declare that foreign income and repatriate the assets. There was an initial deadline of December 31, 2017 which was extended to June 30, 2018 in the latest budget speech in March.
Kenya’s Revenue Authority is expected to issue revised guidelines as a result of the extension but its earlier guidelines threw up some interesting areas of discussion. The KRA said it expected a declaration of all foreign-sourced income that would be taxable in Kenya, had it been earned in Kenya. This was problematic and, according to some sources, apparently copied from recent similar amnesties in India and Indonesia. Tax experts say it was a problem because such a regime works only in jurisdictions where tax is assessed based on residency and exacted on all worldwide income, for example the US.
In Kenya, Section 3(1) of the Income Tax Act says income tax is only applicable on income actually earned in Kenya. This means that while the guidelines called for a declaration of all income, it was not clear what would happen to income that had not been earned in Kenya, such as rental income, capital gains and investment income. The income that would be taxed, and which would then qualify for the amnesty, is foreign employment income by people who are tax registered in Kenya, or of foreign businesses that earn some of their income in Kenya.
The directive called for a mandatory repatriation of the said foreign-held assets (according to political sources, the main intention behind the amnesty) but was not clear on what happens with physical assets (which would have to be liquidated) or what happens on assets that have ongoing liabilities (such as houses still under mortgage).
The proposed amnesty has also faced criticism over the lack of provisions for capital controls. Some have interpreted this as a loophole that runs the risk of allowing interested parties to use the amnesty to bring back in their cash, declare it and benefit from the amnesty – and then take it immediately back out of Kenya as if it were “clean” money.
Revised guidelines from KRA are expected soon. If the intention is to reduce rather than add to the governance challenges in Kenya, there remains a lot of work still to be done.