Introduction
In January 2014, the Kenya Revenue Authority (KRA) sent demand notices to several athletes requiring them to honour their tax obligations. Some athletes reacted angrily with some threatening to change their nationality.[1] They complained that they were being taxed twice and taking home only 20% of their prize money. The first time the matter of assessment of athletes went public was in 2012. Mainstream media (mis)reported that the KRA had introduced a new tax on athletes’ earnings. This was not correct because first, the KRA has no power to impose taxes, only Parliament can do that. Secondly, the income earned by athletes has been subject to tax for as long as the Income Tax Act has been in force.
This is the basis of taxation of such
income. Income from business is taxable in Kenya. A business includes any
trade, profession or vocation and every manufacture, adventure and concern in
the nature of trade. Professional sporting and other forms of commercial
exploitation of talent fall in the category of vocations. Therefore any income
earned from professional sporting is income from business.
The correct position is that KRA never
pursued athletes before 2012 just like it never pursued landlords for rental
income. With pressure to meet revenue targets set by Treasury, the Authority
has been making efforts to make people who were previously not complying
comply. I wont debate the merits and demerits of the requirement for athletes
to pay taxes, I will only interpret the law.
Double Taxation
The term is used mainly in relation to
income. Double taxation occurs when the same income is subject to tax by two
jurisdictions or countries. Kenya taxes income on the basis of residence. Kenya
taxes income on the basis of residence and source. All income which has its
source in Kenya is taxable in Kenya irrespective of whether the person who has
earned it is a resident or a non resident (s. 3(1) Income Tax Act).
If a person is resident in Kenya he is
liable to pay tax on income earned abroad in certain cases. If a resident
carries on business partly in Kenya and partly outside, all the income from
that business is taxable in Kenya (s. 4(a) ITA). For instance if a company
resident and doing business in Kenya opens a branch in Uganda, all the income
of the company including income earned by the Ugandan branch is taxable in
Kenya.
The Ugandan government will also tax
the income earned by the branch in its territory. The income from the branch
will therefore be subject to tax by both Kenya and Uganda. This is what is not
known as double taxation. Assuming that a rate of 30% applies in both
countries, the company will have its income taxed at an effective rate of 60%.
The income earned by athletes outside
Kenya may, and often does, suffer double taxation i.e. taxation in the foreign
country where the income is earned and in Kenya. However, the ITA provides for
relief from double taxation. There are two categories of reliefs given for
foreign tax:
a) Relief for tax paid countries with which Kenya
has no Double Taxation Treaty; and
b) Relief for tax paid in countries with which
Kenya has a Double Taxation Treaty.
1.
Double taxation relief in the absence of a
treaty (s. 39)
Relief is available if one proves that
he has paid tax in that other country in respect of the same income. The income
to which this applies is:
i)
Employment income
ii) Income from appearances and performances to
divert an audience (music events, sporting events, etc.).
The amount of relief is the lower of:
a) the difference between the Kenyan tax on total
income and the Kenyan tax on the Kenyan income, and
b) the tax payable in Kenya on such income.
There need not exist a double taxation
agreement between Kenya and the country from which the income is derived for
set off to be allowed under section 39. However, note that the set off is
allowed for only two categories of incomes. A person must also be a citizen to
benefit from the set off.
2.
Relief under Double Taxation Treaty (Ss. 41,
42)
Section 41 empowers the Kenya
Government to enter into a double taxation relief agreement with the government
of any country with a view to affording relief from double taxation in relation
to income tax and other taxes of similar character. The Minister is empowered
to declare by notice in the Kenya Gazette that such special arrangements have
been made. Among other things the agreement may provide for foreign tax paid or
payable in respect of income derived by a resident person to be allowed as a
credit against that income. A person need not be a citizen to be entitled to a
double taxation relief in this case; one only needs to be a resident.
The amount of the relief to be allowed
is the lesser of:
a) The difference between the Kenyan tax on total
income and the Kenyan tax on the income from Kenya, and
b) The foreign tax on the income from another
country.
This method of granting relief from
double taxation is known as the credit method. With this method, a taxpayer
pays additional tax on foreign income only if the rate of tax in the foreign
country is lower than the rate of tax in Kenya. If the rate in the foreign
country is equal to or less than the rate in Kenya, no additional tax will be
paid in Kenya on the foreign income.
Kenya has double taxation relief
agreements with among other countries: Zambia, Denmark, Norway and Sweden. If
one derives income from a country which does not have a double taxation
agreement with Kenya, the income will suffer double taxation unless it is
income in respect of which a person can afford himself a set off under section
39.
Consider this:
Certain income earned domestically may
be subjected to tax twice. For instance, the trading income of a company is
subject to corporation tax at a rate of 30%. When the income is distributed to
resident shareholders it is subjected to further tax at a rate of 5%.
Is this double taxation?
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