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EY Street address: Mail address: Kenya Re Towers P.O. Box 44286 00100 Off Ragati Road Nairobi Upperhill Kenya Nairobi Kenya
Indirect tax contacts
Hadijah Nannyomo +254 (20) 2886000 hadijah.nannyomo@ke.ey.com
Stephen Ndegwa +254 (20) 2886000 stephen.ndegwa@ke.ey.com
Edna Njoroge +254 (20) 2886000 edna.njoroge@ke.ey.com
Emmanuel Makheti +254 (20) 2886000 emmanuel.makheti@ke.ey.com
A. At a glance
Name of the tax
Value-added tax (VAT)
Local name Value-added tax (VAT)
Date introduced 1 January 1990
Trading bloc membership East Africa Community (EAC) African Continental Free Trade Area (AfCFTA)
Administered by Kenya Revenue Authority (www.revenue.go.ke)
VAT rates
Standard 16% Reduced 8%
Other Zero-rated (0%) and exempt
VAT number format P000111111A
VAT return periods Monthly Thresholds
Registration KES5 million (in 12 months)
Recovery of VAT by non-established businesses No
B. Scope of the tax
In Kenya, VAT applies to the following transactions:
• The supply of goods and services in Kenya by a taxable person
• Taxable imported services received by any person in Kenya to the extent they relate to exempt supplies
• The importation of goods from outside Kenya, regardless of the status of the importer (unless the importer is listed as zero-rated in Part B of the Second Schedule to the VAT Act)
The exportation of goods are zero-rated if, subject to the satisfaction of the Commissioner of Domestic Taxes, the supply takes place in the course of a registered person’s business. The expor tation of taxable services is exempt from VAT, effective 1 July 2021.
C. Who is liable
VAT is paid by consumers of taxable goods and services. It is collected by registered taxable persons (traders) that act as the agents of the government. VAT on imported goods is collected by the Commissioner of Customs and Border Control Department, while the Commissioner of Domestic Taxes collects local VAT and VAT on imported services (reverse VAT).
VAT registration is dependent on the attainment of a turnover threshold of KES5 million with respect to all taxable supplies. After reaching this threshold, they must register for VAT. Within 30 days after becoming a taxable person, a person should apply to the Commissioner of Domestic Taxes to be registered in the prescribed manner. Businesses whose turnover is less than the reg istration threshold can voluntarily apply to the Commissioner for registration.
Exemption from registration. The VAT law in Kenya does not contain any provision for exemption from registration.
Voluntary registration and small businesses. The VAT Act provides for voluntary VAT registration for business providing taxable supplies but have not exceeded the turnover threshold for VAT registration. The registration is granted under the following conditions:
• The person is making or shall make taxable supplies.
• The person has a fixed place of business.
• The person has kept proper books of accounts, if he has commenced business, or there are reasonable grounds to believe that the person will keep proper books of accounts, if he has not commenced business.
Group registration. The Kenyan VAT Act allows group registration. However, no guidelines have been provided in the VAT Act or Regulations.
Section 34 (9) of the VAT Act states that “the Cabinet Secretary may, in regulations, provide for the registration of a group of companies as one registered person for the purposes of the Act.” Par’ 2 of the VAT regulations only interprets member in regard to group registration. However, it does not contain any provisions for the same. Therefore, in practice, group VAT registration does not take place in Kenya.
At the time of preparing this chapter, the guidelines on group VAT registration are still not issued. As such, it is not yet clear if group members are jointly and severally liable for VAT debts and penalties, or if there is a minimum duration for a VAT group.
Non-established businesses. A “non-established business” is a business that has no fixed estab lishment in Kenya. A foreign business that meets the registration requirements in Kenya and does not have a fixed place of business in Kenya is required to appoint a tax representative. A permanent establishment of a foreign business must register for VAT if it makes taxable supplies of goods or services.
Tax representatives. A person who is required to apply for VAT registration but who does not have a fixed place of business in Kenya should appoint a tax representative.
The registration of the tax representative shall be in the name of the nonresident person being represented.
The tax representative of a nonresident person shall:
• Be a person normally residing in Kenya
• Have the responsibility for doing all things required of the nonresident
• With the nonresident person, be jointly and severally liable for the payment of all taxes, fines, penalties and interest imposed
Reverse charge. Reverse-charge VAT is applicable on importation of taxable services to the extent it relates to the provision of exempt supplies. Effective 7 November 2019, the liability to account for VAT on imported services applies to any importer, irrespective of their VAT registration status. The reverse-charge VAT should be accounted by any person to the extent they are not entitled to input tax credit payable on the imported taxable services.
Domestic reverse charge. There are no domestic reverse charges in Kenya.
Digital economy. The VAT Act 2013 defines “Electronic services” as any of the following services, when provided or delivered on or through a telecommunications network:
• Websites, web hosting or remote maintenance of programs and equipment
• Software and the updating of software
• Images, text and information
• Access to databases
• Self-education packages
• Music, films and games, including games of chance
• Political, cultural, artistic, sporting, scientific and other broadcasts and events, including broad cast television
A supply of electronic services is made in Kenya if the place of business of the supplier from which the services are supplied is in Kenya. If the place of business of the supplier is not in Kenya, the supply of the services shall be deemed to be made in Kenya if the recipient of the supply is not a registered person and the electronic services are delivered to a person in Kenya at the time of supply. As such, nonresidents supplying e-commerce services must register and account for VAT in Kenya under a simplified VAT (and/or digital services tax) registration frame work. This is for business-to-consumer (B2C) supplies of e-commerce. There is no requirement to register for business-to-business (B2B) supplies of e-commerce.
There are no other specific e-commerce rules for imported goods in Kenya.
Online marketplaces and platforms. The National Treasury and Planning gazetted the VAT (Digital Marketplace Supply) Regulations 2020 on 10 September 2020. The Regulations provide for a simplified registration framework of charging VAT on taxable services supplied in Kenya through a digital marketplace, over the internet or an electronic network by B2C transactions. The regulations came into effect on 1 January 2021.
Registration procedures. The registration process involves a person making an online application for a Personal Identification Number (PIN). During this process, an entity is required to state its tax obligations including VAT.
Registration for all taxes is currently done online via the Kenya Revenue Authority (KRA) iTax portal (https://itax.kra.go.ke/KRA-Portal/) by filing an online form. The following documents/ information are required for registration purposes:
• An iTax PIN certificate for one of the company directors
• A scanned copy of the national ID or passport for a Kenyan citizen or scanned copy of the alien ID and work permit for a noncitizen
On average, tax registration can take one to five days depending on the availability of informa tion required for registration.
Deregistration. A registered person may apply to the commissioner for deregistration under the following circumstances:
• If the registered person ceases to make taxable supplies
•
If the registered person’s annual value of taxable supplies no longer exceeds the registration threshold
The Commissioner shall, by notice in writing, cancel the registration of a person in the following circumstances:
• The person has applied for cancellation and the Commissioner is satisfied that the person has ceased to make taxable supplies.
• The person has not applied for cancellation, but the Commissioner is satisfied that the person has ceased to make taxable supplies and is not otherwise required to be registered.
The Commissioner may cancel the registration of a person who is no longer required to be reg istered under the following circumstances:
• If the Commissioner is satisfied that the person has failed to keep proper tax records
• If the Commissioner is satisfied that the person has failed to furnish regular and reliable returns
• If the Commissioner is satisfied that the person has failed to comply with obligations under other revenue laws
• If there are reasonable grounds to believe that the person will not keep proper records or furnish regular and reliable returns
Changes to VAT registration details. Any changes to VAT registration details should be done online through the ITAX portal. A VAT registered person should notify the Commissioner of Domestic Taxes, in writing, of any changes in the name, address, place of business or nature of business of the person within 21 days of the change.
D. Rates
The term “taxable supplies” refers to supplies of goods and services that are liable to a rate of VAT, including the zero rate.
The VAT rates are:
• Standard rate: 16% (due to COVID-19, the rate was decreased from 16% to 14% for the period 1 April 2020 to 31 December 2020)
• Special rate: 8%
• Zero-rate: 0%
The standard rate of VAT applies to all supplies of goods or services unless a specific measure provides for a reduced rate, the zero rate or an exemption.
Examples of goods and services taxable at 0%
• Exportation of goods
• Goods and services supplied to Export Processing Zones
• Transportation of passengers by air carriers on international flight
• Goods and services supplied to Special Economic Zones
• Supplies to the Commonwealth
• Supplies to other governments
• Supplies to diplomats
Examples of goods and services taxable at 8%
• Motor fuel (regular and premium gasoline)
• Aviation fuel
• Gas oil
• Natural gas
The term “exempt supplies” refers to supplies of goods and services that are not liable to VAT and that do not qualify for input tax deduction.
Examples of exempt supplies of goods and services
• Unprocessed agricultural products
• Direction-finding compasses
• Passenger baggage
• Financial services
• Insurance
• Medical services
• Agricultural and horticultural services and animal husbandry
• Transportation of passengers by any means of conveyance, excluding international air transport or where the means of conveyance is hired or chartered
• Entry fees into national parks and national reserves
• Exported taxable services
Option to tax for exempt supplies. The option to tax exempt supplies is not available in Kenya.
E. Time of supply
The time when VAT becomes due is called the “time of supply” or “tax point.” In Kenya, the tax point is the earliest of the following events:
• The goods or services are supplied.
• A certificate is issued by an architect, surveyor or a consultant.
• An invoice is issued.
• Payment is received for all or part of the supply.
Deposits and prepayments. There are no special time of supply rules in Kenya for deposits and prepayments. As such, therefore the general time of supply rules apply (as outlined above).
Continuous supplies of services. For continuous supplies, the time of each successive supply is the earlier of the date on which payment for the successive supply is due or received.
Goods sent on approval for sale or return. There are no special time of supply rules in Kenya for supplies of goods sent on approval for sale or return. As such, the general time of supply rules apply (as outlined above).
Reverse-charge services. Reverse-charge VAT is due on the importation of taxable services to the extent that the services relate to the provision of exempt supplies. Where imported taxable ser vices relate to provision of taxable supplies, the net effect of accounting of reverse-charge VAT payable and claim of input tax (self-supply) is zero. There are no special time of supply rules in Kenya for the supply of reverse-charge services. As such, the general time of supply rules apply (as outlined above).
Leased assets. VAT is due on lease rentals at the earlier of when the invoice is raised or when the payment is made.
Imported goods. The time of the supply for imported goods is either the date of importation or the date on which the goods leave a duty suspension regime.
F. Recovery of VAT by taxable persons
A taxable person may recover input tax, which is VAT charged on goods and services supplied to it for business purposes. Input tax is claimed by deducting it from output tax, which is VAT charged on supplies made.
The time limit for a taxable person to reclaim input tax in Kenya is six months. Taxable persons must claim input tax within six months after incurring the expense. Input tax includes VAT charged on goods and services purchased in Kenya and VAT paid on imports of goods.
Nondeductible input tax. VAT may not be recovered on purchases of goods and services that are not used for business purposes (for example, goods acquired for private use by an entrepreneur). In addition, input tax may not be recovered on certain business expenses.
Examples of items for which input tax is nondeductible
• Leasing, hiring or acquisition of passenger cars or minibuses and the repair and maintenance thereof, including spare parts, unless the passenger cars and minibuses are acquired by the registered person exclusively for the purpose of making a taxable supply in the ordinary course of a continuous and regular business of selling and dealing in or hiring of passenger cars and minibuses
• Entertainment, restaurant and accommodation services unless: The services are provided in the ordinary course of the business carried on by the person to provide the services, and the services are not supplied to an associate or employee The services are provided while the recipient is away from home for the purposes of the business of the recipient or the recipient’s employer
Examples of items for which input tax is deductible if related to a taxable business use
• Professional fees
• Utility costs
Partial exemption. VAT directly related to making exempt supplies is not recoverable. A regis tered person who makes both exempt and taxable supplies cannot recover VAT in full. This situ ation is referred to as “partial exemption.”
Under the VAT Act, if a taxable person supplies both taxable and exempt goods and services, only input tax attributable to taxable supplies may be recovered. The following are the attribution rules:
• Input tax directly attributable to taxable goods purchased and sold in the same condition is deductible in full.
• Input tax directly attributable to exempt supplies may not be deducted.
• Attributable to both taxable and exempt supplies is partially deductible. The recoverable amount is calculated using a simple pro rata method based on the value of taxable and exempt supplies made.
If the exempt supplies are less than 10% of the total supplies, the input tax may be claimed in full. Where the exempt supplies constitute more than 90%, the registered person shall not be allowed any input tax attributable to taxable supplies.
Approval from the tax authorities is not required to use the partial exemption standard method in Kenya. Special methods are not allowed in Kenya.
Capital goods. “Capital goods” is not defined under the provisions of the VAT Act in Kenya, and there are no specific rules that outline input tax recovery on capital goods. General rules are applied for deduction of input tax. Specifically, deduction of input tax on passenger vehicles is restricted. In all other cases, deduction of input tax on capital goods depends on whether the business is dealing with exempt or taxable supplies. Where capital goods are used for both tax able and exempt supplies, the input tax should be claimed to the extent it relates to provision of taxable supplies.
Refunds. A taxable person may claim a refund of input tax in excess of output tax if the Commissioner is satisfied that the excess arises from making zero-rated supplies. The Comissioner may refund tax where the tax has been paid in error. A claim for tax paid in error must be filed within a period of one year (12 months) after the date on which the tax was paid.
Pre-registration costs. On the date a person is registered, and for the next three months, the tax able person may recover pre-registration input tax paid on taxable supplies intended for use in
making taxable supplies, provided that those purchases of taxable supplies were completed no more than 24 months before the date of registration.
Bad debts. Where a registered person does not receive payment from a customer, it may, after a period of three years from the date of supply or where the person has become legally insolvent, apply to the Commissioner for a refund of the tax involved. The refund should be lodged before expiry of four years from the period of supply. If legal insolvency does not apply, evidence of the effort to recover the tax is required to support such a claim.
Noneconomic activities. Input tax incurred on purchases that are used for noneconomic activities is not recoverable in Kenya.
G. Recovery of VAT by non-established businesses
Input tax incurred by non-established businesses in Kenya is not recoverable.
H. Invoicing
VAT invoices. A supplier of taxable goods and services must issue a tax invoice to the purchaser at the time of supply.
Credit notes. A credit note may be used to reduce the VAT charged on a supply of goods or ser vices. Credit notes must show the same information as a tax invoice and indicate the tax invoice date and number it relates to.
Electronic invoicing. Electronic invoicing is allowed in Kenya, but not mandatory. An invoice may be generated electronically or manually, provided it meets the prescribed conditions of a valid tax invoice. Effective 1 August 2021, tax invoices must be issued through a prescribed electronic tax register (ETR) or upgraded electronic signature device (ESD).The electronic register is an elec tronic tax invoicing or receipting system that is maintained and used in accordance with the VAT (electronic tax invoice) regulations. See the subsection Digital tax administration below for more detail.
Simplified VAT invoices. Simplified VAT invoicing is not allowed in Kenya. As such, full VAT invoices are required.
Self-billing. Self-billing is allowed for registered persons liable to tax for imported services and is entitled to a credit for part of the amount of input tax payable. They must prepare a tax invoice containing the following information:
• The name, address and PIN of the recipient
• The name and address of the supplier
• The individualized serial number of the tax invoice and the date on which the tax invoice is prepared
• A description of the services supplied and the date of the supply
• The extent to which the supply has been applied other than to make taxable supplies
• The consideration for the supply and the amount of tax charged
Proof of exports. Goods and taxable services exported from Kenya are zero-rated. The documen tation treated as the proof of an exportation of goods or services includes the following:
• A copy of the invoice showing the recipient of the supply to be a person outside Kenya
• Proof of payment for the supply
• For goods, a copy of:
The bill of lading, road manifest or airway bill, as the case may be
The export or transfer entry certified by a proper officer of Customs at the port of exit (for single customs territory clearance cargo manifest (C2))
For excisable goods, a certificate of export (COE) issued from the customs systems (SIMBA or ICMS), in addition to endorsed export entry/single customs territory cargo manifest (C2)
• For services, such other documents as the Commissioner may require as proof that the services had been used or consumed outside Kenya
Foreign currency invoices. Foreign currency invoices are dealt with the same way as invoices in the domestic currency, which is the Kenyan shilling (KES). The tax authority does not require a standard exchange rate to be used to convert the value of foreign invoices into the domestic currency KES. In practice, they accept the rate used by the taxable person, if the rate used is within the prevailing market exchange rates.
Supplies to nontaxable persons. There are no special rules for invoices issued for supplies made by taxable persons to private consumers.
Records. Records must be kept in Kenya. They are not allowed to be held outside of the country. The records to be retained include:
• Copies of all tax invoices and simplified tax invoices issued, in serial number order
• Copies of all credit and debt notes issued, in chronological order
• Purchase invoices, copies of customs entries, receipts for the payment of customs duty or tax and credit and debit notes received
• Details of the amounts of tax charged on each supply made or received and in relation to all services to which section 10 applies (i.e., on imported services), sufficient written evidence to identify the supplier and the recipient, and to show the nature and quantity of services supplied, the time of supply, the place of supply, the consideration for the supply and the extent to which the supply has been used by the recipient for a particular purpose
• Tax account showing the totals of the output tax and the input tax in each period and a net total of the tax payable or the excess tax carried forward, as the case may be, at the end of each period
• Copies of stock records kept periodically as the Commissioner may determine
• Details of each supply of goods and services from the business premises, unless such details are available at the time of supply on invoices issued at, or before, that time
• Such other accounts or records as may be specified, in writing, by the Commissioner
Record retention period. Taxable persons must keep a full and true written record, whether in electronic form or otherwise, in English or Kiswahili of every transaction it makes, and the record must be kept in Kenya for a period of five years from the date of the last entry made therein.
Electronic archiving. Registered persons must keep records, including copies of tax invoices in an electronic manner or otherwise.
I. Returns and payment
Periodic returns. The VAT tax period is one month. Returns must be filed by the 20th day after the end of the tax period. A “nil” return must be filed in instances where the taxable person has not made any supplies. If the normal filing date falls on a public holiday or on a weekend, the VAT return and payment must be submitted on the last working day before that day. A person may apply to the Commissioner before the due date for submission of return for an extension of time to submit a return.
Periodic payments. Payment of VAT is due and received by the KRA in full by the same date as the VAT return submission deadline, i.e., by the 20th day after the end of the tax period. Upon filing the monthly VAT return, a person is required to generate a payment registration number (PRN), which is used to pay VAT at the Revenue Authority’s (KRA) appointed banks or through cellular phones payment platforms (M-pesa).
Electronic filing. Electronic filing is mandatory in Kenya for all taxable persons. All returns must be filed electronically via the KRA i-Tax portal.
Payments on account. Payments on account are not required in Kenya.
Special schemes. Withholding VAT. A person must be appointed by the Commissioner as a with holding VAT agent. Taxable supplies to an appointed withholding VAT agent are subject to with holding VAT at 2% (from 7 November 2019) of the taxable value. Appointed withholding VAT agents include government ministries, parastatals, financial institutions and most of the major taxable persons, as they may be appointed by the Commissioner. A taxable person whose VAT has been withheld must account for the VAT balance.
Annual returns. Annual returns are not required in Kenya.
Supplementary filings. No supplementary filings are required in Kenya.
Correcting errors in previous returns. A registered person can amend its VAT return online within six months. For returns exceeding six months, the returns can only be amended by KRA on application by the taxable person.
Digital tax administration. Electronic register. From September 2020, the electronic register is an electronic tax invoicing or receipting system that is maintained and used in accordance with the VAT (Electronic Tax Invoice) Regulations. Registered suppliers will be required to ensure that the register is in continuous operation. The register shall transmit tax invoice data to KRA’s system and an end-of-day summary of the entities’ transactions. This integration will provide KRA with real-time data on transactions on a day-to-day basis, thereby enabling the authority to eas ily enforce compliance. Registered suppliers shall comply with these regulations by 1 August 2022. Where a person is unable to comply within the stipulated time frame, the person shall apply to the Commissioner for an extension of time, which shall not exceed six months. The application must be made before 1 July 2022.
J. Penalties
Penalties for late registration. A penalty of KES200,000 or imprisonment for a period not exceed ing two years (or both) is imposed in the event of late registration by traders who meet the turnover threshold.
Penalties for late payment and filings. Late submission of a return is subject to a penalty of KES10,000 or 5% of tax due, whichever is higher. Late payment attracts interest at a rate of 1% per month, simple interest.
Penalties for errors. There are no penalties for errors provided by the VAT Act. The Act provides for specific and general penalties for noncompliance offenses. The general penalty is a fine not exceeding one million shillings or imprisonment for a term not exceeding three years or both.
The failure to keep, retain or maintain documents without reasonable cause for a reporting period is subject to a penalty of KES100,000 or 10% of the amount of tax payable under the Act to which the document relates for the reporting period to which the failure relates whichever is higher.
The failure to display registration certificate is subject to a penalty of up to KES200,000 or a maximum sentence of two years’ imprisonment, or both.
Penalties for fraud. Making a fraudulent claim for a refund of tax is subject to a penalty of two times the amount of claim.
Unauthorized access to or improper use of tax computerized system is subject to a penalty of a maximum of KES400,000 or a maximum sentence of two years’ imprisonment, or both.
Interference with tax computerized system is subject to a penalty of a maximum of KES800,000 or a maximum sentence of three years’ imprisonment, or both.
Personal liability for company officers. Where a person acting as an employee or an agent commits an offense under a tax law, that person’s employer or principal shall be treated as having also committed the offense.
If the person that commits an offense under a tax law is a company, the offence shall be treated as having been committed by an individual who, at the time the offense was committed, was:
• The chief executive officer, managing director, a director, company secretary, treasurer or other similar officer of the company Or
• A person acting or purporting to act as the chief executive officer, managing director, a director, company secretary, treasurer or other similar officer of the company.
Statute of limitations. The statute of limitations in Kenya is five years unless the taxable person is under investigation. The KRA may review VAT returns and issue an assessment in the event of any errors before the expiry of five years from the date of filing the self-assessment return. If the Commissioner therefore chooses to exercise this power, it must do so within the stated timeline so as to ensure the request is efficient and reasonable and that the same does not place an onerous obligation on the taxpayer owing to requests for records of transactions that occurred over five years ago.