Worldwide VAT, GST and Sales Tax Guide
At the time of preparing this chapter, the guidelines on group VAT registration are still not issued. As such, it is not 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.
Fixed establishment. In Kenya there is no legal definition of a fixed establishment for VAT purposes. However, a permanent establishment (PE) is defined as follows under the income tax laws (and applied for VAT):
• A fixed place of business through which business is wholly or partly carried on. This includes a place of management; a branch, office, factory, or workshop; a mine, oil or gas well, quarry or any other place of extraction or exploitation of natural resources; a warehouse in relation to a person whose business is providing storage facilities to others; a farm, plantation or other place where agricultural, forestry plantation or related activities are carried out; and a sale outlet.
• A building site, construction, assembly or installation project or any supervisory activity connected to the site or project, but only if it continues for a period of more than 183 days.
• The provision of services, including consultancy services, by a person through employees or other personnel engaged for that purpose, but only where the services or connected business in Kenya continue for a period of, or periods exceeding in the aggregate, 91 days in any 12-month period commencing or ending in the year of income concerned.
• An installation or structure used in the exploration for natural resources where the exploration activities continue for periods not less than 91 days.
• A dependent agent of a person who acts on their behalf in respect of any activities which that person undertakes in Kenya including habitually concluding contracts or playing the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the person.
However, the definition of a permanent establishment excludes the following activities where the activities are of a preparatory or auxiliary character:
• The use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise.
• The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, or display.
• The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise.
• The maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information for the enterprise.
• The maintenance of a fixed place of business solely for the purpose of carrying on for the enterprise any other activity
• The maintenance of a fixed place of business solely for any combination of activities mentioned above
For VAT law, where a nonresident person has PE in Kenya, VAT is applicable on the supply of goods or services as provided under the VAT law. Nonresident persons are advised to evaluate their transactions in Kenya to determine whether they create a PE. Nonresidents with a PE in Kenya are also required to comply with the Tax Procedures (electronic tax invoicing) Regulations, 2024.
Non-established businesses. A “non-established business” is a business that has no fixed establishment 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.
The regulations came into effect on 1 January 2021. With effect from 1 July 2022, B2B supplies were also brought in the ambit of VAT on digital services following the amendment of the Kenya VAT law to exempt supplies made over the digital marketplace from the reverse-charge mechanism.
VAT is applicable to taxable electronic, internet or digital marketplace supplies made in Kenya. An “electronic, internet or digital marketplace supply” means the supply made over the internet, an electronic network or any digital marketplace. These supplies include:
• Downloadable digital content, including downloadable mobile applications, eBooks and films
• Subscription-based media, including news magazines and journals
• Over-the-top services, including streaming television shows, films, music, podcasts and any form of digital content
• Software programs, including software, drivers, website filters and firewalls
• Electronic data management, including website hosting, online data warehousing, file sharing and cloud storage services
• Music and games
• Search engines and automated helpdesk services, including customizable search engine services
• Ticketing services for events, theatres, restaurants and similar services
• Online education programs, including distance teaching programs through prerecorded media, eLearning, education webcasts, webinars, online courses and training, but excluding education services exempted under the First Schedule to the Act
• Digital content for listening, viewing or playing on any audio, visual or digital media
• Services that link the supplier to the recipient, including transport hailing platforms
• Electronic services specified under section 8(3)
• Sales, licensing or any other form of monetizing data generated from users’ activities
• Facilitation of online payment for, exchange or transfer of digital assets excluding services exempted under the Act
• Any other service provided through an electronic, internet and digital marketplace that is not exempt under the Act
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 information 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 registered 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%
• 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.
The special rate of 8% has been removed by the Finance Act 2023 with effect from 1 July 2023.
Effective 1 July 2023, as per Finance At 2023, the exportation of taxable services is now zero rated, which is an amendment to Finance Act 2022 which only qualified exported services relating to business process outsourcing (BPO) to be zero-rated.
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
• Liquified petroleum gas (LPG)
• Electric buses of tariff heading 87.02
• Solar and lithium-ion batteries
• Export of qualified export services relating to business process outsourcing (BPO) (effective 1 July 2023)
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
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. The taxable person can utilize the tax paid in error to offset against future tax liabilities.
Pre-registration costs. On the date a person is registered, and for the next three months, the taxable 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 to whom the supply was made has been placed under statutory management through the appointment of an administrator, receiver or liquidator, apply to the Commissioner for a refund of the tax involved. Effective 1 July 2023, the refund should be lodged before an expiry of 10 years from the date 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 that are not registered for VAT 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 services. 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 mandatory in Kenya, for certain taxable persons.
Scope of electronic invoicing. For B2B, B2C and business-to-government (B2G) supplies, electronic invoicing is mandatory for certain taxable persons in Kenya.
An invoice must be generated electronically, provided it meets the prescribed conditions of a valid tax invoice. Effective 1 December 2022, tax invoices must be issued through an electronic tax invoice management system (eTIMS) or tax invoice management system (TIMS) devices.
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 now repealed and replaced with Tax Procedures (electronic tax invoice) Regulations, 2024. See the subsection Digital tax administration below for more detail.
The use of an electronic tax invoicing system is a mandatory requirement for all taxable persons who are liable to apply for VAT registration, that is:
• A company or individual who has made taxable supplies or expects to make taxable supplies, the value of which is KES5 million or more in any period of 12 months
• A company or individual who is about to commence making taxable supplies, the value of which is reasonably expected to exceed KES5 million in any period of 12 months. Nonresident VAT-registered taxable persons making supplies in Kenya are exempted from issuing electronic tax invoices, with the only requirement for them being issuing invoices or receipts showing the value of the supply made and tax charged. The KRA has issued a new directive through a public notice dated November 2023 requiring all taxable persons, including those not registered for VAT, to onboard on the electronic tax invoice management system (e-TIMS). While
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. Invoices issued through e-TIMS must, however, be transmitted only in KES.
Supplies to nontaxable persons. There are no special rules for invoices issued for supplies made by taxable persons to private consumers.
Records. In Kenya, examples of records that must be held for VAT purposes 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 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
In Kenya, VAT books and records can be held outside the country. Where the books are held outside Kenya, they must be provided upon request by the Commissioner.
Record retention period. Taxable persons must keep a full and true written record, 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. Electronic archiving is allowed in Kenya. Registered persons must keep records, including copies of tax invoices, in an electronic manner or otherwise (i.e., in paper form).
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.