Proposed amendment to clarify Income Tax Act, reduce stress

By Ilyas Khan

Every person who pays tax is required to submit a self-assessment return to the Domestic Taxes Department of the Kenya Revenue Authority. This is how the tax authority determines that one has paid the correct tax due.

Documents that need to be filed along with the self-assessment return include income and expenditure statement or accounts, working of how various sources of income and tax have been arrived at, vouchers or certificates for any credit of tax and any other supporting documentation supporting figures or claims in the return.

While this has always been understood and practiced by taxpayers, for a number of years there has been several issues that remained unclear regarding the supporting documents to be submitted with the self-assessment return.

Functional currency

One such uncertain issue had been on what functional currency and language the income and expenditure statements or accounts should be used in preparing the document. The tax legislation was silent on this, while the Company Act’s only prescribed that the accounts should be in the English language.

This had created a lot of confusion, especially in the case of local branches of multinational companies who, due to their overseas head office requirements, prepared books of accounts and financial statements in foreign currencies.

Usually such foreign currency financial statements were submitted by the local permanent establishments with their self-assessment return to the Domestic Taxes Department.

KRA subsequently reverted back requesting for statements in Kenya shillings, even though there was no legislation or law to back this. This often created a lot of unnecessary correspondence, arguments, and therefore tension, between taxpayers and the Department.

Finally, to clarify matters, amendments have now been introduced in the 2011 Finance Bill that provides that any return, record or other document required to be kept or produced under the Income Tax Act, will be in either of the official languages prescribed by the Constitution, which are English and Kiswahili.

Also, the unit of currency in any such return, accounts or document shall be in Kenya shillings.

Additional time

While, this may mean additional administration time and costs for resident multinational taxpayers in order to have records and financial statements prepared in English or Kiswahili and in shillings as well in their head office’s foreign functional currency and language, it does create certainty on the matter.

Unquestionably it will reduce the unnecessary correspondence, arguments and stress on this simple matter and improve taxpayers and tax authority relationships.

This article was written by Ilyas Khan, Senior Tax Manager Deloitte Kenya. The views expressed in this article are the author’s and not necessarily those of Deloitte Kenya. Please visit http://www.deloitte.com/ke for more on our Budget analysis.