Withholding Tax in Kenya: What Is It, How to Calculate, New Rates, and Filing Returns
Discover all you need to know about Withholding Tax in Kenya, from calculation methods to filing returns. Stay updated with the latest rates and compliance requirements.
Have you ever been in a situation where your income fell short of what you expected, especially after offering consultancy services or receiving various payments? It can be frustrating, but before you storm into anyone's office, you may receive a reassuring email from iTax and a 'Withholding Certificate' attached. This certificate often explains the missing amount as 'Withholding Tax.'
In this article, we'll delve into what Withholding Tax is, how to calculate it, the latest rates, and the process of filing withholding tax returns in Kenya.
What is Withholding Tax?
Withholding Tax, often referred to simply as 'Withholding Tax,' is a retention tax system in which the payer of certain types of income deducts a specific percentage as Tax at the source. This deducted Tax is then remitted to the Kenya Revenue Authority (KRA). The types of income subject to Withholding Tax include management/professional fees, dividends, royalties, interest, and winnings from betting and gaming. The percentage withheld varies based on the nature of the income and the taxpayer's residency status.
There are two main parties involved in the Withholding Tax process:
- Withholder: This is the individual or entity making the payment and withholding a portion for tax purposes. They are responsible for remitting the withheld Tax to the KRA.
- Withholdee: The withholdee is the recipient of the income subject to withholding. They are the ones who receive the reduced payment after the tax deduction.
Is Withholding Tax a Final Tax?
The status of Withholding Tax as a final or advance tax depends on the nature of the transaction:
- Advance Payment: When Withholding Tax is deducted as an advance payment, it is used to offset the recipient's overall tax liability to the government. If the recipient's actual tax liability, determined after filing tax returns, is less than the Tax withheld, a refund may be issued. Conversely, additional Tax is due if the tax liability exceeds the withheld amount.
How to Calculate and Pay Withholding Tax
Withholding Tax should be remitted to KRA on or before the 20th day of the following month. The payment process has been streamlined through the iTax platform. Here's how to calculate and pay:
- Generate Payment Slip: Using iTax, the withholder generates a payment slip that can be presented at designated KRA banks for payment.
- Alternative Payment: Payment can also be made via M-PESA using KRA's PayBill Number 572572, with the Payment Registration Number (PRN) on the generated payment slip as the Account Number.
- Certificate Distribution: Upon successful remittance, iTax automatically sends copies of the Withholding Certificate to the registered email addresses of both the withholder and the withholder.
Withholding Tax Rates In Kenya
The rates that are currently applicable for payments to residents and nonresidents as indicated in the table below: -
|
Payments |
Resident WHT rate (%) |
Non-resident WHT rate (%)* |
|
Dividend** |
10 |
15*** |
|
Qualifying dividend |
5 |
N.A |
|
Interest on Bearer instruments of at least 2 years |
25 |
25 |
|
Interest on Government bearer bonds with maturity ≥ 2 years |
15 |
15 |
|
Interest on bearer bonds with maturity ≥ 10 years |
10 |
25 |
|
Interest paid by SEZ to non-resident |
|
5 |
|
Fees payable to insurance brokers |
5 |
|
|
Qualifying interest on housing bonds |
10 |
|
|
Qualifying interest on other bearer instruments |
20 |
- |
|
Qualifying interest-other |
15 |
N/A |
|
Royalty, natural resource income |
5 |
20 |
|
Royalties paid by SEZ to non-resident |
|
5 |
|
Winnings from gaming and betting |
20 |
20 |
|
Management fees, professional fees, training fees |
5 |
20**** |
|
Contractual fees |
3 |
20 |
|
Management Fees paid by SEZ to non-resident |
|
5 |
|
Rent/leasing of Immovable property |
10 |
30 |
|
Rent/leasing of property other than immovable property |
N/A |
15 |
|
Pension/retirement annuity |
Graduated scale |
5 |
|
Sales promotion, marketing, advertising services, and transportation of goods (excluding air and shipping transport services) |
N/A |
20 |
|
Insurance or reinsurance premiums |
N/A |
5 |
|
Payments to sportsmen and entertainers |
5 |
20 |
|
Supporting, assisting or arranging an appearance or performance |
N/A |
20 |
|
Gains from business of non-resident ship-owner taxed under Section 9(1) of Income Tax Act |
|
2.5 |
|
Gains & Profits from the business of transmitting messages chargeable under Section 9(2) of Income Tax Act |
|
5 |
* The rates of WHT applicable for non-residents may vary if the payee is a resident of a country which has a double tax agreement with Kenya that provides a different rate.
**Dividend paid to a resident corporate shareholder with more than 12.5% voting power is exempt from withholding tax
*** Rate applicable to citizens of the East African Community Partner States in respect of dividends shall be 5%
****Rate applicable on payment in respect of consultancy fees to citizens of the East Africa Community Partner states shall be 15%.
Filing Income Tax Returns with Withholding Certificates
If you have received income subject to Withholding Tax and possess a Withholding Certificate, filing an income tax return is still essential. Here are the steps to follow:
- Download the IT1 Return Form: Visit the KRA website and download the IT1 return form.
- Declaration of Income and Tax Withheld: Complete the IT1 form, declaring your income and the corresponding tax withheld.
- Payment of Balance Tax: Any balance of Tax owed must be paid on or before the 30th of April in the following year.
For a more detailed guide on filing your income tax return, refer to the official tutorial video provided by KRA.
Withholding Tax serves two critical purposes:
- Boosting Government Revenue: It provides an avenue for bolstering government cash flows as an advance tax payment.
- Source-Based Taxation: In countries like Kenya that operate under a source-based taxation model, withholding Tax ensures that all income derived from the country is taxed. This model means income is only taxed if earned within the country's borders.
READ ALSO: Withholding Tax Returns: How to Easily File Withholding Tax Returns And Applicable Rates In Kenya
Conclusion
Withholding Tax is a crucial aspect of the Kenyan tax system, ensuring that Tax is collected at the source for various types of income. Understanding its nuances, including calculation, payment, and filing, is essential for businesses and individuals. Stay informed about the latest rates and compliance requirements to navigate the Kenyan tax landscape effectively.
