MISSUE NO. 3616 

April 19 - 24, 2013


 Coastweek   Kenya

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Taxation Of Payments
By Non-Residents

most countries have adopted principles of international tax law in their legislation to ease international trade

Coastweek -- The business environment in the world is truly global and we live in an era where we cannot ignore the effects of international trade, writes STARLING MUCHIRI.

It is common to find a business whose assets, customers and suppliers are situated in a different continent from where it is resident.

As the business world becomes globalized, companies and individuals plying their trade in the international arena are exposed to different tax jurisdictions.

They pay their taxes according to “international tax law”. International tax law is however a misnomer since a person is required to comply with a multiplicity of domestic laws in the countries where they operate.

The business will also be required to comply with bilateral tax agreements (between any two states) and multilateral agreements (among more than any two states) as well as international norms and practices in inter-border operations.

No man is an island. Consequently, most countries in the world have adopted principles of international tax law in their domestic legislation on their own volition (unilaterally) to ease international trade.

Generally, countries impose tax on income on the basis of residency of the taxpayer or the source of the income.

A country may tax its citizens on income derived or accrued from its jurisdiction and from the rest of the world.

This is common among devel-oped countries which are mostly exporters of capital.

A country may also tax its citizens as well as foreigners on income sourced from within its jurisdiction.

This is common among developing countries which are mostly importers of capital.

Developing countries often forego taxing their residents on foreign sourced income, to encourage them to invest abroad.

In practice, most jurisdictions use a combination of the residency and source basis.

Countries that impose tax on a source basis face a challenge in imposing and collecting taxes from foreigners.

They overcome this challenge by requiring residents or non-residents with a trading presence (permanent establishment) in their jurisdiction to withhold taxes when making taxable payments to non-residents.

Certain sources of income are taxed under special provisions.

These include incomes from international freight, income from passive sources and incomes arising from professional and personal services.

Taxation of income from ships in international operations is complex due to the various jurisdictions the vessels operate in.

There are practical challenges in apportioning income and expenses incurred in the various countries.

Ship owners might also end up paying taxes abroad whereas they are making losses in their home jurisdiction.

Consequently, under international tax laws and practice, ship owners pay income tax in their own countries.

However, Jurisdictions that do not have their own shipping companies reserve the right to charge tax on income earned by foreign shipping lines in their jurisdictions, at reduced rates.

In Kenya, the rate of tax is 2.5 per cent of gross freight charged on goods, passengers and mail embarked in Kenya.

Section 10 of the Kenya Income Tax Act (ITA) imposes tax on passive sources of income including rental income, dividends, royalties and interest as well as income from personal services, including management or professional fees, performance and sporting fees.

The tax is collected by withholding under Section 35 of the ITA. Section 10 of the ITA imposes tax where there is a payment by a resident person or a non-resident person with a perm-anent establishment in Kenya.

Further, the payment should be incurred in the production of income by the payer.

My interpretation of Section 10 is that tax is not imposed on professional or management fees income if the payer is not resident in Kenya and does not have a trading presence in Kenya.

Income tax is also not imposed on these sources if the payment does not form part of the expenses of the payer.

In these circumstances, tax should not be collected under section 35 of the ITA.

The author is a Tax Manager at PKF Taxations Services Ltd. The opinions expressed in this article are the author’s own and do not represent the views of PKF, its management or Associates.


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