The Accountant Sep-Oct 2016√(2)

Financial reporting and assurance
CLARIFICATION ON
SOME ISSUES IN
WITHHOLDING TAX
By FCPA Jim McFie, a Fellow of the Institute of Certified Public Accountants of Kenya
The other day I was given a
pamphlet published by the
Kenya Revenue Authority
(KRA) entitled “With-holding
tax overview” – henceforth, the
document. The document states that the
rate of withholding tax on “Interest earned
from long term bearer bonds of 10 years
and above” is 10% when paid to residents
and 10% when paid to non-residents.
However, in the latest Income Tax Act
on the website of KRA, the Income Tax
(Withholding) Tax Rules 2001 state in
paragraph four, subparagraph one: “A
person who makes a payment of, or on
account of, any income which is subject
to withholding tax shall deduct tax there
from in the amount specified – (a) under
paragraphs 3 and 5 of Head B of the Third
Schedule”. Paragraph 3 of Head B of the
Third Schedule reads: “The non-resident
tax rates shall be-(e) (i) in respect of interest
arising from a Government bearer bond
of at least two years duration and interest
and deemed interest, discount or original
issue discount, fifteen percent of the gross
sum payable; (ii) in respect of interest,
arising from a bearer instrument other
than a Government bearer bond of at least
two years duration, twenty-five per cent
of the gross amount payable”. Paragraph
5 reads: “The resident withholding tax
rates shall be –(b) in respect of interest,
discount or original issue discount arising
from –(i) a bearer instrument other than
a Government bearer bond of at least two
years duration, twenty-five percent;(ii) a
Government Bearer Bond of at least two
years duration and other sources, fifteen
percent of the gross amount payable;
(iii) bearer bonds with a maturity of ten
years and above, ten percent of the gross
amount payable”. The document published
by KRA states that “the consequences of
non-compliance by the agent (the payer of
the interest) are: (i) tax which should have
been recovered from the income of the
payee will be recovered from the payer; and
(ii) penalties and interest on late payment
of the due tax are payable by the payer” – I
have simplified that phraseology to make it
more understandable.
The document also states: “The
following types of Withholding Tax
payable to Resident individuals becomes
the final tax: Withholding Tax on
qualifying Interest; Withholding Tax on
qualifying Dividends”. The document
goes on to say: “Where deducted from
incomes of Residents, the following types
of withholding Taxes are available for offsetting
against assessment: (i) Withholding
Tax charged on Non-qualifying Dividends;
. . . . . .(v) Withholding Tax on Pension/
Provident fund, or lump sum payable to
Residents”.
Nowhere in the Income Tax Act does
it actually say that “withholding tax on
qualifying interest payable to a resident
individual is final tax” or that “withholding
tax on qualifying dividends payable to
a resident individual is final tax”. From
Section 2 of the Act, “qualifying interest”
means the aggregate interest, discount
or originalissue discount receivable by a
resident individual not a company) in any
year of –(i) a bank or financial institution
licensed under the Banking Act, or(ii)
a Building Society registered under the
Building Societies Act which in the case
of housing bonds has been approved bythe
Cabinet Secretary for the purposes of this
Act, or(iii) the Central Bank of Kenya:
Provided that –(a) interest earned on
an account held jointly by a husband and
wife shall be deemed to be qualifying
interest; and(b) in the case of housing
bonds, the aggregate amount of interest
shall not exceed three hundred thousand
shillings”. Section 34, (1) states: “Subject
to this section - (a) tax upon the total
income of an individual, other than that
part of the total income comprising wife’s
6 SEPTEMBER - OCTOBER 2016