Tax Implications for Not-for-Profit Organizations in Kenya

Kenya exempts from corporate income tax, the income of certain Not-for-Profit Organizations that carry out specific types of activities. Unrelated business income is subject to tax under certain circumstances.

Kenya also subjects certain sales of goods and services to VAT, with a fairly broad range of exempt activities. The tax laws confer only limited tax benefits on corporate donors and on individual donors.

Taxation for Not-for-Profit Organizations

There are various taxes applicable to NPOs whether they are NGOs or Companies based on their type of business registered and tax rates apply to depend on the tax residency of the service providers.

The income Tax Act has set out qualifications for Kenya tax residency and in addition, the tax rates used to withhold tax and the taxes applicable such as PAYE, VAT, WHT. Also, the presence of double taxation agreements applies.

Pay As You Earn (PAYE)

NGO’s usually have both local and international employees and directors. The compensation earned is basic pay and benefits. Kenyans working for NPOs are not exempt from PAYE.

Foreigners working for NPOs may get exemptions on their PAYE but this applies on a case-by-case basis. PAYE is deducted monthly at the prevailing individual income tax rates, on or before the 9th of the following month.

PAYE returns are filed online via iTax NPOs without PAYE to remit should file a NIL return via iTax. The total compensation is subject to PAYE with admissible deductions such as retirement contributions, deposits in HOSP, and owner-occupied interests.

Withholding Tax

There no exemptions associated with Withholding Tax. Withholding Tax rates vary depending on the income, and whether the recipient of the income is resident or non-resident. Services subject to withholding tax such as:

Payments to Residents and PE

• Management or professional fee whose value exceeds KES 24,000 (5%)
• Training fee
• Dividend (exempt >12.5% voting power) (5%<12.5% voting power)
• Interest and deemed interest
• Royalty and natural resource income
• Rent on commercial property (10%)
• Pension/retirement annuities (0-30%)

Payments to Non – Residents

• Management or professional fee (20%)
• Training fee
• Royalty and natural resource income (20%)
• Rent for use or occupation of a property
• Dividend (10%)• Interest and deemed interest (15%)
• Payment to sportsmen or entertainers (20%)
• Telecommunication service fees (5%)
• Pension/retirement annuities (5%)

Payment is done via iTax. Generate a payment slip and present it, with the tax due, at any of the KRA-appointed banks. After successful payment of Withholding Tax, both the Withholder and Withholdee will receive a withholding certificate via email.

Value Added Tax (VAT)

Normally NGOs are not exempted from VAT unless they have sorted and been granted an exemption. Therefore, the VAT invoices from suppliers should be paid. In the budgeting for the projects, they should factor VAT.

The two tax rates for VAT are:

• 14% – general rate of tax and is applicable to most of taxable goods and taxable services.
• 0% – applies to certain categories of goods and services (excluding exports). These are; agricultural inputs, pharmaceutical products, educational materials and supplies to privileged persons.

VAT returns are filed online via iTax, on or before the 20th of the following month, by filling a VAT3 Return form. After filing your VAT returns online, generate a payment slip for any tax due and make payment to any of the KRA-appointed banks. Payment can be made in Cash, Cheque, or RTGS.

VAT status of supplies by NGOs

Exempt supplies

The supply of social welfare services by charitable organizations is exempt. This is on condition that:

1. The charitable organizations are registered as such; or

2. Such charitable organizations are exempted from registration by the Registrar of Societies or by the Non-Governmental Organizations Coordination Board and their income is exempt from VAT under Para 10 of the First Schedule to the Income Tax Act (ITA).

• Para 10 exempts the income of an institution, body of persons, or irrevocable trust, of a public character established solely for the purpose of relief of the poverty or distress of the public.
• Generally, gains or profits from the business are not exempt unless solely applied for the above-referred purpose.

Taxable supplies or importations by the following privileged persons or institutions are zero rated for VAT:

1. Goods consigned to Commonwealth and other governments for personal use or consumption by officials or men on board a naval vessel
   1. Diplomats and first arrival persons – household and personal effects including one motor vehicle
   1. Taxable supplies for the use of the United Nations or its special agencies
   1. Donor agencies with bilateral or multilateral agreements – mainly covering household and personal effects of entitled persons
   1. Supplies to international and regional organizations – including donor agencies, organizations with diplomatic accreditation or bilateral or multilateral agreements
   1. Relief goods supplied or imported for emergency use
   1. Supplies to National Red Cross Society and St. John Ambulance

Excise Duty

NPOs are also not exempt from paying excise duty on domestic purchases of items that are subject to it and should apply for exemptions where they wish not to pay. The rate varies depending on the goods and services. The types include:

• Specific Duty Rate: This is where a specific amount of tax is charged per unit of measure on an excisable product e.g., Kshs. 120 per litre of spirit.
• Advalorem Duty Rate: This is where a percentage rate of duty charged on the value of an excisable product.
• Import tax is charged on the total Cost, Insurance and Freight (CIF) and;
• Locally manufactured goods advalorem rate is charged on the Ex-factory selling price.

Excise Duty on import is paid at the port of entry. Where NPOs import items to be used for their charitable work, they should apply for exemption on those specific items through the relevant ministries and they don’t enjoy blanket exemptions.

Domestic Excise Duty should be paid by 20th day of the following month. Generate a payment slip via iTax and present to any of the KRA appointed banks to make the payment.

Customs Duty

To get an exemption on Customs Duty, NPOs must apply to the Cabinet Secretary for National Treasury through the NGO Board.

The import declaration fee is Levied at 2% of the customs value on goods imported into Kenya for home-use subject to a minimum of KShs 5,000 Exemptions

• Household goods, personal effects, and motor vehicles exempted from import duty under the EAC CMA
• Gifts and supplies for diplomatic and consular missions and to the UN missions
• Gifts by foreign governments and international organizations to charities and foundations.

Taxable Advantages under the PBO Act

The PBO tax provides tax incentives that are broader e.g., inclusion of employment tax aspect. The tax incentives apply to a wider list of organizations i.e., not just for relief of distress or advance of religion or education.

They are contained in the same piece of legislation. It would be neater if the Tax Acts then referred to the PBO Act so that all PBO exemption information is available in a single Act. Those organizations that are registered under the PBO Act are exempt from:

• income tax on income received from membership subscriptions and any donations or grants;
  • income tax on income acquired from the active conduct of income-producing activities if the income is wholly used to support the public benefit purposes for which the organization was established;
  • tax on interest and dividends on investments and gains earned on assets or the sale of assets;
  • stamp duty;
  • court fees (PBO Act Second Schedule Para 1(a)).

These organisations have a number of benefits. These include:

1. an income tax exemption on income received from membership subscriptions and any donations or grants;
2. preferential treatment for value-added tax (VAT);
3. an exemption on customs duties in relation to imported goods or services that are used to further their public benefit purposes; and
4. other exemptions provided in the PBO Act.

For other organisations, for its income to be exempt from income tax, an organization must have been established solely to relieve poverty or distress of the public, or to advance religion or education. In addition, the Commissioner of Income Tax (“Commissioner”) must conclude that the income is expended either wholly within Kenya or in ways that benefit the residents of Kenya (Income Tax Act First Schedule, Cap 470, Para. 10 as amended by Finance Act, No. 6 of 2001). 

Income consisting of profits from a business is subject to an additional restriction. Such income is exempt from tax only if it meets the criteria in the previous paragraph and if one of the following is true: 

(a) The business is carried on in the course of advancing the organization’s stipulated purposes; or

(b) The business is conducted mainly by beneficiaries of those purposes; or

(c) The gains or profits consist of rents (including premiums or similar consideration in the nature of rent) received from leasing land and attendant chattels (Income Tax Act First Schedule, Cap 470).

Once issued, tax exemption certificates are valid for a period of five years and are subject to renewal. The renewal certificate is to be issued within 60 days of lodging the application. The Cabinet Secretary may also revoke an exemption on the basis of any just cause (Income Tax Act First Schedule, Para. 10 as amended by Section 23 of Finance Act, 2012). [15]

This affects trusts, NGOs, churches, and other charitable organizations involved in relief, education, and religious activities.

Deductibility

Individuals and corporations generally can deduct any cash donations from their income tax to a charitable organization that is registered or exempt from registration under the Societies Act or the NGO Act 1990 or the PBO Act; and the income of which is exempt from tax under the provisions of Para. 10 of the First Schedule (Income Tax Act Section 15(2)(w)). This also applies to any project approved by the Cabinet Secretary of Finance (Income Tax Act Section 15(2)(w)).

Expenditures of a capital nature by a person on the construction of a public school, hospital, road, or any similar kind of social infrastructure can be deducted as well, with prior approval of the Cabinet Secretary (Income Tax Act Section 15(2)(x)).

Furthermore, deductibility is permitted for expenditures on scientific research to advance a business, including sums paid to approved scientific research institutes or universities, provided that certain conditions are satisfied (Income Tax Act Section 15(2)(n)). 

Value Added Taxes

Under the PBO Act, there shall be preferential treatment under VAT and customs duties for imported goods or services that are used to further an organization’s public benefit purposes (PBO Act Second Schedule Para. (1)(b)).

If an organization requires exemption from VAT on goods and services required to meet its objectives; or on income-generating activities; or on income for expatriate employees, an application must be made through the NGO’s Board to the Cabinet Secretary of Finance.

“Social welfare services” provided by a charitable organization are exempt from VAT, provided that the organization satisfies two criteria:  

(a)   It must be registered under the Societies Act or NGO Act, or exempted from registration by the Registrar of Societies or the NGO Coordination Board; and

(b)   Its income must be exempt from tax under the Income Tax Act and approved by the Commissioner of Social Services.

Such services are not treated as taxable supplies, and no VAT is charged on them (VAT Act First Schedule, Part 2 Para. 11(b)).

The VAT Act also exempts the supply of services rendered by educational, political, religious, welfare, and other philanthropic associations to their members, provided that this shall not apply where any such services are rendered by way of business (VAT Act First Schedule, Part 2 Para. 11(a)). Certain foods are also VAT exempt (VAT Act First Schedule Part 1).

Import Duties

Customs duties are levied on imported goods. While most industrial plant and machinery is zero-rated, it is necessary to consider each item on a case-by-case basis. The application and management of customs duties are governed by the East African Customs Management Act.

NGOs are not automatically entitled to exemptions on import customs duties. To obtain such exemptions, an application must be made to the Cabinet Secretary for National Treasury through the NGO Board.

A remission of duty may be granted for certain goods, if they are donated or purchased for donation to registered homes for poor and needy persons. The remission is subject to approval by the Cabinet Secretary. Remissions also may be granted when the goods are imported during periods of civil strife, national calamity, or disaster as declared by law or where intended for use in officially recognized refugee camps in Kenya (The Customs and Excise (Remission) (Charitable Organisations) Order 1999 as amended by Legal Notice 46 of 2004).

Compliance

Depending on how the NGO is registered, relevant compliance is necessary:

• If registered under the Companies Act – Limited by shares or Guarantee
• Should file returns with the Registrar of companies annually
• Any change of directors should also be filed with the registrar of companies

Recent cases concerning Not for Profit Organisations in Kenya

1. Trusted Society of Human Rights Alliance v. Cabinet Secretary Devolution and Planning & 3 others [2016] eKLR;  [2017] eKLR
2. Republic v. Non-Governmental Organisations Co-ordinations Board & 4 others Ex-parte International NGO Safety Organisation (INSO) [2017] eKLR
3. Republic v. County Government of Nairobi & 3 others Ex parte Complimentary Schools Association of Kenya (Dagoretti Sub-County Branch) [2017] eKLR.

Also read: Non Governmental Organization

Applications for Exemption from Income Tax

Tax Considerations of Entry Permits

• Sponsorship: All work permit applications must be sponsored by an employer who is locally registered in Kenya.
• Duration of assignment: employers must consider the duration of the individual in the country when determining the type of entry permit to take up. Employers can do some tax planning for Special Pass holders.
• Tax Registrations: Tax Registrations are dependent on the Entry Permit type. Holders of Work Permits/alien cards are entitled to tax registrations. Special Pass holders must obtain approval from the Commissioner to register for the tax PIN upon proof of taxable income in Kenya.
• Alignment of Work Permit and Employment Contract: For tax planning purposes employers require to align their expatriate employment contracts to the work permits.

Procedures to apply for a tax exemption certificate

1. Review whether the exemption is covered under either:
   1. Bilateral or Double Tax agreements; or
   1. Paragraph 10 of the Income Tax Act
   1. Where one qualifies under option 1 (a) above – then there is no requirement to make the application as one automatically qualifies.
   1. Where you fall under category 1 (b) above – you are required to make a formal application for exemption to the relevant KRA policy unit station
   1. The KRA to conduct a comprehensive tax audit to ensure that the organization complies with all relevant legislation i.e., PAYE, Withholding Tax
   1. Where KRA is satisfied that the organization is fully complaint with all tax heads they will then issue the exemption certificate
   1. Application for renewal of this certificate to be done after every 5 years. In practice, this application must be made 6 months prior to the expiry of the existing exemption status

KRA requirements

KRA requires the following information for first-time applicants:

1. A letter of application for Income Tax exemption status
2. Returns of income and audited accounts
3. Copies of the bank statements – for at least 6 months
4. Constitution or Trust Deed
5. A letter from the representative of Central Government stating the activities carried out by the organization
6. Registration certificate
7. PIN Certificate
8. Evidence of the projects carried out for the last 3 years or for whatever period of operation
9. Any other useful information in support of the application