Withholding tax on foreigners should be scrapped or drastically slashed under a reformed Income Tax Act, PricewaterhouseCoopers (PwC) has recommended.
The tax — which is mainly charged on professional fees, royalties, dividends and interest — is currently set at 20 per cent but PwC argues the rate is too high.
In the Budget Policy Statement (BPS) for 2018/19, the Treasury has proposed to have Income Tax Act reviewed by mid this year, ahead of the start of next fiscal year.
PwC reckons that imposing the tax on amounts will be double taxation because the same firms or individuals are also expected to pay tax in home countries.
It notes the levy applies well for local residents because it is considered to be advance tax so that the taxpayer only meets the difference (that has not been paid) by the end of the year.
“The withholding tax that is imposed on non-residents ought to be removed or reduced by a big margin to remove the element of double taxation,” said Titus Mukora, a tax partner with PwC.
Mr Mukora said removing or cutting the tax substantially was one way of encouraging foreign investments in Kenya noting that many countries do not apply the withholding tax on foreigners.
“You are only taxed if you have a permanent establishment in the country. But what is needed here to start with is a better definition of a permanent establishment, which is one of the reasons for the confusion on this law,” said Mr Mukora.
The Treasury has been planning to make changes to the Income Tax Act as it seeks to increase revenues while cutting the fiscal deficit in coming years. The deficit has been rising in recent years as a result of financing of mega projects but the gap is now set to fall substantially by 2021.
Tax revenues have been constrained by a soft economy where income tax revenue has stagnated due to loss of thousands of jobs in many companies as well as low profitability or losses.
According to the Treasury’s most recent Quarterly Economic and Budgetary Review, ordinary (mostly tax) revenue collected for the half year to last December was below target by Sh44.8 billion with more than half (Sh24.75 billion) of this being a result of lower pay-as-you-earn (PAYE) collections.