CPA: WITHHOLDING TAXES

WITHHOLDING TAXES

Objectives

By the end of the topic the student should be able to:-

  • Compute tax liability using tax rates
  • Define withholding tax, set off
  • Identify which relief is applicable

7.1 Introduction

This is a method of collecting taxes at source which was introduced to make payment of taxes convenient both to the tax payer and to the government. It also reduces the collection costs and minimizes chances of tax evasion.

A person who makes a payment of, or on account of, any income which is subject to withholding tax shall deduct tax there from as per the specified rate and

  1. Remit the tax deducted to the DTD by the 20th day of the following month and for PAYE by the 9th day of the following month.
  2. Pay the payee net of withholding tax
  • Furnish the payee with a certificate showing the gross amount paid, the total tax deducted and such other particulars as the Commissioner may require.
  1. Keep a record in respect of, name of payee, Personal Identification Number (PIN), gross amount paid, nature of payment and amount of tax deducted.

At the end of the year the person will be assessed on the gross income but a credit will be given as a set-off for all taxes paid in advance, except in those cases where WHT is a final tax. A set-off tax must be made in the same year in which the deduction took place.

 

 

Highlight two advantages and two disadvantages of taxation at source method to both the revenue authority and the taxpayer.

 

Suggested solution

Revenue authority:

 

Tax payers

 

Advantages

i.            Minimizes changes of tax evasion

ii.            Administratively cheaper. The agents are fewer than the tax payers and they bear the cost.

Advantages

i.            Risk of non compliance transfer to the agent : No penalties, interest etc.

ii.            Convenient since tax is collected before receipt of income and the procedures are observed by the agent.

Disadvantages

i.            Risk of dishonest agents overtaxing people and failing to remit the tax.

ii.            Cost of monitoring compliance and educating agents.

Disadvantages

i.            Taxes are deducted before theirdue dates. There’s an opportunity cost to this eg loss of working capital .

ii.            In some cases does not lead to civic conscious, no– pinch.

 

 

 

7.2 Withholding tax rates

  Resident

payee

Notes Non-resident payee
Management, professional and training fees 5% (1) 20%*
Royalties 5%   20%*
Leasing equipment Nil (2) 15%
Dividend<12.5% voting power 5%* (3) 5%/10%*
               >12.5% voting power Exempt   10%
Interest from financial institutions and gov’t 2-year bearer bonds (1) 15% (4) 15%*
Interest on bearer bonds with maturity of 10 years and above 10%   15%
Interest on bearer certificates(1) 25%* (5) 25%*
Housing bond interest(1) 10%* (4&5) 15%*
Rents-immovable property N/A   30%*
Pension and taxable withdrawals from pension/provident funds 10%-30%* (6) 5%*
Insurance commissions 10% (7) 20%*
Contractual fees 3% (8) 20%
Consultancy and agency fees 5% (8) 20%*
Consultancy fee to ea community countries N/A   15%
 Surplus pension fund withdrawals 30%   30%
 Shipping business N/A (9) 2.5%

 

Transmission of messages by cable,  radio etc     5%
Lottery/ betting winnings 20% (10)  

* means that the withholding tax is final

  • Agency fees on export of flowers, fruits and vegetables are exempted. From January 2006, audit fee for analysis of maximum  residue limits paid to a non-resident laboratory or auditor are exempted.
  • Aircraft leasing exempted. Note: no withholding tax on aircraft leasing from residents  with effect from 15 June 2007.
  • 5% applicable to East African citizens from 15 June 2007.
  • This applies only to individuals. The non-resident rate is 15%. The resident rate is as shown but is not a final tax for corporations.
  • Limited to income of sh. 300,000 p.a.
  • This rates apply only on the graduated PAYE tax rates (for early withdrawal) or in bands of sh. 400,000 (for withdrawals after a 15 year period or at 50 years of age)
  • 5% is paid to a resident broker.
  • If fees are in excess of sh. 24,000 per month when paid to a resident person.
  • For taxable  shipping
  • Effective 1st January 2012

Note: Lower rate may apply there is a tax treaty in force. The countries with which Kenya has  signed double tax treaties with are UK, German, Canada, Denmark, Norway, Sweden, Zambia, and India. Treaties have been negotiated or are being negotiated with France, Uganda and Tanzania but are not in force.

7.3 Pay as you earn (PAYE)

The “Pay As You Earn” method of deducting income tax from salaries and wages applies to all income from any office or employment. Thus “Pay As You Earn” applies to weekly wages, monthly salaries, annual salaries, bonuses, commissions, directors’ fees (whether the director is resident or non-resident) pensions paid to pensioners who reside in Kenya, where the amount from a registered pensions funds exceeds Kshs.300,000 per annum, and any other income from an office or employment. The system applies to all cash emoluments and all credits in respect of emoluments to employees’ accounts with their employers, no matter to what period they relate.

 

It does not include earnings from “casual employment” which means any engagement with any one employer which is made for a period of less than one month, the emoluments of which are calculated by reference to the period of the engagement or shorter intervals.

 

It is the employer’s statutory duty to deduct income tax from the pay of his employees whether or not he has been specifically told to do so by the Department. The normal P.A.Y.E. year runs from 1st January to 31st December. The necessary P.A.Y.E. Stationery is issued to Employers before commencement of the year.

 

Who is liable for P.A.Y.E.

Any individual whose gross pay plus benefits including housing provided by employer exceeds

Kshs 24,000 in 2020- per month is liable to PAYE. However, if employer is aware that the employee has income from main employment elsewhere, then PAYE should be deducted even though the earnings are less than Shs.11135/- per month.­­­­­­­­­­­

 

Employees leaving in the course of the year

When an employee is leaving employment, his employer must complete the employee’s Tax Deduction Card, up to the date of leaving and including the final payment of remuneration.

The Tax Deduction Card should be retained by the employer until the end of the year. Any late payment of emoluments, e.g. arrears of pay, bonus, commission made in a month after the employee has left employer should be taxed without any monthly personal relief.

New employee

For a new employee whose emoluments exceed the amounts stated in Paragraph 3 of Part II, the employer should grant personal relief effective from the month of commencement of  employment.

 

REMITTANCE OF TAX

The Law requires an employer to pay-in the P.A.Y.E. tax deducted from his employees’ pay on or before the 9th day of the month following pay-roll month. Failure and/or late P.A.Y.E payments will incur penalty at the rate of 20 per cent of amount paid late and interest at 2% per month.

 

If an employer finds that he is unable to make his monthly payments by the due date – i.e. before the tenth day of the month following the month of deduction – for reasons of remoteness or distance from a bank, he should make full representations setting out all the relevant facts to the appropriate Domestic Taxes Office.

 

Employers are required to make payments of tax recovered from Lump Sum amounts, tax established through P.A.Y.E. Audits, penalty or interest imposed for P.A.Y.E. offences  in the usual way as normal monthly P.A.Y.E. remittances.

 

PAYE RETURNS

Employers are now required to submit quarterly Pay as you earn returns before the 9th  of the month following the end of each quarter, in respect of emoluments earned in each of the three months including the tax deducted.

Quarterly and Annual PAYE returns

Employers are not required to submit quarterly returns if they file monthly PAYE returns

online. The requirement to submit Annual PAYE returns has been scrapped.

PAYE PAYMENT

This relates to payment of PAYE on emoluments paid to directors of a company. This rule requires employers to deduct and remit PAYE on emoluments. The due date for tax on any emolument to a director would be the 9th of the following month or the fourth month of the accounting date.

 

PAYE Offences – Section 37 (2)

The Commissioner may impose a penalty under Section 37 (2) of the Income Tax Act if an employer fails;-

  1. i) to deduct tax upon payment of emoluments to an employee
  2. ii) to account for tax deducted

iii) to supply the Commissioner with a certificate prescribed under PAYE Rules.

The penalty is at the rate of 25% of the amount of tax involved or Kshs. 10,000, whichever is greater.

 

 

PAYE  AUDIT PROCEDURE

The Domestic Taxes Department may send officers to employers’ paying points during the year to check that they are operating the scheme correctly and to give guidance to employers if they are in difficulties.

Any such officer will produce a signed authority. Employers will be expected to make all records relating to P.A.Y.E. operation available for inspection.

The audit process will include inter alia, a check that:

  1. a) The employer has brought into the payroll all the employee’s emoluments, cash allowances and benefits.
  2. b) The employer has deducted correct amount of P.A.Y.E. tax.
  3. c) The tax deducted has all been paid over to the bank.
  4. d) The pay shown in employer’s salary records has correctly been transferred to the Tax Deduction Cards.
  5. e) The Tax Deduction Card has been correctly completed.

Exam focus

Highlight four objectives of Pay As You Earn  (PAYE)  audits  conducted  by  the revenue authority of your country (4 marks)                                                         (May 2006 Question One-b)

 

 

CIRCUMTANCES THAT MAY TRIGGER PAYE AUDIT

  • Non-remittances of PAYE tax which has been deducted (arrears cases)
  • Fluctuating and late payment of PAYE
  • Irregularities detected through examination of PAYE end of year returns
  • Employers whose final accounts submitted to DTD are suspect
  • Salaries, wages and other staff related expenses claimed in the accounts being higher than in comparison with the PAYE remittances made as per employer records.
  • Directors’ fees bonuses claimed in accounts not corresponding with PAYE as you earn remittances.
  • Third party information about employer flouting PAYE rules (especially former employees)
  • Information from taxpayer recruitment unit program.
  • Risk criteria or random selection generally based on the officers’ best information.

 

 

  1. MULTIPLE P.A.Y.E. SOURCES OF INCOME

There are employees who have two or more sources of income which fall within P.A.Y.E. provisions, e.g. a person with several directorships or a person with several part-time employments not falling within the definition “casual employment” .

Such employees should be granted monthly personal relief by the employer at their main source of employment income.  Other employers should compute tax at a flat rate of 30%

  1. IRREGULARLY PAID EMPLOYEES

P.A.Y.E. tax basically is deductible from all payments made in any month. Thus if employees are paid weekly, fortnightly or at any other interval, the entry of pay on the Tax Deduction Card for the month will be the total of payments in the month and will be made on the occasion of the last payment. Tax due on the whole of the monthly pay will be deducted from the last payment. Where exceptionally the last payment of salary, etc., to an employee in the month is less than the whole of the tax for the month, the employer will recover the balance of tax from the next payment of salary, etc. to the employee.

 

  1. TAX FREE REMUNERATION

There are certain instances when an employer wishes to pay his employees salaries negotiated net of tax. In such circumstances, the employer bears the burden of tax on behalf of such employees. The tax so paid by the employer for the employee becomes a benefit chargeable to tax

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