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The East African : Dec 26th 2015
30 It’s time to sp≥ead the chee≥ al≥ight, but let us ≥emembe≥ the taxes too COMMENTARY JURGEN MURUNGI “The consideration for a gift is zero since the giver does not expect any consideration from the recipient.” T he end of the year festivities come with the culture of spreading the cheer and gifting. Many people are giving out gifts together with cards and other memorabilia to employees, colleagues and clients in their individual capacities or as corporate entities. I am persuaded to repeat an oft-quoted adage by Benjamin Franklin,that only two things are certain in life: Death and taxes. In that spirit, therefore, it would be apt to bring to mind the various tax considerations around gifting and sharing free merchandise in the festive season. In Kenya, taxes fall into vari- ous heads: Value added tax (VAT), personal income tax typically referred to as Pay as You Earn (Paye), corporate income Ttax (CIT) and others such as excise duty, import duty and capital gains tax. This discussion will dwell on the first three tax categories, VAT, Paye and CIT. Under the current VAT law, the taxable value of any supply is the consideration received for a particular supply. It is clear that the consideration for a gift is zero since the giver does not expect any consideration from the recipient. The taxable value of a gift is, therefore, zero, hence the VAT payable on issuance of the gift is zero. The Act, however, makes cer- tain exceptions regarding the taxable value of a supply. In the event that the supply occurs between two related parties, the taxable value is deemed to be the open market value of the gift. As entities engage in gener- The EastAfrican BUSINESS DECEMBER 26, 2015 - JANUARY 1, 2016 Where a corporate entity chooses to make donations in the festive season, the tax status of the recipient is critical.” other gifts, this qualifies as part of non-cash benefits and the tax treatment will follow the basic treatment of other non-cash benefits. In essence, the monthly threshold of non-cash benefits will come into consideration. For entities giving these gifts to staff, clients and others, considerations around the deductibility of the related expenses for CIT computations come into play. The main consideration here being whether the issuance of gifts can be construed to have been in furtherance of business or whether it will fall into the broader categories called donations. Where a corporate entity chooses to make donations in the festive season, the tax status of the recipient is critical. It pays to consider making donations to tax exempt recipients as this entitles the gifting entity to a tax deduction in their CIT computations. While this festive season Purchasing gift hampers for corporate clients. Some gifts attract taxes. Picture: File ous gifting, therefore, there is an element of related parties and open market values that should resonate whenever one seeks to give a gift. The VAT Act further provides that input VAT is recoverable in as far as it was incurred in making taxable supplies. As established earlier, the provision of gifts amounts to making of taxable supplies, hence input tax should be fully deductible for as long as the gift comprised a taxable item. When thinking of Paye con- siderations, the specific type of gift that comes to the fore is where an employer grants gifts such as shopping vouchers, cash and other items to employees over this period. The provision of cash bonus- es or cash gifts to employees renders itself as part of employment income and therefore its taxation follows the basic tenets of employment income. On the other hand, if the employer provides vouchers and many will be inundated with messages of good will, gifts and copious volumes of drink, the accountants and finance managers will in January be scratching their heads over which journal entries to pass and which accounting entries to post. In the ensuing head scratch- ing, it is beneficial to keep an eye on the tax impact to ensure the sweet gifts don’t leave a sour taste in the mouth. Here’s to cheerful giving. Jurgen Murungi is manager of tax services at PwC Kenya Bill on Mombasa Po≥t will c≥eate t≥ade ba≥≥ie≥—t≥ade≥s TURN FROM 29 craving, given huge deficits in the devolved units’ annual budgets. Mombasa collects about Ksh2.2 billion ($21 million) in revenue annually. In the 2014/2015 financial year, the county received Ksh4.4 billion ($42 million) from the national government against a budget of Ksh12 billion ($115 million), leaving a deficit of about Ksh6 billion ($57 million). “By January we expect that the authority will be in place, establish the online system and start collecting the levy. We will also factor the revenue in our next budget,” said Mr Thoya. Mr Mambembe, however, warned that the law will scare away users of the port, which is already facing competition from the port of Dar es Salaam, to which TradeMark East Africa, this UK’s Department for International Development (DfID) and the World Bank are funding a $565 million upgrade. It is expected the project will boost cargo handling capacity from 14.6 million tonnes in 2013/14 to 28 million tonnes by 2020, posing serious competition to Mombasa port. Businesses say the law will cre- ate trade barriers within the corridor. Law Society of Kenya Mom- basa branch chairman Benjamin Njoroge said the Bill goes against the Constitution. “Laws passed contrary to the Constitution will not hold, as they open avenues for lawsuits for interpretation in the courts. So why invite the wrath of people by passing faulty Bills?” he asked. He said the MCPA will create “double taxation” and “two centres of power” at the port of Mombasa, which in the current Constitution, just like the airports, has been declared a national asset. “But under the provisions of devolution, the County can establish its own small ports, for instance, at Tudor, Nyali and Mishomoroni seafronts for sea transport to generate its own revenue,” he suggested. About 4,000 importers and 250 small scale clearing and forwarding agents are worried that “invisible” power brokers and cartels are behind the Bill. One of the importers questioned why the County Assembly “rushed” the passing of the Bill in an “unfinished state.” 4,000 Number of importers who are worried about the power brokers behind pushing of the Bill. “The Bill is silent on how the County will generate revenue from the port when it is not linked to the tariff regime dealing with imports and exports,” he said Ultimate Maritime Consultants managing director Stanley Chai said county officers acted ignorantly by thinking that they would control any revenue coming from the port. “They have not even said how they will collaborate with the Kenya Revenue Authority which is mandated to collect revenue from all cargo handled at the port. How will the system mesh with that of KRA so that there is no conflict? Instead of coming up with such a law the county should seek ways of addressing the matter without creating conflict,” he said. Mr Chai however said that there was also a need to review the Acts of Parliaments of Kenya Ports Authority (KPA), Kenya Bureau of Standards and KRA to change the ports’ ownership. Citing the Copenhagen Malmo port, which is owned 50 per cent by Copenhagen City, 20 per cent by Malmo City and 23 per cent by private investors, the consultant said there was need to consider listing KPA or the Nairobi Securities Exchange and allowing Mombasa County to own a stake. Contacted for comments, Gov- ernor Hassan Joho through his director of communications Richard Chacha said the Bill had not reached his desk for assen. “He cannot comment on an issue that has not reached him; the only person who can comment is nominated Member of County Assembly Mohamed Hatimy,” Mr Chacha said. Kenya Ports Authority chairman Danson Mungatana ruled out the possibility of the port sharing its revenue with the County government, saying the seaport is anational asset that cannot be forced to remit monies. He was reacting to a statement by the governor and the Mombasa Senator Hassan Omar, who claimed the port was one of the County’s natural assets.
Dec 19th 2015
Jan 2nd 2016