Taxation of Extractives Industry in Kenya - RSM Ashvir

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Taxation of Extractive Industries

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in accordance with the Ninth Schedule.
Taxation of Extractive Industries © RSM Ashvir
Taxation of Extractive Industries
Presented by:
Ashif Kassam
General Definitions
• A resident person in relation to a body corporate means:
– that the body is a company incorporated in Kenya;
– that the management and control of the affairs of the body was
exercised in Kenya; or
– that the body has been declared by the Minister by notice in the
Gazette to be resident in Kenya.
General Principles in Taxation of Extractive Industries
• Charge to Tax - Income tax shall be charged for each year of
income upon all the income of a person, whether resident or
non-resident, which is accrued or was derived from Kenya.
• Taxation of a licensee (mining rights including prospecting and
extraction), contractor (exploration, and development, production
and transportation of petroleum and natural gas up to point of
export or into a refinery but excludes refining) or a subcontractor
(any person supplying services to a contractor or a licensee
excluding an employee) shall be in accordance with the Ninth
Schedule.
• Geothermal operations to be taxed similarly to mining operations

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excluding immovable property (royalties etc).
Tax Rate and Basis of Taxation for Extractive Industries
• Extractive industries taxed in accordance with the Act, subject to
modifications in the 9th Schedule.
• Other parts of the Act therefore apply fully
• Where there is any inconsistency with the Schedule and the Act, the
Schedule shall prevail.
Tax Rates % rate
Licensee that is a company and a contractor operating through a
resident company (9th Sch 2 (3) & 3rd Sch Head B 2(a) / 9th Sch 7
(3)(a))
30%
Non-resident company having a permanent establishment (9th Sch 7
(3)(b))
37.5%
Taxation - Specified Sources of Income - S 15 7(e)
• Specified Sources - Gains or profits from one specified source
shall be computed separately from the gains or profits from
another specified source and separately from any other income
of that person.
• Loss may only be deducted from the gains or profits derived from
the same specified source in the following year.
Taxation of Non-Specified Sources
• Rent.
• Surplus funds withdrawn or refunded to an employer in respect of
registered pension or provident funds.
• Income of a licensee from one license area or a contractor from
one contract area as determined in accordance with the Ninth
Schedule
• Other sources of income chargeable under 3 (2) (a) not falling
under sources above. This covers gains or profits from a business
i.e. trading, manufacturing, disposal of a mining or petroleum right
or interest, rights granted for use or occupation of property

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the consideration for the disposal reduced by the cost of the interest.
Taxation of Non-Specified Sources
• Other income which is taxable separately:
– Dividend or interest.
– The net gain derived on the disposal of an interest in a person, if the
interest derives 20% or more of its value, directly or indirectly, from
immovable property in Kenya.
– A natural resource income.
– Any other income deemed under the Act or rules made under the Act.
Hedging Transactions - Specified Sources
• Hedging transaction means a transaction entered into by a
licensee or a contractor to manage commodity risks.
• Heading transactions shall be treated as a specified source of
income, unless the hedging transaction was entered into by a
licensee or a contractor that has an annual turnover of less than
Shs 10 million, and was approved by the Commissioner.
Farm-outs and Their Tax Implications
• Net gain derived on the disposal of an interest, if the interest derives
20% or more of its value, directly or indirectly, from immovable
property in Kenya is deemed to be income accrued in or derived
from Kenya.
• Immovable property means a right, an interest in a petroleum
agreement, mining information or petroleum information.
• Net gain in relation to the disposal of an interest in a person means

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– The consideration given by the transferee for the interest wholly or
partly includes the transferee undertaking some or all of the work
commitments of the licensee or contractor under the right of
agreement.
• Consideration - the total amount received or receivable for the
disposal, including the fair market value of any amount in kind
determined at the time of disposal.
• Cost - means the total consideration given for the acquisition of the
interest, right, or information, including the fair market value of any
amount given in kind determined at the time the amount is given.
• Farm-out agreement arises when:
– A licensee or a contractor enters into a farm-out agreement with a
person (“transferee”) for the transfer of an interest.
• The consideration received by the licensee or the contractor for the
interest shall not include the value of any work undertaken by the
transferee on behalf of the licensee or the contractor.
• If the transfer is deferred until the transferee completes some or all of
the work commitments, than:
– The amount in money payable under the agreement before the transfer
of the interest shall become taxable in the year of income in which the
amount is payable; and
– The value of work undertaken by the transferee on behalf of the
licensee or the contractor shall be excluded in the consideration.

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Licensee - a person who has been granted a mining right.
• The net gain to be included in income chargeable to tax is:
– If the interest derives more than 50% of its value directly or indirectly
from immovable property in Kenya - the full amount of the net gain.
– If the interest derives less than 20% of its value, directly or indirectly,
from immovable property in Kenya - no liability to tax.
– If the interest derives between 20% and 50% of its value directly or
indirectly from immovable property in Kenya - the net gain shall be
prorated based on the value of the interest derived directly or indirectly
from the immovable property in Kenya to the total value of the interest.
• A licensee or a contractor shall immediately notify the Commissioner,
in writing, if there is a 10% or more change in the underlying
ownership.
• Underlying ownership - an interest in the person held directly or
indirectly through an interposed person or persons, by an individual
or by a person not ultimately owned by the individual.
• The licensee or the contractor is liable, as an agent of the non-
resident person, for any tax payable under this Act by the non-
resident in respect of the disposal.
Taxation of Mining Operations
Mining operations - authorised operations undertaken under a
mining right.
Mining right - prospecting right or an extraction right.
Prospecting right - :
 A right to prospect for minerals granted under the Mining Act.
 An authority or right to search for geothermal resources granted
under the Geothermal Resources Act.
Licence area - area that is subject of a mining right.

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Taxation of Mining Operations
Mineral - a geological substance whether in solid, liquid or gaseous
income shall be allowed in priority to the later years.
form occurring naturally in or on the earth or in or under water, in
mine waster or tailings and includes the minerals specified in the
First Schedule but does not include petroleum, hydrocarbons, gases
or groundwater.
Based on the above, minerals like diatomite, gypsum, anhydrite,
sulphur, dolomite, kaolin, limestone, sodium or potassium
compounds which were excluded under the definition of minerals
under the ITA are now included.
Minerals still excluded include common clay, murram, sand,
sandstone, gravel, brine and bauxite.
Taxation of Mining Operations - Treatment of Losses
A loss in relation to mining operations in a licence area for a year of
income arises if:
 The total deductions of a licensee in respect of the mining operations
undertaken in the licence area during that year of income
exceed the
 Total income derived from such operations in the area for the year.
A deduction for expenditure incurred by a licensee in a license area
during a year of income shall only be allowed against the income
derived from the license area during that year.
A loss suffered in a license area for a year of income shall be carried
forward and allowed as a deduction against the income of a licensee
from the licensed area in the following year of income.
Any loss not extinguished shall be carried forward to the next
following year until the loss is fully deducted or the mining operations
in the license area cease.
Where there are multiple year losses, the loss of the earliest year of

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If:
 A licensee ceases mining operations under a mining right in a license
area; and
 Has unutilised losses which have not been extinguished;
 The licensee may elect to write to the Commissioner to treat the loss in
relation to another license area in which the licensee undertakes
mining operations if the area covered by the second-mentioned license
area falls wholly within the area covered by the first-mentioned license
area.
If:
 A licensee ceases mining operations under a mining right in a license
area and has a loss in relation to that license area for that year of
income and does not carry mining operations in another license area,
he may elect by notice in writing to treat the loss against the income of
the previous year of income from that license area.
 Carry back of unutilised losses limited to 3 years of income from the
year of income in which the loss arose.
Taxation of Mining Operations - Prospecting Expenditure
Prospecting expenditure means expenditure incurred in undertaking
operations authorised under a prospecting right, other than social
infrastructure expenditure or expenditure to which Part II of the
Second Schedule applies, and includes expenditure incurred in
acquiring:
 An interest in a prospecting right from the Government or under a
farm-out agreement.
 Prospecting information from the Government or under a farm-out
agreement.

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Social infrastructure expenditure means capital expenditure incurred
by a licensee on the construction of a public school, hospital, road or
any other social infrastructure.
Such infrastructure requires prior approval from the Cabinet
Secretary, National Treasury.
Prospecting expenditure allowed as deduction in the year of income
in which it is incurred.
Where:
 An interest in a mining right or information is disposed, the cost of
which has been deducted as a prospecting expenditure;
 Or where the prospecting expenditure claimed is subsequently
recovered;
 The disposal consideration or the amount recovered is charged to tax
under 3 (2)(a)(i) as a gain or profit from business in the year of disposal
or recovery.
Wear and Tear Deduction - Sch 2 Part II / 9th
Sch 4 (3)
Nature Rate
100% deduction allowed for machinery first used to undertake operations
under a prospecting right
Class I: Tractors, combine harvesters, heavy earth-moving equipment and
such other heavy self-propelling machines of a similar nature as the
Commissioner in his discretion, having regard to the likely usage and
depreciation, in any particular case may agree (lorries over 3 tonnes included
by practice)
Class II: Computers and peripheral computer hardware, calculators, copiers
and duplicating machines
100%
(wef
1st Jan
2015)
100%
(wef
1st Jan
2015)

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Wear and Tear Deduction - Sch 2 Part II / 9th Sch 4 (3)
Nature Rate
Class III: Other self propelling vehicles, including aircrafts
15 (1) / (6) - Where capital expenditure is in excess of Shs 2 million (wef 1st
Jan 2006) in respect of a road vehicle, other than a commercial vehicle or a
vehicle used by a person whose main business is that of hire or sale of
vehicles and such vehicles are used exclusively for hire or stock-in-trade, the
expenditure shall be restricted to Shs 2 million
100%
(wef
1st Jan
2015)
Class IV: All other machinery including ships (by practice, also includes
furniture, fittings and office)
100%
(wef
1st Jan
2015)
Taxation of Mining Operations - Extraction Expenditure
Extraction expenditure means capital expenditure incurred by a
licensee when undertaking operations authorised under an extraction
right, other than social infrastructure expenditure or expenditure to
which Part II of the Second Schedule applies, and includes
expenditure whenever incurred in acquiring:
 An interest in a mining right other than that incurred as prospecting
expenditure.
 Mining information other than that incurred as prospecting expenditure.
 A right to extract minerals granted under the Mining Act.
 A right to extract geothermal resources granted under the Geothermal
Resources Act.
Commencement of Commercial Production means the first 30 day
consecutive days during which the average level of production during
25 highest production days during the 30 day period reaches the
level as determined by the CS for Mining.
Written down value in relation to an interest in a mining right or
information of a licensee means the cost of the right or information
reduced by the deduction allowed to the licensee.

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Extraction expenditure is deductible equally in the year of income in
which it is incurred and the next four subsequent years, and the total
amount deducted shall not exceed the expenditure.
Where the expenditure is incurred before the commencement of
production, it shall be deemed to incur at the commencement of
commercial production.
Where commercial production starts mid-year, the amount of
deductible expenditure shall be prorated based on the number of
days during which commercial production took place during the year
divided by the total number of days in that year.
Where an interest in a mining right or information is disposed, the
cost of which has been deducted as an extraction expenditure:
 No deduction shall be allowed in the year of disposal; and
 Where the consideration received exceeds the written down value, the
excess shall be charged to tax as under 3 (2)(a)(i) as a gain or profit
from business in the year of disposal; or
 Where the written down value exceeds the consideration received, the
excess shall be allowed as a deduction in the year of disposal.
Where the licensee recovers or recoups an amount deducted as
extraction expenditure, the amount recovered or recouped shall be
charged to tax as under 3 (2)(a)(i) as a gain or profit from business in
the year of disposal.
Taxation of Mining Operations - Rehabilitation Expenditure
Approved rehabilitation plan means a plan for the rehabilitation of a
mine site approved by the CS for Mining.
Rehabilitation fund means a fund or account required to be
established under a mining right to provide for the future payment of
remedial work to the license area and which is jointly managed by the
CS for mining and the licensee.
A contribution made by the licensee to a rehabilitation fund in
accordance with an approved rehabilitation plan shall be allowed as a
deduction for the year of income in which the contribution was made.

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– Total income derived from such operations in the area for the year.
Any amount accumulated or withdrawn for the rehabilitation fund to
meet expenditure incurred under an approved rehabilitation plan shall
be exempt from tax. Any amount returned to the licensee shall be
charged to tax as under 3 (2)(a)(i) in the year of withdrawal.
Where an expenditure is made by a licensee using funds other than
those made directly or indirectly from the rehabilitation fund, such
expenditure shall be allowed as a deduction in the year of income in
which the expenditure is made.
Any surplus remaining in the rehabilitation fund at the time of
completion of the rehabilitation shall be charged to tax under 3
(2)(a)(i) in the year in which the rehabilitation is complete.
Taxation of Petroleum Operations
• Contractor - a person with whom the Government has concluded a
petroleum agreement and includes any successor or assignee of the
person.
• Where more than one person has signed a petroleum agreement,
each person shall be considered as a contractor for the purposes of
this Schedule.
• Contract area - the area that is the subject of a petroleum agreement
and, if any part of that area is relinquished pursuant to the
agreement, contract area means the contract area that was originally
granted.
Taxation of Petroleum Operations - Treatment of Losses
• A loss in relation to petroleum operations in a contract area for a year
of income arises if:
– The total deductions of a contractor in respect of the contract
operations undertaken in the contract area during that year of income
exceed the

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viability; or
– Any other work that is necessarily connected with the above activities.
• A deduction for expenditure incurred by a contractor in a contract area
during a year of income shall only be allowed against the income derived
from the contract area during that year.
• A loss suffered in a contract area for a year of income shall be carried
forward and allowed as a deduction against the income of a contractor
from the contract area in the following year of income.
• Any loss not extinguished shall be carried forward to the next following
year until the loss is fully deducted or the petroleum operations in the
contract area cease.
• Where there are multiple year losses, the loss of the earliest year of
income shall be allowed in priority to the later years.
• If:
– A contractor ceases petroleum operations and has a loss in relation to
that contract area for that year of income, he may elect by notice in
writing to treat the loss against the income of the previous year of
income from that contract area.
– Carry back of unutilised losses limited to 3 years of income from the
year of income in which the loss arose.
Taxation of Petroleum Operations - Exploration Expenditure
• Exploration operations - work authorised under a petroleum
agreement in the search for petroleum prior to the approval of a
development plan and includes:
– Geological, geophysical, and geochemical surveys and analysis;
– Ariel mapping;
– Investigation of subsurface geology;
– Stratigraphic tests;
– The drilling of wells to test a geological feature and assess commercial

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agreement.
• Exploration expenditure - expenditure incurred in undertaking
exploration operations authorised under a petroleum agreement,
other than social infrastructure or expenditure to which Part II of the
Second Schedule applies, and includes expenditure incurred in
acquiring:
– An interest in a petroleum agreement from the Government or under a
farm-out agreement; or
– Petroleum information relating to exploration operations from the
Government under a farm-out agreement.
• Exploration expenditure shall be allowed as deduction in the year of
income in which it is incurred.
• Where:
– An interest in a petroleum agreement or information is disposed, the
cost of which has been deducted as a exploration expenditure;
– Or where the exploration expenditure claimed is subsequently
recovered;
– The disposal consideration or the amount recovered shall be charged
to tax as under 3 (2)(a)(i) as a gain or profit from business in the year
of disposal or recovery.
Taxation of Petroleum Operations - Development Expenditure
• Development expenditure - capital expenditure incurred when
undertaking operations authorised under a development plan, other
than social infrastructure or expenditure to which Part II of the
Second Schedule applies, and includes expenditure whenever
incurred in acquiring:
– An interest in a petroleum agreement other than incurred as
exploration expenditure.
– Petroleum information other than that incurred as exploration
expenditure.
• Development plan - a plan prepared and adopted under a petroleum

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business in the year of disposal.
• Commencement of Commercial Production means the first day of
commercial production as determined under the petroleum
agreement.
• Written down value - cost of the interest or information reduced by
the deduction allowed to the contractor.
• Development expenditure is deductible equally in the year of income
in which it is incurred and the next four subsequent years, and the
total amount deducted shall not exceed the expenditure.
• Where the expenditure is incurred before the commencement of
commercial production, it shall be deemed to incur at the
commencement of commercial production.
• Where commercial production starts mid-year, the amount of
deductible expenditure shall be prorated based on the number of
days during which commercial production took place during the year
divided by the total number of days in that year.
• Where an interest in a petroleum agreement or information is
disposed, the cost of which has been deducted as a development
expenditure:
– No deduction shall be allowed in the year of disposal; and
– Where the consideration received exceeds the written down value, the
excess shall be charged to tax as under 3 (2)(a)(i) as a gain or profit
from business in the year of disposal; or
– Where the written down value exceeds the consideration received, the
excess shall be allowed as a deduction in the year of disposal.
• Where the contractor recovers or recoups an amount deducted as
development expenditure, the amount recovered or recouped shall
be charged to tax as under 3 (2)(a)(i) as a gain or profit from

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Taxation of Petroleum Operations - Decommissioning Expenditure
• Approved decommissioning plan means a plan for the rehabilitation of
a mine site as approved by CS.
• 9th Sch 11 (1) - A transfer made by the contractor to an escrow
account in accordance with an approved decommissioning plan to
finance expenditure expected to be incurred by the contractor in the
abandonment or decommissioning of the petroleum operations shall
be allowed as a deduction for the year of income in which the
contribution was made.
• Any amount accumulated or withdrawn form the escrow account to
meet expenditure incurred under an approved decommissioning plan
shall be exempt from tax. Any amount returned to the contractor shall
be charged to tax as under 3 (2)(a)(i) in the year of withdrawal.
• Where an expenditure under an approved decommissioning plan is
made by a contractor using funds other than those made directly or
indirectly from the escrow account, such expenditure shall be allowed
as a deduction in the year of income in which the expenditure is
made.
• Any surplus remaining in the escrow account at the completion of the
decommissioning of the contract area shall be charged to tax under 3
(2)(a)(i) in the year in which the rehabilitation is complete.
Taxation of Petroleum Operations - Paid-on-Behalf
• Where the Government receives a portion of profit oil inclusive of
taxes payable by the contractor under this Act, then such taxes will be
limited to the petroleum operations and shall exclude:
– Any tax payable on any gain made by the contractor or any other
person on a disposal, directly or indirectly, of any interest in the
petroleum agreement; or
– Any tax that the contractor is liable under the Act to deduct from a
payment made by the contractor.

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Taxation of Extractive Industries - Allowable Expenditure
• Other allowable expenses under the Act:
– All expenditure (subject to certain restrictions) which is wholly and
exclusively incurred in the production of that income.
– Expenses incurred prior to the commencement of business where
these would have been deductible if incurred after the date of
commencement (deductible on the date on which the business
commenced).
– Legal fees and stamp duty incurred in connection with an acquisition
of a lease not exceeding ninety-nine years for premises used or to
be used for business.
– An entrance fee or annual subscription paid to a taxable trade
association.
– Club subscriptions paid by an employer on behalf of an employee
(provided taxed on the employee as a benefit).
– Sums contributed by an employer to a national retirement benefit
scheme created by a written law.
– Expenditure, which the Commissioner considers just and reasonable,
incurred on advertising and promoting (whether directly or indirectly)
goods and services provided by that business.
– Operating and finance lease payments paid by the lessee under a
lease contract where the title of the asset leased always remains with
the lessor.
– Donations made, subject to certain conditions, to a charitable
organisation registered or exempt from registration under the Societies
Act or the Non-Governmental Organisations Co-ordination Act, 1990,
and whose income is exempt from tax under the Income Tax Act, or to
any project approved by CS Treasury.
– Approved capital expenditure by the CS Treasury on the construction of
a public school, hospital, road or similar social infrastructure.

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• Where the Government of Kenya has a DTA with a Government of
another country, the amount of WHT deducted shall be the lower of
the amount specified under the 3rd Sch Head B Paragraphs 3 and 5
or the amount specified in the DTA.
Taxation of Extractive Industries - Disallowable Expenditure
• The following expenses are specifically disallowed:
– Non-business and personal expenses (expenses not wholly and
exclusively incurred in the production of income).
– Personal or domestic expenditure including:
– Personal entertainment.
– Hotel and restaurant expenses other than those incurred on business
trips, training courses and seminars, and meals provided to employees
on business premises.
– Vacation trip expenses except passage for a non-citizen expatriate staff.
– Educational fees for an employee’s dependents or relatives.
– Club fees (entrance and subscriptions) except club subscriptions paid
by an employer on behalf of an employee.
– Expenditure or loss which is recoverable under an insurance
contract or indemnity.
– All donations with the exception of those specified above.
Withholding Tax
• “Management and professional fees” means a payment made to a
person, other than a payment made to an employee by his employer,
as a consideration for managerial, technical, agency, contractual,
professional or consultancy services however calculated.
• “Consultancy fees” means payments made to any persons for acting
in an advisory capacity or providing services on a consultancy basis.
• “Agency fees” means payments made to a person for acting on
behalf of another person or groups of persons, or on behalf of the
Government and excludes payments made by an agent on behalf of
a principal when such payments are recoverable.
Withholding Tax
• “Training fees” means a payment made in respect of a business or
users of training services designed to improve the work practices
and efficiency of an organisation, and includes any payment in
respect of incidental costs associated with provision of such
services.
• “Contractual fees” in the context of “management and professional
fees” shall mean payment for work done in respect of building, civil
or engineering works.

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Withholding Tax on Gross Amount Upon Payment
* Indicates Final Tax Resident
Non-
resident
Royalties and Natural Resource Income 5% 20%*
Dividends
NB: i) 3rd Sch 3 (d) - Rate of dividend paid to citizens of East African Community Partner States
is 5% / ii) 7 (3) - Not final tax for resident specified financial institutions 5%* 10%*
Dividends paid to companies having 12.5% or more voting
power
Exempt 10%*
Non-
resident
Contractual fees 3% 12.5%*
Management, professional or training fees
i) For some reason, training fee has not been covered in 34 (2) meaning that tax deducted at
source for non-residents is not final tax.
ii) For residents, tax to be deducted where the aggregate value is Shs 24,000 or more in a month.
5% 12.5%/
20% (for
training)*
Withholding Tax
• “Royalty" means a payment made as a consideration for the use of or the
right to use (a) the copyright of a literary, artistic or scientific work; or (b) a
cinematograph film, including film or tape for radio or television
broadcasting; or (c) a patent, trade mark, design or model, plan, formula or
process; or (d) any industrial, commercial or scientific equipment, or for
information concerning industrial, commercial or scientific equipment or
experience, and gains derived from the sale or exchange of any right or
property giving rise to that royalty.
• Natural Resource Income means:
– An amount including a premium or such other like amount paid as a
consideration for the right to take minerals or a living or non-living
resource from land or sea.
– An amount calculated in whole or in part by reference to the quantity or
value of minerals or a living or non-living resource taken from land or
sea.

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Non-
resident
Rent, premium or similar consideration for the use or occupation
of immovable property (land & buildings) - 30%*
Rent, premium or similar consideration for the use of property
other than immovable property except aircraft, aircraft engines,
locomotives or rolling stock (equipment hire) - 15%*
Non-
resident
Interest (including Government bearer bonds of at least 2 years
duration)
i) 3rd Sch Head B 3(j) -12.5% in respect of any interest deductible under paragraph 5(2)(g) of the
9th Sch.
15% 15%*
Deemed interest on interest free loans in respect of thin
capitalisation
i) While deemed interest is included in S 10 and S 35, it has not been included in 34 (2)(e)
meaning that such amount deducted is not final tax.
- 15%*
Taxation of Subcontractors
• Subcontractor - a person supplying services other than a person
supplying services as an employee to:
– A licensee in respect of mining operations undertaken by the
licensee.
– A contractor in respect of petroleum operations undertaken by
the contractor.
• A non-resident subcontractor means a subcontractor that is not a
resident and includes a subcontractor that is a foreign government
or foreign government body.

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a branch, an office, a factory, a workshop, and a mine, an oil
and gas well, a quarry or any other place of extraction of
natural resources, a building site or a construction or
installation project which has existed for six months or more
where that person wholly or partly carried on business.
• A non-resident sub-contractor who derives a fee for the provision
of services (service fee) to a licensee or contractor in respect of
mining or petroleum operations shall be liable to pay non-resident
withholding tax rate on the gross amount of the service fee as
follows, which shall be final tax in Kenya:
– Fee paid by a contractor - 5.625% (37.5% at an assumed
margin of 15%).
– Fee paid by a licensee - 20%.
• Withholding tax is not applicable if the subcontractor provides
services through a permanent establishment in Kenya, in which
case it shall be income accrued in or derived from Kenya and
assessed on him.
• The onus of deducting the withholding tax is on the licensee or the
contractor paying the service fee to the non-resident and the
withholding tax is deductible at the earlier of when the account of
the non-resident subcontractor is credited with the service fee or
the time the actual fee is paid.
• The due date for payment and filing of the withholding tax returns
are the same as for other withholding tax requirements.
Business with Non-Resident Persons
• A permanent establishment in relation to a person means a
fixed place of business and includes a place of management,

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person.
• The income earned by a PE in Kenya shall be computed disregarding any
foreign exchange loss or gain with respect to net assets or liabilities
purportedly established between the permanent establishment in Kenya and
the non-resident.
• Non-resident person includes both the head office and other offices of the
non-resident. Taxation of Extractive Industries © RSM Ashvir
• The Income Tax Act empowers the Commissioner to adjust profits accruing
to a Kenyan resident where such a person enters into transactions with a
related non-resident or through a PE and the transactions are such that that
they produce either no profits or less than the ordinary profits which might be
• Where a resident person or a person having a PE in Kenya makes a
payment to another person and the payment is incurred in the production of
income accrued in or derived from Kenya or in connection with a business
carried on or to be carried on, in whole or part in Kenya, the amount thereof
shall be deemed to be income which is accrued in or was derived from
Kenya.
• The provision shall not apply to a payment made or purported to be made
by a PE of a non-resident person to that non-resident.
• Non-resident person shall include both the head office and other offices of
the non-resident person.
• Applies in respect of management or professional or training fees; royalty or
natural resource income; interest and deemed interest; use of property; and
net gain the disposal of a mining / petroleum asset.
• Where a non-resident person carries on a business in Kenya which
consists of manufacturing, growing, mining, producing, or
harvesting, whether from land or from water, a product or produce,
and sells or utilises outside Kenya that product or produce in a
business carried on by him outside Kenya, the gains or profits for
the Kenya business for tax purposes shall be such amount as
would accrue if that product or produce would have fetched if it
had been sold wholesale to the best advantage.
expected to accrue to the resident person if the transactions had been
conducted by independent persons dealing at arm’s length.
• The income earned by a PE shall be computed disregarding any
expenditure incurred in respect of interest, royalties, management or
professional fees paid or purported to be paid by the PE to a non-resident

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• For the purpose of ascertaining taxable profits for a business carried on in
Kenya, no deductions shall be allowed in respect of expenditure incurred
outside Kenya by a non-resident person other than expenditure which the
Commissioner determines that adequate consideration has been given. In
particular, no deduction shall be allowed for:
– Remuneration for services rendered by non-resident directors (other
than whole time service directors) who have a controlling interest
unless the amount is less than Shs 150,000.
– Only those reasonable executive and general administrative expenses
incurred outside Kenya by that person which the Commissioner
determines just and reasonable.
Anti-Avoidance Provisions
• Where the main purpose or one of the main purposes for which a
transaction was effected was the avoidance or reduction of
liability to tax for a year of income or that the main benefit which
might have been expected to accrue from the transaction in the 3
years immediately following the completion thereof was the
avoidance or reduction of liability to tax, the Commissioner may
direct that such adjustments be made as he considers appropriate to
counteract the avoidance or reduction of liability to tax which could
otherwise be effected by the transaction.
• The Commissioner may:
– Charge tax to persons who, but for the adjustments, would not ne
charged to the same.
– Charge a greater amount of tax that would be charged but for the
adjustments.
Anti-Avoidance Provisions - DTAs
• Where an arrangement exempts or excludes from tax income
derived from Kenya or the arrangement results in reduction in the
rate of Kenyan tax, then such benefit shall not be available unless
50% or more of the underlying ownership of that person resident
in the other contracting state is held by an individual or individuals
who are residents of the other contracting state.
• Not applicable if the in case of a company listed in a stock exchange
in that other contracting state
• Person includes an individual, company, partnership, trust,
government or similar body or association.
• Underlying Ownership in relation to a person means an interest in
the person held directly, or indirectly through an interposed person or
persons, by an individual or by a person not ultimately owned by the
individual.

23
Anti-Avoidance Provisions - Information to the Commissioner
• To notify the Commissioner the following changes within 30 days of
occurrence:
– Place of business, trading name or contact address
– 10% or more of the shareholding
– Beneficial ownership in case of nominee ownership
– Full identity and address of the settlors and beneficiaries of the trust
– Identity and address of all the partners
– On cessation or sale of business, all the relevant information regarding
liquidation or details of new ownership.
Avoidance of Tax by Non-Distribution of Dividends
• Where the Commissioner is of the opinion that a company has not
distributed to its shareholders as dividends within a reasonable
period (not exceeding 12 months from the end of the accounting
period) that part of income which could have been distributed without
prejudice to the requirements of the company’s business, he may
direct that such excess be treated for tax purposes, on a date 12
months after the end of the accounting period, as having been
distributed as dividends to the shareholders.
• Where such profits are subsequently distributed, a shareholder shall
be excluded in computing his total income.
Thin Capitalisation
Definitions
“Loans” includes loans, overdrafts ordinary trade debts, overdrawn
current accounts or any form of indebtedness in respect of which a
company is paying a financial charge, interest, discount or
premium.
“Deemed interest” means interest deemed on an interest-free loan
provided or secured by the non-resident person calculated using
the average 91-day Treasury Bill rate.
“Revenue reserves” includes accumulated losses.
“Control” in the case of a body corporate, unless defined in its
constitution, means the holding of 25% or more of the capital or
the voting rights.
A bank or a financial institution licenced under the Banking Act is
exempt from this provision. Taxation of Extractive Industries © RSM Ashvir

24
Thin Capitalisation
Arise where a company incorporated in Kenya is controlled by a
non-resident person alone or together with 4 or fewer other
persons.
Interest payments are restricted in proportion to the extent that the
highest amount of loans held by the company at any time during
the year of income exceed two times the sum of the revenue
reserves and the issued and paid up capital of that company.
In addition, any foreign exchange loss on loans from controlling
parties is also deferred for tax purposes.
Deemed interest to be levied on interest free loans from controlling
parties. Withholding tax is payable on the deemed interest, and
both the deemed interest and the withholding tax paid thereon are
not deductible for tax purposes.
VAT
• Taxable supplies (goods and services), excluding motor vehicles,
imported or purchased for direct and exclusive use by geothermal,
oil or mining prospecting or exploration companies subject to
recommendation by the respective CSs.
Custom - EAC CMA
• Exemption from duty goods including motor vehicles and aircraft,
imported or purchased by any company which has been granted an
oil exploration or oil prospecting licence in accordance with a
production sharing contract with the Government of Kenya and in
accordance with the provisions of the Petroleum (Exploration and
Production) Act.
• Exempt from duty machinery imported to be used in oil, gas and
geothermal exploration including machinery and inputs, but not
including motor vehicles, imported by a licensed company for direct
and exclusive use in oil, gas or geothermal exploration and
development upon recommendation by the Ministry of Finance
• The above provision does not extend to service providers who are
not oil exploring companies and no specific provisions for mining
companies.

25
Custom - EAC CMA
• Temporary importation exemption - A person does not have to pay
duty for temporary importation provided he furnishes a temporary
importation bond to cover the equipment for the temporary usage.
The imported items need to be exported back within 12 months or a
short period agreed on. KRA has to approve of the temporary usage
importation.
• Goods shall be deemed to be entered for home consumption when
they have been declared for use in a Partner State, other than
temporary use, and the provisions of paragraph (a) have been
fulfilled.
• Subject to the provisions of the Customs laws, goods imported in
accordance with this section for a temporary use or purpose only
shall be exempt from liability to import duties.
Custom - EAC CMA
• Goods shall not be exempt from liability to import duties under this
section unless the proper officer has given permission for such
importation; and the proper officer shall not give such permission:
– Unless he or she is satisfied that the goods are imported for temporary
use or purpose only; and
– Unless the owner thereof has deposited, or given security for, the
amount of the import duty to which the goods would otherwise be
liable.
• Where the proper officer gives permission for the importation of any
goods under this section, he or she may impose such conditions as
the proper officer deems fit and such goods shall be exported within
such period, not exceeding twelve months from the date of
importation, as is consistent with the purpose for which the goods
are imported.
Custom - EAC CMA
• The Commissioner may, where he or she deems fit, allow a further
period as is consist with the purpose for which the goods are
imported.
• Where the conditions of the importation of goods have been
complied with then, on the exportation of the goods any deposit or
security given shall be refunded or discharged, as the case may be.
• Where the conditions of the importation of the goods have been
contravened then the goods shall become liable to duty, as from the
date of their importation and the owner shall be required to pay duty
and on payment of the duty any deposit given shall be brought into
account or, if security was given, security shall be discharged.

26
Custom - EAC CMA
• Save where goods are allowed to remain in a Partner State:
– An importer who fails to export temporarily imported goods at the end
of the period specified; or
– A person who sells, alters or re-places or otherwise modifies the goods
or part thereof; commits an offence and is liable, on conviction, to a
fine equal to 25% of the dutiable value and any goods which are the
subject of the offence, shall be liable to forfeiture.
• The Council may, by notice in the Gazette, declare that the goods
specified in the notice shall not be imported in accordance with this
section, or declare that the goods may be imported subject to
proportion of duty.
CAVEAT
This slide presentation has been prepared for general guidance only, and does not constitute professional advice.
You should not act upon the information contained in these slides without obtaining specific professional advice.
Accordingly, RSM Ashvir, its associates and its employees and agents accept no liability, and disclaim all
responsibility, for the consequences of anyone acting, or refraining from acting, in reliance on the information
contained in these slides or for any decision based on it, or for any consequential, special or similar damages
even if advised of the possibility of such damages.
The guidance reflects our interpretation of the tax legislation in Kenya and is not binding on the tax authorities.
Consequently, the guidance should not be considered as an assurance that the tax authorities will agree with it.
RSM Ashvir is a member firm of RSM, a global network of accounting and consulting firms. RSM does not offer
professional services in its own name. Each member firm of RSM is a legally separate and independent national
firm and is not a member of one international partnership, and member firms are not legal partners with each
other. One member firm is not responsible for the services or acts of any other member firm.

AWARDS AND ACHIEVEMENTS
InterContinental Finance Magazine Tax and Audit Advisors of the Year 2012, 2013 and 2014
Tax Advisory Firm of 2013 and 2014 in Kenya by the ACQ Finance Magazine
DealMakers Country
Awards Winner 2013 Audit &
Tax Advisors of The Year -
Kenya
Most Innovative use of
PR/Marketing in
Promoting the RSM Brand
Corporate International
Global Awards
Tax Firm of the Year 2014 in Kenya

30
FOR FUTHER INFORMATION PLEASE CONTACT:
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Tel: +254 41 2311778
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E-mail: info@ke.rsmashvir.com
Contact: Lina Ratansi
(Managing Partner)
1st Floor, Reliance Centre,
Woodvale Grove, Westlands
P.O. Box 349, 00606
Nairobi, Kenya
Tel: +254 20 4451747/8/9
Fax: +254 20 4451773/4
E-mail: info@ke.rsmashvir.com
Contact: Ashif Kassam
(Executive Chairman)
Nairobi Office
16th Floor, Golden Jubilee
Towers, Ohio Street
P.O. Box 79586
Dar es Salaam, Tanzania
Tel: +255 22 2137314/15
Fax: + 255 22 2137316
Email: info@tz.rsmashvir.com
Contact: Lina Ratansi
(Group Chief Executive)
Dar es Salaam Office
6th Floor, DTB Centre,
Plot 17/19
P.O. Box 31704,
Kampala, Uganda
Tel: +256 414 342780
Fax: +256 414 342789
E-mail: info@ug.rsmashvir.com
Contact: John Walabyeki
(Managing Partner)
Uganda OfficeMombasa Office
www.rsmashvir.com

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