A Branch in Kenya is considered a foreign company as under Part XXXVII of the Companies Act, due to its corporate structure. It still uses the systems and resources of the Head Office and maintains the name, brand, and all other attributes of the main office. A subsidiary, on the other hand, is considered a local/resident company in Kenya due to the fact that the foreign company incorporates a different company, under a new name in Kenya.
Therefore, a subsidiary enjoys all the benefits of a local company in Kenya, while a Branch office is a foreign company for all intents and purposes.
For the purposes of taxation, it is important to note that, under Kenya tax laws, a Branch is taxed as a non-resident/ foreign company which has a permanent establishment in Kenya, while a Subsidiary is taxed like a local company incorporated in Kenya. To delve deeper:
- Taxable income [what income is subject to tax?]
For the Branch Entity, the focus is on the income that is got in Kenya, therefore the total income of the Branch entity that is accrued in or derived in Kenya is subject to tax. This is in contrast with a subsidiary whose whole business income is subject to tax.
- Income tax.
Firstly, under the Income Tax Act, a Branch is liable for payment of Corporation Tax at a corporate income tax rate of 37.5%. On the other hand, a Subsidiary pays corporation tax at a 30% tax rate.
Secondly, the Branch entity can make payments to the Main office without being charged Withholding Tax on these payments, since the payments are seen to be within the same legal entity. Nevertheless, there are restrictions on the deductibility of expenses such as royalties, interest and management fees paid to the Head Office. These expenses, which are termed as tax deductibles in local companies like the Subsidiaries, are not deducted from the taxable income of the Branch; they are computed together with all other income and used to determine the taxable income.
In comparison, the payments made by a Subsidiary entity to its Holding company are subject to Withholding Tax like local companies, since they are seen to be payments in different legal entities. Withholding Tax rate is 10% on dividends made to the holding company.
- Excise duty.
Excise duty is not a direct tax, it is an indirect tax charged on the importation, local manufacture of certain products, and supply of excisable services. The tax is levied on the producer or supplier, who passes the tax onto the consumer by including it in the product’s price.
An entity will only pay Excise Duty if it deals in excisable goods or services in Kenya. Excisable commodities include bottled water, soft drinks, cigarettes, alcohol, fuels, and motor vehicles, while excisable services include telephone and Internet data services, fees charged for money transfer services, and other fees charged by financial institutions. Under the Excise Duty Act, there are different rates of excise duty charged on different goods or services in Kenya. Further, there is excise duty on betting and gaming at the rate of 7.5% of the amount wagered or staked, and fees or commissions earned in respect of a loan are also subject to excise duty.
Nonetheless, there are goods and services which are exempt from excise duty under the Excise Duty Act, including:
- Goods listed in the Second Schedule of the Excise Duty Act;
- Excisable goods exported under Customs control, including as stores;
- Excisable services exported from Kenya;
- Excisable goods that the manufacturer has destroyed, with the prior written permission of the Commissioner, under the supervision of an authorised officer prior to their removal from the factory in which they were manufactured;
- Denatured spirits for use in the manufacture of gasohol or as a heating fuel; and
- Excisable goods that have been lost or destroyed by accident or other unavoidable cause in the course of removal of the goods by the manufacturer from the factory including when loading or unloading the goods, or before removal from the factory, or on board an aircraft or vessel prior to importation into Kenya.
- Value Added Tax (VAT).
An Entity is required to register for VAT if it is making or expecting to make taxable supplies of over KES 5 million in a 12-month period. The supplies that attract VAT include:
- Local taxable supplies taxed at 16%;
- Local supply of fuel taxed at 8%; and
- Zero rated supplies which attract 0% VAT.
In addition, the Value Added Tax (Digital Marketplace Supply) Regulations, 2020 operationalized the collection of VAT on digital marketplace supplies as provided for in the VAT Act. The regulations provide clarity on the nature of supplies subject to VAT, at the standard rate of 16%, when supplied through a digital marketplace. These services include amongst others:
- Downloadable digital content, including mobile applications, e-books, and films;
- Software programs, including software, drivers, website, filters, and firewalls;
- Electronic data management, including website hosting, online data warehousing, file sharing, and cloud storage services;
- Distance teaching through pre-recorded media or e-learning, including online courses and training;
- digital content for listening, viewing, or playing on any audio, visual, or digital media; and
- any other service provided through a digital marketplace that is not exempt under the VAT Act.
Nevertheless, there are supplies which are exempt from VAT and they are provided for under the First Schedule of the VAT Act.
Therefore, a Branch Entity or Subsidiary dealing in the supplies attracting VAT will be liable for VAT payment where the taxable supplies are made for the consumption of Kenyan consumers. The taxable value for payment of VAT is the consideration for the supply which includes any taxes, duties, levies, fees, and charges paid or payable on or by reason of the supply.
TRANSFER PRICING RULES.
Essentially, in Kenya, all companies that belong to a group of companies, whether local or foreign, are treated independently. Under Section 18(3) of the Income Tax Act, transactions between a resident entity and its related non-resident should be at arm’s length.
Transfer Pricing rules became effective from 1st July 2006 and borrowed significantly from the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines. The Transfer Pricing Rules apply to:
- Transactions between associated enterprises within a multinational company, where one enterprise is located in, and is subject to tax in, Kenya, and the other is located outside Kenya [Subsidiary]; and
- Transactions between a permanent establishment and its head office or other related branches, in which case the permanent establishment shall be treated as a distinct and separate enterprise from its head office and related branches [Branch].
These Rules form the basis for the determination of the arm’s length price in transactions between related parties. They entitle the Commissioner to adjust transaction prices where he is of the view that the transaction was not an arm’s length transaction. The transactions which are subject to the transfer pricing rules include:
- Purchase or sale of goods and services;
- Sale, purchase or lease of tangible assets;
- Transfer, sale, purchase or use of intangible assets;
- Provision of services;
- Lending or borrowing of money; and
- Any other transactions which may affect the profit or loss of the enterprise involved.
How does an entity comply with these rules?
An entity that seeks to prove that the transactions between the entity and its non-resident Head Office or Parent Company, it is required to:
- Develop an appropriate transfer pricing policy;
- determine the arm’s length price as prescribed under the guidelines provided under the Transfer Pricing Rules; and
- Avail documentation to evidence their analysis upon request by the Commissioner.
A transfer pricing policy document should include:
- The selection of the transfer pricing method and the reasons for the selection;
- Application of the Transfer pricing method, including the calculations made and price adjustment factors considered;
- The global organization structure of the enterprise;
- The details of the transaction under consideration;
- The assumptions, strategies and policies applied in selecting the method; and
- Such other background information as may be necessary regarding the transaction.
Therefore, any Branch or Subsidiary present in Kenya must comply with these transfer pricing rules in Kenya.