The unseen implications of taxing rent income


The recent much ado about apparent introduction of taxation on rental income is really nothing to me. Rental income has been, for as long as I can remember, been subject to tax. In fact, it is so subject to tax that it is subjected to tax separately from a taxpayer’s other income, for a taxpayer who receives rent income in addition to trading income, which in effect implies that trading losses would not be offset against rent profits.

The issue therefore is the renewed vigour at bursting the tax evaders. This is laudable, especially since real estate is one of, if not the first, leading growing sectors in Kenya, indeed even globally if the recent survey is anything to go by. One would say that this is a smart move by the government.

It is therefore interesting to see that KRA has gone all out, what with the regular public notices sensitizing should-be taxpayers, encouraging them to register as well as creating a department to handle rent tax compliance. It is notable that KRA has in the past made efforts at catching tax evading landlords when the tax returns provided for taxpayers to declare their landlord’s details and details of rent paid. KRA has even offered to collect land rents and rates on behalf of the city and municipal councils. It is said a lot of information regarding landlords has been collected.

This shouldn’t really be worrying so long as one has been declaring and paying tax on the income. Taxation of the rent income should also be pretty straightforward, the requisite documentation having been maintained. What will be of interest though, according to me, are the unseen ramifications this zeal is likely to have on some of the taxpayers. Remittances from the Kenyans living in the Diaspora are on their all time high, according to the Central Bank of Kenya. It is only possible that a good proportion of those remittances are channelled to the real estate.

The various conferences held for Kenyans in the Diaspora have actually identified real estate as one of the viable investment opportunities in Kenya within the Diaspora and to overseas investors. But how they hold that investment in Kenya may not have really been considered.

If held through a company, there would be no unfavourable tax consequences as tax would only be on the company, and on any dividends distributed. If held individually however, which is likely to be the case with Kenyans in the Diaspora, tax would payable by the individual landlord at the individual tax rates. Such ownership would, invariably, have in the first instance necessitated the individuals to register such ownership in Kenya.

The question that would arise, with respect to the Kenyan individuals, would be whether owning the houses would constitute them having a permanent home in Kenya, especially if they have part of those houses available to them for shelter when they come to Kenya. There is this provision in the tax law which requires individuals who are considered resident in Kenya to pay tax on their worldwide employment income.

What is rather absurd about this provision is that any individual who has a permanent home in Kenya becomes resident for tax by being in Kenya even for a day. This provision has not been clarified and its applicability has remained ambiguous. Seeing as the Kenyans in the Diaspora would more often than not visit Kenya at certain times in their Diaspora life, it will be interesting how the landlords among them will be taxed, and whether tax will be extended to their income from employment in the other countries, considering that a majority of them have gone to those countries in search of a living, quite often of the employment nature.

There are no prizes for guessing how such a move will be received by such Kenyans or even what impact it will have on their investments back home, which ironically plays a critical role in the overall development. Many of them have previously expressed concerns at the lack of clarity in the tax provision.

Perhaps this provision was made with rules of domicile in mind, or on the basis of the family-social tie connector to Kenya, but it certainly has been overtaken, at least in other jurisdictions like the UK and indeed by best practice, by proper tax statute. May be this rent matter will require us to do likewise.

The writer is a consultant with Viva Africa Consulting, specialist legal financial tax consultants. The views expressed are personal.

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