Tax Amnesty for Kenyans in the Diaspora
The Finance Minister declared a generous amnesty to the Kenyan Diaspora for any year of income ending on or before 31 December 2010. The amnesty covers taxes due, penalties and interest on condition that the income for the year 2010 is declared and returns and accounts for the same period are filed no later than 30 June 2011.
The amnesty means well, and the minister hopes it will translate into higher remittances from the diaspora. He noted that a number of Kenyans have shied away from remitting funds for investment in Kenya because of the requirement to declare income and file returns in Kenya.
The Kenyan diaspora’s contribution to the Kenyan economy is well acknowledged. In my view, the government has to think long and harder how to leverage the diaspora phenomenon.
That Kenya has a large diaspora did not happen by design. The political crackdown of the 80’s and severe economic decline of the 90’s seem to have been the main cause. Interestingly, it is only in the last 10 years that remittances from abroad have grown tremendously.
It would appear to have been an endorsement of the new government that took over from 2003. There were no incentives whatsoever directly provided by the government. It was a natural consequence of having a more palatable government in power.
Based on the foregoing, it can then be argued that there are certain softer issues that encourage the diaspora to invest back at home. The political and economic climate must be right.
The government has to go beyond a tax amnesty in order to work out a package that would harness the enormous potential that the diaspora presents. We have to look at the Kenyan diaspora in the same way as are foreign investors. The government has gone a long way to wooing foreign investors with a raft of incentives. A tax amnesty is not a good starting point.
You see, an amnesty comes with some negative connotations. It implies, firstly, that the beneficiaries of the amnesty have been evading taxes and the government is giving them opportunity to come clean.
Secondly, and naturally, after an amnesty comes the cracking of the whip. So what happens to those who do not partake of the amnesty? Are we not causing panic with the amnesty?
In the same Budget Speech, Minister Uhuru Kenyatta averred that our VAT law is not modern and in keeping with best practice. I wonder what he thinks of our Income Tax law. Lifted directly from the EAC Income Tax Management Act of 1973, no amount of amendments will bring it in line with modern economic and business trends.
Our commercial and revenue laws have to be modernised to become relevant to present day changes in global and cross-border trade, manpower mobility, technological innovations.
Apart from the migration of the 80s and 90s, more and more Kenyans are finding employment in the rest of Africa. This has happened in two ways: either the spread of Kenyan businesses across the continent or a number of foreign multinationals that hubbed their operations in south Africa, middle east or Europe are increasingly making Kenya the hub for their Africa and even middle east operations.
This in turn means those Kenyan entities are increasingly dispatching Kenyans to those other African countries that they oversee.
The above phenomenon is good for Kenya as it helps address the perennial unemployment problem. The president is on record urging Kenyans to seek job opportunities abroad. Secondly, as Kenya becomes the corporate regional headquarters for more companies, this attracts other investments, visitors as well as enhancing the opportunity to also become a financial centre.
Kenya citizens are liable to pay taxes in Kenya if they are technically resident in Kenya. The Income tax Act has a very aggressive definition of when a Kenyan citizen is resident in Kenya for tax purposes. If one has a permanent home in Kenya, and in a particular year was present in Kenya for any period of time, then for tax purposes, that person is deemed to be resident for that full year.
Kenyan courts, in interpreting that definition have also taken a very aggressive stance. For instance, presence in Kenya would include over-flying the Kenyan airspace. One is deemed to have a permanent home in Kenya if he was born in Kenya and there is no need to demonstrate the possession or presence of a physical home.
Such an aggressive stance fails to recognise there are two types of Kenyan Diasporas. Foremost, there are Kenyans who relocated from Kenya without the intention to return. They have taken up residence and even citizenship in other countries.
Secondly, there are Kenyans who left temporarily for employment reasons – either a foreign job or a secondment to another country. Thus our tax laws need to recognise the above scenario.
Kenyans who are not “ordinarily resident” in Kenya are essentially like foreigners who come to tour Kenya. To demand that they pay taxes would be akin to asking tourists and foreign investors coming to Kenya to pay income tax.
As Kenya becomes more economical and politically mature, a number of the Kenyan diasporas have invested heavily in Kenya and are considering permanently relocating to Kenya. If they return then they will become “ordinarily resident” in Kenya and will pay their taxes.
Until then, any attempt to loop them into the tax net might be a huge disincentive to invest and return to Kenya. Clearly no one would wish to return to Kenya permanently or on short visit, if there is a risk of trouble with KRA.