Kenyans to Disclose Offshore Income and Assets or Face Stiff Penalties.

Global Tax Initiatives and Kenya.

Kenya Revenue Authority (KRA) has thrown down the gauntlet, advising Kenyans who are working overseas that failed to take advantage of Kenya’s tax amnesty program that they will now face stiff penalties. This latest move is consistent with global enforcement initiatives including; the Common Reporting Standards (CRS) developed by the Organisation for Economic Development (OECD) to which Kenya is a signatory; and the reporting requirements enacted in the United States with respect to Foreign Financial Accounts (FBAR) and the Foreign Account Tax Compliance Act (FATCA). These initiatives were designed to create greater cross border transparency, encourage voluntary tax and financial reporting compliance and to punish those who continue to try and game the system.

Failure of Kenyans to report their foreign source of income and assets erodes Kenya’s tax base and flies in the face of the notion that every individual should pay his or her fair share of tax.  Accordingly, Kenyans living in the U.S. need to know the rules of engagement both in the United States and in Kenya if they hope to stay on the right side of the law.

Kenya has a right to tax Kenyan residents on the diaspora income earned abroad. The term “residence” is defined under the Tax Act of 2004 as an individual who maintains a permanent home in Kenya or an individual who does not maintain a permanent resident in Kenya but is physically present in Kenya for more than 183 days.

U.S. Tax Residents are taxed on their world-wide income, but are permitted exclusion for foreign earned income and may also be able to take advantage of the foreign tax credit for taxes paid to foreign jurisdictions. Unlike the term “residence” in Kenya, a U.S. Tax Resident includes both U.S. Citizens and Lawful Permanent Residents, irrespective of the amount of time spent in the United States during any given tax year. The terms also include those who are neither citizens nor lawful permanent residents of the United States but who meet the physical presence test in the United States.

Financial Reporting for Kenyan’s living in the U.S.

Kenyans, who are either permanent legal residents of the United States or naturalized citizens, are required to file FinCen Form 114 (FBAR) with respect their interest in or signatory authority over Foreign Financial Accounts where the aggregate balance exceeds $10,000 in any given tax year. In other words, if a Kenyan living in the US holds or is a signatory to any financial account(s) in Kenya and the balance on all those accounts is more than $10,000, then he/she has to file an FBAR (Foreign Bank Account Report). Failure to do so can result in significant civil and criminal penalties, and in certain cases, criminal prosecution. In addition, Kenyans, who are considered U.S. Tax Residents are required to file Form 8938 (Report of Foreign Financial Assets) if they meet certain thresholds, and are also required to report their worldwide income including; interest, dividend income and capital gains derived from Foreign Financial Accounts; income derived from rental property held in Kenya as well as any other income derived from Kenya sources including business income or wages received from Kenyan sources.

Intergovernmental agreement(IGA) between Kenya and the U.S.

Although Kenya is a signatory to the CRS, they do not have an intergovernmental agreement in place yet with the United States; In addition, Kenya has yet to conclude a Multilateral Agreement with the United States.

On January 17, 2013, the U.S. Department of the Treasury issued regulations for the implementation of FATCA (Foreign Account Tax Compliance Act), requiring foreign financial institutions (FFI’s) to search their data bases for records related to U.S. Persons and report their names, account numbers and account balances to the Internal Revenue Service. Failure on the part of an FFI to comply with the FATCA rule results in the imposition of 30% withholding on all U.S. source funds received by the non-compliant FFI.

Kenya’s relationship with the United States, its reliance upon Correspondent Bankers for the settlement of payments in U.S. Dollars currency and the fact that inflows from diaspora remittances from the United States constitute over 40% of the total inflows in to Kenya have placed Kenya on the U.S. Radar. Furthermore, Kenyan Banks are required to register as agents of the I.R.S. and commit to collection of information on U.S. Persons holding foreign financial accounts in Kenya.

In 2014, The Department of the Treasury formed a task force comprised of IRS agents, members of the Kenya Bankers Association (KBA) and the Central Bank of Kenya (CBK) as well as financial sector experts to fast-track the process to the final signing of an IGA (Intergovernmental Agreement). As of this date, Kenya and the United States have yet to conclude an IGA. Despite the absence of an executed IGA between Kenya and the United States, Financial Foreign Institutions in Kenya are compelled to comply with FATCA. Accordingly, if you have unreported Foreign Financial Accounts and assets as well as unreported income from Kenya, there is a substantial likelihood that the IRS will learn of your accounts.

Kenya and the United States have yet to conclude a Double Taxation agreement, which would prevent Kenyans living in the United States from incurring taxation on U.S. Source income in Kenya. The Kenyan tax authorities have intimated that despite the absence of a Double Taxation agreement with the United States, diaspora income will not be subject to double taxation. Nevertheless, Kenyans living in and working in the United State still have a filing obligation in Kenya and may still have a liability to the KRA, depending upon the effective tax rate in each jurisdiction.

The end to Kenya’s amnesty program signals the beginning of a crackdown on Kenyans living in the United States who fail to report their U.S. source income and assets to Kenya. Kenyans living in the United States (permanent residents and Citizens) should be concerned if they have foreign financial accounts (aggregate of $10,000 and above) or income from Kenya that they have failed to report to the United States. These transgressions can result in civil and criminal penalties and in the worst scenario criminal prosecution. Kenyans waiting to become naturalized are particularly vulnerable since a felony conviction in all likelihood will result in deportation. Conversely, Kenyans, who fail to report their U.S. Source income and Assets to the KRA, could find themselves in dire circumstances in the form of stiff penalties and potential criminal prosecution.