KRA considers stricter rules on disclosures for third party payments

Wednesday, June 7th, 2023 03:00 | By
KRA office. PHOTO/Print

The Kenya Revenue Authority (KRA) has issued a public notice regarding the declaration of related party transactions, in a move set to impact businesses that make payments to non-residents.

The notice, which introduces stricter disclosure requirements, is expected to have a significant impact on businesses involved in transactions with foreigners.

“KRA would like to notify taxpayers that the Income tax Company Return on the I-tax platform has been enhanced to provide for declaration of related party transactions by persons with related parties and whose ascertainment of gains is subject to the provisions of Income tax Act Section 18,” KRA said in a statement.

The State agency has long been focused on ensuring tax compliance and preventing tax evasion.

With the latest public notice, the authority aims to enhance transparency and accountability in transactions involving related parties, particularly those with non-resident entities.

Related party transactions refer to deals or transactions carried out between two entities that have a close relationship or connection with each other. These relationships may include family ties, ownership interests, or other economic or financial ties.

Such transactions can potentially be used to manipulate prices or transfer profits between related entities, leading to potential tax avoidance.

Under the new disclosure requirements, businesses engaged in related party transactions with non-resident entities will face additional scrutiny from the KRA.

The purpose of this increased disclosure is to enable KRA to assess at arm’s length, the nature of the transactions, and ensure that they are conducted on fair and reasonable terms.

Answered questions

“When filing their returns, all taxpayers with related party transactions are required to answer, Yes, to the question under the basic information sheet of the income tax company return on whether or not they have related parties outside Kenya or controlled transactions,” the taxman said.

By implementing stricter disclosure requirements, the KRA aims to prevent tax leakage and ensure that businesses pay their fair share of taxes. As at the close of March 2023, revenue collection averaged 95.1 per cent on original target and 93.4 percent on Supplementary target, representing a collection of Sh1.554 billion and a year on year 8 per cent growth.

The government wants the taxman to collect Sh2 trillion next year up from the Sh1.6 trillion it is expected to collect this financial year.

Failure to comply with the disclosure requirements may result in penalties or other enforcement actions by the KRA.

The public notice issued by the KRA is a clear indication of the authority’s commitment to enhancing tax compliance and fairness in Kenya.

It serves as a reminder to businesses to maintain accurate and transparent records of their related party transactions, particularly those involving non-resident entities. 

The authority is expected to provide further guidance and clarification on the implementation and enforcement of these requirements in the coming months.

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