I ran an office with the exact same details as you have listed. KRA caught up with us due to a disgruntled employee, what we call an UNK UNK (unknown unknown).
Luckily, it was during an amnesty year so we got off very lightly, had to register the office with KRA, and start deducting tax at source. So I even went ahead and registered for NSSF and NHIF, to avoid any problems in the future.

To be honest, it can work as I managed to stay out of KRA's view for quite some years but sooner rather than later, they will catch up with you and make you pay dearly.

Income tax applies to all proceeds received while living in Kenya, whether the funds come from outside or within.

The source was my bank account, where the salaries were transferred from overseas.




Medical cover was done via AAR, individual payments. I just refunded the employees (we weren't many) on a cash basis against the receipts. Pension was done with an insurance company.

Double tax gani? This is employee income tax we're talking about. I was paying the employees in Kenya.

I think @essyk's question has confused some people.

The query was whether local employees of a foreign based company can get away with paying no tax as asked here:



The answer is no. There is no issue of double taxation as the local employees are not employed in the foreign country, hence are not liable to their tax (in contrast, our athletes, who're now being targeted by KRA, are taxed at source as they earned the money there but live here and the double taxation agreements would come in play).

The employment is here in Kenya and whether the salaries are transferred directly to their individual accounts or whatever, they are earning a salary in Kenya. PAYE therefore applies. I personally spent a few sweaty days with KRA learning all of this the hard way.

@ essyk, here some notes Kenya's taxation

b. determination of taxable income


FOREIGN SOURCED INCOME
Income that is not income accrued or derived from Kenya is not assessable in Kenya
except:
(a) employment income for an employee who at the time of employment was a
resident person in respect of any employment by him outside or inside Kenya
(b) business activities carried out across borders
(c) foreign bank branches’ income on investments or trading abroad using locally
generated income.
INCENTIVES
Capital deductions are as given under ‘Capital allowances’ above. There are currently double
taxation treaties with UK, India, Germany, Zambia, Norway, Sweden, Denmark and Canada.
A ten year tax holiday is available to certain designated enterprises that undertake
activities consisting of the manufacture of goods for exports only (under the export
processing zones). At the end of the tax holiday, a reduced rate of tax of 25% is available.
A lower rate of corporation tax at 27% for the first three years for companies newly
listed on a securities exchange, with at least 20% of the issued share capital listed.
Tax exemptions apply for organisations undertaking charitable, medical, alleviation of
poverty, and religious activities.
c. foreign tax relief
Foreign tax relief is limited only to countries with double taxation relief.
d. corporate Groups
Generally for tax purposes, a corporation tax rate of 30% and applies to all incorporated
companies irrespective of groups in Kenya. The rate is 37.5% for non-resident companies.
e. related party transactions
Related party transactions are allowable expenses if incurred wholly and exclusively in
the production of income and taxed as income if earned or accrued in Kenya as business
activities. Transfer pricing rules were brought into operation with effect from 1 July 2006.

That's what I did. Paid the salaries out in cash out of my own personal account. The branch, if we can call it that, had been operating like that here for close to 35 years. I ran it for the last 8 years but it took just one pissed off ex-employee to rat us out. If it wasn't for him, things could have probably continued like that for another 30 years

Proving it was easy for the KRA, as they had a rat singing the kind of song they love snapping their fingers to.

The point is, if KRA catches up with you, for their purposes, they will assume YOU are the employer (local branch) who "somehow" neglected to deduct PAYE, penalize you accordingly and even go after your assets. That's the unfortunate and unenviable position I found myself in. Good for losing a lot of weight fast and getting grey hair but not much else I can think of.

I did. There's nothing like having your gross salary = your net salary and it looks good on the bank statement

Honestly, I believe there are many people operating like that outside KRA's eyes. Even just opening a bank account outside Kenya and having them deposit 3/4 of your salary there and only pay PAYE on a 1/4. How will KRA ever find your foreign account, unless you go through an extremely messy divorce à la Gichuru ex KPLC?

I believe some of this cash is being used to speculate in our fake housing boom: Bid to Track Source of Kenya Property Development Cash

The rule is very simple. Income earned in Kenya from employment is taxed - even smuggling. The employer is an agent of KRA who collects from the employee (what you are calling deducting at source). It is your duty to file returns at the end of each year where you declare all income, all tax deductions made by employer supported by P9 then pay the difference.
If you work for a department of a foreign company, I believe the tax rates are even more punishing (37.5% with no allowable deductions).
Lipa ushuru else if they audit you, it will be a very painful experience.

Thanks Ash for the practical example.
You've educated me plus everybody else.

Weeee,my company is on migingo island.
Foreign based! and exempted from local taxes.


believe me at ur own risk

@essyk Ash Ock has pointed out the risks of your arrangement.

Note the following:

1. For employees of a foreign branch, the obligation to withhold PAYE is on the person making the payments to the employees IN KENYA.

2. The law appoints you the Agent of the foreigner. Technically KRA can therefore require that:
a) You pay the tax;
b) You pay the penalties (25%);
c) You pay the interest (2% per month);
d) You are prosecuted for tax fraud (2 yrs imprisonment, or fine of 200k, or x2 the tax evaded).

3. For corporation tax (tax payable by the foreign company in Kenya), it depends on:
a) The kind of activities the company is engaged in Kenya (through the Branch) i.e if they amount to trading;
b) How long the branch has operated in Kenya ie 6 months or more;
c) If company is paying tax in Kenya through other means (by withholding tax);

4. If caught up in situations 1&2 above, you need to shift the risk of KRA assessment for tax from YOU to the Foreign company and comply with tax requirements.

5. You also need to minimize the risk of back taxes, penalties and interest assessment on the foreign company. This can be done.

If interested in 4&5, give me a shout at sparkly99@ovi.com then we can go through the specifics.