ADVANCED ASPECTS OF THE TAXATION OF BUSINESS INCOME QUESTION AND ANSWERS

QUESTION 1

Explain how savings and Credit cooperatives society (Sacco) are taxed

The total taxable income of a cooperative society carrying on business as a credit and  savings cooperative society shall be deemed to be the aggregate of:-

50% of its gross income from interest other than interest from its members.

Its gross income from any right granted for the use or occupation of any property not a royalty i.e. rental income.

Gains chargeable to tax under see 3 sub (2) (F) i.e. gains from transfer of property.

Any other income excluding royalties chargeable to tax under income tax Act and not mentioned above.



 

Note: The taxable income shall be deemed after deducting therefrom an amount equal to  the aggregate of bonuses and dividend declared for that year and distributed by to its  members.

 

QUESTION 2

Charitable trusts are nonprofit making organizations formed with the objective of promoting the social well-being of the general public. With reference to sections 25 and 26 of the income tax act (cap 470), explain the tax treatment of the charitable trusts.

 

The income of a charitable trust is exempted from tax, subject to these conditions

That the trust is public in character  ii)   It is established for relief of distress or poverty to the public  iii)   It is established for the advancement of region or education  iv)   Its total income must be spend for charitable purposes

 

In Kenya where a charitable trust is running a business, then this business income will be exempted from tax if this trust business relates to (ii) and (iii). Any income of such a trust building and chattels is not subject to tax.

 

QUESTION 3

The main tax incentives available to investors setting up companies in the Export Processing Zones

(EPZs) in Kenya

 Tax incentives for Export Processing Zone Enterprises

 

EPZ enterprises are tax exempt for the first 10 years and pay 25% corporation tax on income for the next 10 years

During the period in which an export processing zone enterprise is exempt from corporation tax the enterprise shall be deemed to be subject to a non-resident withholding tax on payments made to such enterprises where such payments are made by a person who is not an processing enterprise, the tax shall be shall be final tax

Payment by EPZ enterprises shall be zero rated or exempt for tax purpose e.g. import of machinery equipment and goods for use in the enterprise.

Cost of building and machinery is ‘expensed’ by granting investments deduction at the rate 100%

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