INTRODUCTION.
A tax is a financial charge or levy imposed on an individual by a state or a functional equivalent of a state. It is a pecuniary burden laid upon individuals or legal entities or property by governments or sub national entities and exacted by a legislative authority. It is an enforced contribution. It is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to a legislative authority and is “any contribution imposed by government whether under the name of toll, tribute, gable, impost, duty, excise, kodi, forodha or other name.
DEFINITION OF TAX RESIDENCY AND HOW IT AFFECTS TAXATION.
The criteria for residence for tax purposes vary considerably from jurisdiction to jurisdiction, and “residence” can be different for other, non-tax purposes.
For individuals physical, presence in a jurisdiction is the main test. Some jurisdictions also determine residency of an individual by reference to a variety of other factors, such as the ownership of a home or availability of accommodation, family, and financial interests. For companies, some jurisdictions determine the residence of a corporation based on its place of incorporation.
Other jurisdictions determine the residence of a corporation by reference to its place of management. Some jurisdictions use both a place-of-incorporation test and a place-of-management test.
JURISDICTION TAX (SOURCE AND RESIDENCE)
Section 3(1) of the Income Tax Act of Kenya states “Subject to , and in accordance with, this Act, a tax to be known as income tax shall be charged for each year of income upon all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya.”
The section seems to focus on two points namely a) “accrued in” or was “derived from”. Phrase “accrued in” or was “derived from” Kenya in Section 3 (1) Connotes a territorial or geographical basis
Generally, a country’s jurisdiction to impose income tax is based either on:
i. the source or situs principle (the relationship of the income to the taxing state or
ii. residence or nationality (the relationship of the taxpayer (tax subject) to the taxing state.
Generally business profits derived from overseas by a Kenyan resident are, in general, calculated and taxed in the same manner as Kenya sourced profits.
In the exercise of its taxing power the state applies a number of principles to establish tax liability.
There are three basic principles of income tax
i. Residence and Nationality
ii. Source
iii. Worldwide and Territoriality Principle.
SOURCE
Phrase “accrued in” or was “derived from” Kenya connotes a territorial or geographical basis.
CONCEPT OF SOURCE
The question of source is not easy to determine because source is not determined by application of some scientific rules or formula.
a) It is determined by factual examination
b) Each case of source must be determined on its facts
Business profits derived from overseas by a Kenyan resident are, in general, calculated and taxed in the same manner as Kenya sourced profits.
i. Sec 4(a) deems certain worldwide income to be accrued in or derived from Kenya. Trouble comes up in the way courts have looked at it.
ii. Sec 10 deems certain income to have accrued in Kenya.
iii. Sec 9 (1), (2) also deems income from use of a ship/aircraft in Kenya ports to have accrued in or derived from Kenya unless otherwise.
iv. Sec 9(2) income from business or transmitting cable or radio messages from apparatus established in Kenya is also deemed to have accrued in or derived in Kenya.
v. Sec 10 touches on payments by Kenyan based residents persons and any persons who are non-residents in respect of management /professional fees, royalties, interests, use of property in Kenya and for any appearance or performance or any place for entertainment or sporting, then any such payments will be deemed to have accrued in or derived from Kenya and will be subject to a W.H.T (persons paying withholds tax from that payment and remits it to the Government.
SOURCING RULES
a) Dividends
Normally determined by reference to the origin of profits from which dividends are paid.
Dividends are derived from a Kenyan source if the dividends are paid by a resident company. Dividends paid to a non-resident person are only treated as derived from Kenya source to the extent is paid out of profits sourced in Kenya.
b) Interests
The question of source is difficult and there is no clear precedent. Some of the factors to consider in determining source include:
i. Place of lending and place of borrowing
ii. the residence of the debtor: that is, the place in which the debt will be enforced;
iii. the source from which interest is paid,
iv. where the interest is paid, and
v. the nature and location of the security for the debt
c) Employment Income
Source is where physical work is performed. However, regard has to be had to all contributing factors (such as where the contract was signed and payment made) which gained the income.
d) Trading profits
Relates to profits derived from trading in commodities or goods provision of services
RESIDENCE
TYPES OF RESIDENCE AND PRINCIPLES OF RESIDENCE
a) PRINCIPLES OF RESIDENCE
This principle determines that an individual or corporate person is liable to taxation on the basis that he is a resident.
A resident can be determined to be a resident by applying the following Tests.
i. Accommodation
If a person has a permanent home in Kenya and if that person was present in Kenya for any particular period during the year under consideration.
Section 2 of the Income Tax Act Cap 470 does not seem to have an exception or diminimus period of residence. Further if a person is ordinarily a resident of Kenya and then leaves the country during part of the year, he is deemed to remain a resident even during the period of absence
Permanent home is not defined in the Act. For purposes of income tax all that is necessary is that an individual has permanent access.
ii. The 183 Day Rule
A person is considered to be a resident if he was in Kenya for an aggregate of 183 days or more during the year of income.
In England the rule is that if the place being rented is being rented for 2 years and it has furnished accommodation or less than one year but unfurnished accommodation then it is permanent.
iii. The 122 Day Rule
A person will be considered to be a resident if he was in Kenya during the year of income and in each of the presiding years an average of 122 days or more. The purpose of the visit is immaterial.
iv. Incorporation Rule
A body corporate is deemed to be resident in Kenya if it was incorporated in Kenya.
v. Control Rule
A body corporate is deemed to be resident if the management and control of the affairs of the company were exercised in Kenya during the year of income under consideration.
vi. Ministerial Declaration.
The Minister may by notice in the gazette declare a body corporate to be a resident of Kenya for any year of income.
vii. Nationality Principle .
This principle defines that an individual is liable to taxation in the country of his citizenship.
Application of this principle often leads to double taxation.
Under special arrangements however foreign tax payable in respect of income derived by a resident in Kenya can be allowed as a credit against tax chargeable in Kenya.
However where foreign tax is chargeable on different parts of the total income of that person the tax chargeable on that income is apportioned to each part in such amounts as the commissioner may determine.
TAX RESIDENCY IN THE UK.
i. The automatic non-resident test
An individual will be non-resident for a tax year if they are present in the UK at midnight at the end of the day for less than a specified number of days in the tax year in question, as follows:
a. For an individual who was resident in the UK for one or more of the preceding three tax years the limit is 15 days or;
- For an individual who was resident in the UK for none of the preceding three tax years the limit is 45 days or
- For an individual who works abroad ‘full-time’ throughout the tax year (broadly, 35 hours per week on average), without a significant break (more than 30 days, with exceptions for annual, sick or parenting leave), the limit 90 days. Such an individual must also have less than 31 days in the tax year on which he does more than three hours’ work in the UK.
Days of presence will be disregarded where an individual spends a day in the UK due to circumstances beyond their control or where it is a day spent in transit.
If none of the three tests above are met, the automatic resident tests must be considered.
ii. The automatic resident test.
An individual will be conclusively regarded as resident in the UK in a tax year if:
- They are present in the UK for 183 days or more in that years or
- They have a home in the UK for 91 consecutive days or more (where at least 30 days of that period fall within the tax year in question), are present there for some time on at least 30 days in the tax year, and during that 91 day period either have no home overseas, or have one or more such homes but are present for fewer than 30 days at each of those homes in the tax year or
- They work full-time in the UK for a period of at least 365 days, all or part of which falls within the year, without a significant break. More than three quarters of the days in the 365 day period when they work for more than three hours must be days where they work in the UK.
Provided none of the automatic resident tests are satisfied, the sufficient ties test must then be considered.
iii. The sufficient ties test
For individuals who want to spend more than 15 or 45 days a year in the UK and do not want to work full-time abroad, it is still possible to become non-resident. However, it will be necessary for them to substantially reduce both the amount of time they spend in the UK and the number of ‘ties’ they have with the UK.
The sufficient ties test combines the concept of UK ties with the number of days that the individual is present in the UK. There are many situational complexities to each of the five UK ties but, in outline, the ties are:
a. Family tie – the individual has a spouse, civil partner, unmarried partner or minor child resident in the UK. Children will not be taken into account if the individual sees the child in the UK on fewer than 61 days in the year or the child is only resident because they are in full-time education in the UK and they spend less than 21 days in the UK outside term time.
- Accommodation tie – the individual has accommodation in the UK that is available to be used by them for a continuous period of at least 91 days in a tax year and they spend at least one night there in the year. If the accommodation is the home of a close relative the ‘one night’ test is extended to 16 nights. This tie does not require the individual to own the accommodation so holiday homes and even hotels may trigger tie.
- Work tie – the individual works in the UK for 40 or more days in a tax year, for at least three hours per day.
- 90 day tie – the individual has been present in the UK for more than 90 days in either of the previous two tax years.
- Country tie – the individual is present in the UK at midnight in the tax year as much as (or more than) they are present in any other single country.
iv. Split year treatment
Residence status is determined for a complete tax year. However, if the individual’s circumstances fit one of the cases for split year treatment to apply then the tax year of departure will be split into a resident period and a non-resident period. These rules are complex so personal advice based on an individual’s circumstances is required.
TAX RESIDENCY IN TANZANIA
a. Individual Residency.
Residency status is satisfied in Tanzania if one of the following conditions exists:
i. If the individual has a permanent home in Tanzania and is present in Tanzania during any part of the year of income;
ii. If the individual is present in Tanzania during the year of income for a period or periods amounting to aggregate 183 days or more;
iii. If the individual is present in Tanzania during the year of income and in each of the two preceding years of income for periods averaging more than 122 days in each such year of income; or
iv. The individual is an employee or an official of the Government of Tanzania posted abroad during the year of income.
b. Corporate Residency.
A company is tax resident if it is incorporated or formed under the laws of Tanzania or if the management and control of its affairs is exercised in Tanzania.
c. Permanent establishment (PE)
A non-resident entity has a PE in Tanzania if it carries on business in Tanzania. This includes a place where a person
(i) is carrying on business through a dependent agent;
(ii) has used or installed, or is using or installing, substantial equipment or machinery; and
(iii) is engaged in a construction, assembly, or installation project for six months or more, including a place where a person is conducting supervisory activities in relation to such a project.
TAX RESIDENCE IN UGANDA
a. Individual Residency
An individual is resident for a year of income if that individual satisfies any one of the conditions below:
i. The individual has a permanent home in Uganda.
- The individual is present in Uganda:
- for a period of, or periods amounting in aggregate to, 183 days or more in any 12-month period commencing or ending in the year of income, or
- during the year of income and in each of the two preceding years of income for periods averaging more than 122 days in each such year of income.
- The individual is an employee or official of the government of Uganda posted abroad during the year of income.
b. Corporate residence
A company is resident in Uganda for a year of income if it meets one of the following criteria:
a) Is incorporated or formed under the laws of Uganda.
b) Has its management and control exercised in Uganda at any time during the year of income.
c) Undertakes the majority of its operations in Uganda during a year of income.
c. Permanent establishment (PE)
A PE (branch) means a place where a person carries on business, and includes:
I. A place where a person is carrying on business through an agent, other than a general agent of independent status acting in the ordinary course of business as such.
II. A place where a person has, is using, or is installing substantial equipment or substantial machinery.
III. A place where a person is engaged in a construction, assembly, or installation project for 90 days or more, including a place where a person is conducting supervisory activities in relation to such a project.
IV. The furnishing of services, including consultancy services, by an enterprise of a contracting state through employees or other personnel engaged in the other contracting state, provided that such activities continue for the same or a connected project for a period or periods aggregating more than 90 days within any 12-month period.
TAX RESIDENCY IN SOUTH AFRICA
a. Individual Residence.
A natural person ordinarily resident in South Africa, or who is physically present in South Africa for a specified period, is considered a resident for tax purposes.
There is no statutory definition of ‘ordinarily resident’. South African courts have held that a taxpayer is ordinarily resident in the country of their most fixed or settled residence, the country to which they would naturally, and as a matter of course, return from their wanderings, or their usual or principal home.
If not ordinarily resident in South Africa, an individual is considered a South African resident if the individual is physically present in South Africa for more than 91 days, in aggregate, in the relevant tax year and each of the preceding five tax years, and also for more than 915 days, in aggregate, in the preceding five tax years. If a person, who has become a South African resident in terms of this physical presence test, spends a continuous period of at least 330 days outside South Africa, then the individual ceases to be a resident from the date of the beginning of the absence from South Africa.
b. Corporate residence
A company is resident in South Africa if it is incorporated, established, or formed in South Africa or has its place of effective management in South Africa. However, a company that is deemed to be exclusively resident in another country in terms of a double taxation agreement (DTA) is excluded from SA residency.
In terms of an Interpretation Note issued by the SARS, the place of effective management is regarded as the place where key management and commercial decisions that are necessary for the conduct of its business as a whole are, in substance, made. This approach is consistent with internationally accepted principles.
c. Permanent establishment (PE)
South Africa does not, as a general rule, tax non-residents on the basis of having a PE in South Africa. Rather, non-residents are subject to income tax in South Africa on income derived from a South African source. The primary exception to this rule is in relation to capital gains, where non-residents are subject to tax on assets attributable to a PE in South Africa. A PE is defined with reference to the definition thereof in the OECD Model Tax Convention.