Doing Business in Kenya.2010.UHY

Doing Business in Kenya

2010

Contents 1.

Introduction ................................................................................................... 1

Business environment .................................................................................. 2

Setting up a business .................................................................................... 6

Labour ............................................................................................................ 9

Taxation ........................................................................................................ 11

Accounting and Reporting ........................................................................ 14

UHY firms in Kenya ................................................................................... 16

UHY offices worldwide ............................................................................. 16

Introduction

UHY is an international organisation providing accountancy, business management and consultancy services through financial business centres in over 80 countries throughout the world. Business partners work together through the network to conduct trans‐national operations for clients as well as offering specialist knowledge and experience within their own national borders. Global specialists in various industry and market sectors are also available for consultation. This detailed report providing key issues and information for investors considering business operations in Kenya has been provided by the office of UHY representatives: UHY Kenya Mungai & Associates P.O. Box 42844‐00100 Nairobi Kenya Phone: +254 20 4442860 Email: mungaiassociates@mgkcpak.com You are welcome to contact Mwai Mbuthia for any inquiries you may have. Information in the following pages has been updated so that they are effective at the date shown, but inevitably they are both general and subject to change and should be used for guidance only. For specific matters, investors are strongly advised to obtain further information and take professional advice before making any decisions. This publication is current at January 2010. We look forward to helping you do business in Kenya. UHY Kenya Mungai & Associates is a member of UHY, an international association of independent accounting and consultancy firms, whose organising body is Urbach Hacker Young International Limited, a UK company. Each member of UHY is a separate and independent firm. Services described herein are provided by UHY Kenya Mungai & Associates and not by Urbach Hacker Young International Limited or any other member of UHY. Neither Urbach Hacker Young International Limited nor any member of UHY has any liability for services provided by other members.

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Business environment

Political and Legal System The country is divided into 8 administrative areas (provinces); Central, Coast, Eastern, North Eastern, Nyanza, Rift Valley, Western and Nairobi. The capital city is Nairobi. The country has its own constitution, which was adopted on 12 December 1963; and amended as a Republic in 1964. It has subsequently been reissued with minor amendments in 1979, 1982, 1986, 1988, 1991, 1997 and 2001. The constitution has been amended severally is headed for a major review. Views have been collected and the first draft constitution was rejected during the referendum of November 2005. We anticipate a new constitution in 2009. The country’s legal system is based on Acts of Parliament, English Common law as amended by the doctrine of Equity, Delegated Legislation and customary laws. Kenya is a multi‐party democracy. The executive power is bestowed on the President of Kenya as the head of state and Government, and in which capacity he defines basic domestic and foreign policy guidelines of state accordance with the constitution. He is elected for a term of 5 years and can be re‐elected into office to serve a one more term. Elections are due in 2012. In 2008 a coalition government was formed after disputed election in 2007 thus making it to be a semi‐ presidential republic with a president and a prime minister whom they share power on 50‐50 basis. The domestic market Population 39,802,000 Area 582,650 sq.km Population density 68.3 persons per km Currency Kenya Shillings Languages Official language is Kiswahili; the working language is English

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The Economy Economic sectors (in % of employment) Agriculture: 22.7% Industry: 21.4% Services: 68.3%

Agriculture

Industry

Services

The Kenyan economy suffered major shocks due to post election violence, which impacted negatively on the gains achieved over economic recovery strategy that was established in 2003 – 2007. The global financial crisis also slowed down recovery of major economic sectors, especially tourism that experienced significant reduction in remittances and private capital inflows. The government is trying to put up measures that will help mitigate the impact of shocks arising from higher world prices of food, fuel, fertilizers and financial crisis. Natural Resources: Kenya’s most valuable natural assets are rich agricultural land and a unique physiography and wildlife. The highly diverse wildlife is a key draw for the tourism industry. The country is not well endowed with mineral resources. Mineral resources currently exploited are gold, limestone, soda ash, salt, rubies, fluorspar, and garnets. At present, only 3 percent of the land is forested, a reduction by half over the past three decades. Kenya’s water resources are similarly under pressure. Kenya relies to a significant extent on hydropower. The Kenyan economy is agriculturally based, with the sector producing the following products; tea, coffee, corn wheat, sugarcane, fruit, vegetables, dairy products, beef, pork, poultry, and eggs.

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The industrial sector produces small‐scale consumer goods (plastics, furniture, batteries, textiles, soap, cigarettes, flour (agricultural products, oil refining, aluminium and steel). The service sector includes such sub‐sectors as tourism, transport and communication, information, banking and insurance. Unemployment This entry contains the percent of the labour force that is without jobs. Average unemployment is currently 40%, and is even higher for youth that drop out of school and for women, averaging 25% in both cases. The economy has continued on the recovery path, and employment outside small‐scale farming and pastoralists activities has increased by 5.9% over recent years. Economic growth was supported by increased demand for Kenya’s goods and services by the rest of the world, particularly in the agricultural and tourism sectors. Prices and Interest rates June 2007 1USD=67 Kshs December 2007 1USD=63 Kshs June 2008 1USD=65 Kshs December 2008 1USD=78 Kshs June 2009 1USD=77 Kshs Inflation rates (Consumer prices): 9.7% (2007) to 26.3% (2008) Fiscal Year: Kenya’s fiscal year runs from July 1 though June 30. The high rise was due to international oil prices, post election violence and global financial crisis. Foreign trade and balance of payments By direction of trade with the rest of the world, African destinations continue to be the dominant market for Kenya’s exports; followed by the European Union. In 2007 horticulture exports raised to 65%, surpassing tourism as largest foreign exchange earner. Remittances are Kenya largest source of foreign exchange and a key social safety net.

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Trade (2008): Exports‐‐$4.4 billion: tea, coffee, horticultural products, petroleum products, cement, pyrethrum, soda ash, sisal, hides and skins, fluorspar. Major export markets‐‐Uganda, United Kingdom, Tanzania, Netherlands, United States, Egypt, and Pakistan. Imports‐‐$9.9 billion: machinery, vehicles, crude petroleum, iron and steel, resins and plastic materials, refined petroleum products, pharmaceuticals, paper and paper products, fertilizers, wheat. Major suppliers: United Arab Emirates, India, China, South Africa, Japan.

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Setting up a business

An intending investor has various options to choose from on the form which his business enterprise will assume. These include: Limited Liability Company A limited liability company is a company whose registered capital is divided into a certain number of shares of a specific nominal value. A company‘s authorised capital is made up by par values of its members’ equity stakes. If it is incorporated by more than one person (individuals or legal entities), the authorised capital of which is divided into equity stakes of a certain size. A company’s authorised capital determines a minimum size of company property, which guarantees the interests of its creditors. Members of limited liability companies are not liable for its obligations beyond the size of their capital contribution and any unpaid amounts on issued capital. A limited liability company is the legal form preferred by state authorities for joint ventures. It is also the form into which former state enterprises, that are being privatised, have been converted. A joint‐stock company can be established by one or more entities, including the state or a business entity. The registered capital of the company must be subscribed by the shareholder(s) and at least 30% of monetary contributions and all in‐kind contributions must be paid up before the company is registered by the registrar of companies. Company profit gained as a result of its business activity should be distributed among members in the proportion to their equity stakes in the authorised capital. The distributable profit is subject to taxation through the Banks of Kenya. A limited liability company may either be a private or a public company. Public Limited Company This is formed by a minimum of 51 members and has the power to invite public subscription for its shares and this must be made upon incorporation of the company. To this end, a General Meeting on the

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establishment of the company must be held by the subscribers, unless the founder(s) agree in the Memorandum of Association to pay the total registered capital of the company themselves in a certain ratio. If the shares of the company are subscribed through a public offering of shares, then a prospectus in accordance with the Companies Act must be approved by the Capital Market Authority prior to publication of the announcement on the public offering and published no later than concurrently with the public offering. Where the company is listed in the country stock exchange (Nairobi Stock Exchange), approval of the Stock exchange is also needed. The payment of dividends or profit shares is not restricted, provided the company has sufficient distributable profits. Private Limited Company In contrast to a public company, a private company must have a minimum of two but should not exceed 50 shareholders. Furthermore, it cannot invite public subscriptions for its shares; transfer of shares is restricted in that the consent of other shareholders is required before the transfer of private subscription to its shares is allowable. General Partnership A general partnership is a commercial company, the members of which, in accordance with the agreement concluded between them, carry on the business on behalf of the partnership and are liable for its obligations with their property. The partners of a general partnership are called members and conclude transactions on behalf of the partnership and carry on business in any other manner. A general partnership is incorporated and operates under the partnership deed, which establishes the size and composition of the capital and size of the members’ contribution therein. Any profits and losses of a general partnership are divided amongst its members in proportion to their capital contribution as may be varied by their deed. Funds A fund is a not‐for‐profit organisation without membership. It is founded by citizens and / or legal entities on voluntary basis by contributing money

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or properties. Their aim is to pursue social, charitable, cultural and educational, or any other, purposes. The founders or trustees are not liable for obligations of the fund. The income derived from any economic activities carried out by the fund and contributions received can only be used for purposes set out in the Articles of the Association. Associations and Unions Associations and unions are non‐profit making organisations set up to co‐ ordinate the activities of members and to represent and defend their common rights and interests. They are separate legal entities independent of the members composing them. They have limited liability status. The constitutions of the individual associations spell out the obligations of members towards them. This may be in terms of contributions to be made by the members. Associations and unions must be registered with the registrar of societies upon which they acquire a legal status. Their legal status ceases upon being struck off the register maintained at the registrars of societies.

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Labour

The provisions regulating the employer‐employee relationship are spelt out in the Employment Act. For factory workers, the factory wages and conditions of employment Act is the binding law. The employer‐employee relationship stems from the agreement signed between an employer and an employee. A responsible officer of the company e.g. the manager may represent an employer in this agreement. The agreement usually contains:  The terms of reference of the employee detailing the specific duties and responsibilities  The terms of employments including the hours of work, salary and other benefits, period of paid leave and other entitlements  The respective rights and obligation of both employer and employee. The minimum period of annual leave is 21 days per annum. Maternity leave is 3 months and paternity leave for male is two weeks. The employment agreement can, however, vary this upwardly. An employment agreement may either specify the period for which it’s applicable or may have no set period but instead lay out situations in which it may be terminated or deemed terminated. To safeguard and champion for the interest of either parties, trade unions are formed. The employees trade unions represents members in negotiating and concluding Collective Bargaining Agreements (CBA) with employers and in industrial disputes flowing from go slows, strikes inter alia. Social Security The only social security issues in Kenya are pension and compensations for injuries sustained in the course of employment and loss of earning capacity. An employer with more than four employees must make a monthly contribution of a maximum of Kshs 200 towards each employee’s retirement. These are made to National Social Security Fund (N.S.S.F.), a

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body established by statute. Failure to make contributions leads to penalties and interest being imposed against on the company. For injuries arising from the workplace, employees can only enforce such through instituting legal proceedings in courts of law against the employer entity.

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Taxation

Taxation in Kenya is governed by several pieces of legislation, depending upon the type of tax.  For income: Income tax Act covering corporate profits and individual incomes  Local taxes: land rent payable by landowner for land leased from the government and rates payable to the local authorities  Commodity taxes e.g. Value added Tax (VAT), Excise duty and import duties. Corporate Taxes These are payable based on the tax adjusted profits of the company. The adjusted profits are arrived at by reducing the taxable income of the company earned in a year of income by the allowable expenses, which are normally those solely incurred in earning the income. The rate applicable is 30% for resident companies and 37.5% for non‐ resident companies. A resident company is one incorporated in Kenya under a law of Kenya, or one whose management and control of its affairs was exercised in Kenya in a particular year of income under consideration, or one declared by the minister in a notice in the Kenya Gazzette, a publication by the Government, to be resident for any year of income. Companies are required to pay instalment taxes on income as the year progresses. For non‐agricultural ones, there are four instalments to be paid by 20th of the month as follows: 1st Instalment 4th month 2nd instalment

6th month

3rd Instalment

9th month

4th Instalment

12th month

A failure to pay leads to penalties. A company is supposed to use the previous years’ income as a guide and an error rate of 10% is allowed on underpayment. Underestimation leads to a penalty of 20% on the difference between the instalment tax payable (based on actual results) and the amount of instalment tax paid times a factor of 1.1. Further, a 2% penalty per month is charged on tax unpaid plus penalty.

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Value Added Tax This is a tax on goods delivered in, or imported into Kenya; and on certain services supplied in or imported into Kenya and for connected purposes. It is charged in accordance with the provision of the Valued Added Tax Act on the supply of goods and services in Kenya (including anything specified by the minister as such a supply) and on the importation of goods and services in Kenya save for the exempt ones. The Vat rate is 16%. There is, however, another category of zero‐rated goods where the Vat Rate is 0%. The remaining category is that of Exemption from VAT charges e.g. Embassies, Non‐Governmental Organisations. This exemption is obtained and approved by the Ministry of Finance in application. Included in this class are exports. Input tax is paid on the supply to a registered person of any goods and services to be used by him / her for the purpose of his / her business, or for import. Output tax is deducted on the taxable supplies. A registered person is supposed to compute the tax payable to the commissioner of income tax by deducting the input tax from the output tax. Where excess input tax is paid, a registered person shall lodge a claim for the amount provided that this is a regular feature of his business. Deduction of input tax paid is only allowed if the invoices have been generated by an electronic tax register approved by the revenue authority. Turnover Tax For businesses whose turnover is less than Kenya shillings 5,000,000, there is a turnover tax that replaces both value added tax (VAT) and corporate tax. The rate is 3% of gross receipts of the business. Individual Income Tax Payers of the income tax are defined as residents of Kenya who are taxed on the employment income earned in Kenya and world over. Kenya tax residents are currently defined as individuals who spend not less than 183 days of a calendar year in Kenya or those who have been in Kenya for an average of 123 days or more in the year and the preceding two years. Kenya residents are taxed on their employment income that is earned worldwide and also on the other incomes derived from Kenya including:  Income from business  Royalty income  Interest income.

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Kenya has Double Tax Treaties with the following countries:  United Kingdom  Germany  Canada  Norway  Denmark  Sweden  Zambia  India.

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Accounting and Reporting

All commercial enterprises are required to prepare accounts for the purposes of determination of corporate taxes payable. On the other hand, non‐profit making organisations, whose incomes are not taxable, also have in their constitutive documents a requirement to prepare accounts, but showing only funds received and their applications. The Companies Act also lays out the requirements, which need to be met, in order to satisfy the reporting requirements. In this regard, the accounts must comprise:  Balance sheet  Profit and loss account  Cash flow statement. In addition, the financial statements have to comply with International Financial Reporting Standards. This creates a further requirement for a company to prepare, in addition to the three requirements above:  Statement of changes in equity  Explanatory notes to the financial statements  Disclosures as required by IFRS and International Auditing Standards (IAS). The financial statements are required to be prepared every 12 months. Audit Requirements An individual asked to sign an audit opinion should meet the requirements laid out by the Institute of Certified Public Accountants of Kenya (ICPAK). Only registered auditors with the Registrar of Accountants Board (RAB) can express audit opinions on any set of accounts required by any legislation or regulation for audit. Audit examinations are either obligatory or initiative in nature. Obligatory audit examinations are established by law and are conducted for:  Joint stock companies  Bank, insurance companies, investment institutions.

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Obligatory audit examinations should be conducted in accordance with standards approved by international financial reporting standards and sector – specific regulations. Useful Websites Central Bank of Kenya www.centralbank.go.ke Kenya Revenue Authority www.kra.go.ke Nairobi Stock Exchange www.nse.co.ke Kenya Investment Authority www.investmentkenya.com

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UHY firms in Kenya

UHY Kenya Mungai & Associates Centro House ‐ Ring Road Westlands P.O. Box 42844‐00100 Nairobi Kenya Phone: +254 20 4442860 Fax: +254 20 4446452 Email: mungaiassociates@mgkcpak.com Contact: Mr Mwai Mbuthia Phone: +254 722 720 147 Fax: +254 20 4446452 Email: mmbuthia@wananchi.com

UHY offices worldwide

For contact details of UHY offices worldwide, or for details on how to contact the UHY executive office, please visit www.uhy.com.

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