Kenya introduces Common Reporting Standards Regulations, 2023

The Kenyan Government has issued Common Reporting Standards Regulations, 2023. The Regulations contain due diligence procedures and record-keeping requirements, outlined in this Alert, for compliance with the Common Reporting Standards.

Executive summary

On 7 February 2023, Kenya’s Cabinet Secretary, National Treasury & Planning issued the Tax Procedures (Common Reporting Standards) Regulations, 2023 (the Regulations). The CRS Regulations prescribe guidelines for the reporting by both financial and non-financial entities as designated and are effective from 1 January 2023.

The Regulations give effect to Section 6B of the Tax Procedures Act (TPA) and set out due diligence procedures and record-keeping requirements to ensure Kenya is compliant with international requirements for the automatic exchange of information with other jurisdictions.

Detailed discussion

Background

The Common Reporting Standards (CRS) were first introduced in Kenya by Finance Act, 2021, which set the stage for reporting procedures in the country. According to the Finance Act, 2021, “Common Reporting Standard” means the reporting and due diligence standard for the automatic exchange of financial account information.

The Regulations are expected to facilitate the automatic exchange of information.

Key terms

These Regulations have defined the following terms:

Account holder

An account holder is a person identified to operate a financial account by a financial institution. This excludes custodians, nominees, signatories, investment advisors and intermediaries which are not financial institutions in nature.

Non-financial entity (NFE)

An NFE is a non-financial entity which can be either active or passive in nature.

Active NFE

An active NFE is one where less than 50% of the NFE's gross income for the preceding calendar year or other appropriate reporting period is passive income and less than 50% of the assets held by the NFE during the preceding calendar year or other appropriate reporting period are assets that produce or are held for the production of passive income.

Passive NFE

A passive NFE is any NFE that is not an Active NFE or an Investment Entity that is not a Participating Jurisdiction Financial Institution.

Investment entity

Investment entity is an entity that primarily conducts, as a business, one or more of the following activities or operations for or on behalf of a customer:

• Trading in money market instruments, foreign exchange, exchange, interest rate and index instruments, transferable securities, or commodity futures trading

• Individual and collective portfolio management

• Otherwise investing, administering, or managing financial assets or money on behalf of other persons

Custodial institution

Any entity that holds a substantial portion of its business and/or financial assets on behalf of others.

High value account

This is an individual account whose aggregate balance as of 31 December 2022 or subsequent periods exceeds US$1,000,000.

Reportable Person

Also known as a “Reportable Jurisdiction Person” which is not a government entity, international organization, a central bank, a financial institution nor a listed corporation. This refers to an individual or entity that is resident in a reportable jurisdiction under the tax laws of such jurisdiction, or an estate of a decedent that was a resident of a reportable jurisdiction.

Reportable Jurisdiction

A Reportable Jurisdiction is a jurisdiction other than the United States or Kenya.

Reportable Account

Reportable Account is a financial account that is maintained by a Reporting Financial Institution and is held by one or more Reportable Persons or by a Passive NFE with one or more Controlling Persons that is a Reportable Person.

Cash value

The amount that the policyholder is entitled to receive upon surrender or termination of the contract (determined without reduction for any surrender charge or policy loan)

Reporting and record-keeping obligations

Filling obligations

Reporting Financial Institutions will be required to file with the Kenya Revenue Authority by 31 May of each calendar year a return with details of reportable accounts.

Maintenance of records

Reporting Financial Institutions (RFIs) will maintain and document due diligence procedures as per these new Regulations. In addition, they will maintain the records of reportable accounts and other related documentary evidence for a minimum of five years after the end of a period.

Due diligence for pre-existing and new individual accounts

Pre-existing individual accounts

Procedure for low-value account

If the RFI has in its records, a current residence address for the individual account holder based on documentary evidence, it may treat the individual account holder as being a resident in that jurisdiction for tax purposes.

High-value accounts

For high-value accounts, RFIs are obligated to review electronically searchable data as per the regulations. If the electronic database does not capture all the information, the RFI is then required to review the current customer master file and the documents as described in the regulations.

Accounts not required to be reviewed

• A pre-existing individual account that is a cash value insurance contract

• An annuity contract

New individual accounts

The Regulation provides that the RFI must obtain a self-certification that allows it to determine the Account Holder's residence(s) for tax purposes. Afterwards, the RFI is obligated to treat the account as a Reportable Account.

If the original self-certification is incorrect/unreliable, the RFI is required obtain a valid self-certification that establishes residence of the account holder or reasonable explanation and documentation supporting validity of the original self- certification.

Due diligence for new and pre-existing entity accounts

For new entity accounts

For new entity accounts, an RFI is required to obtain a self-certification which will allow them to determine the tax residence of the entity. If the entity does not have a tax residence, then the address of the entity may be used to determine residence of the entity. Accounts belonging to Entities in a Reportable Jurisdiction will be treated as a Reportable Account.

For pre-existing entity accounts

An RFI is required to obtain information on the tax residence of the holder of the entity account from the information maintained by the financial institution for regular customer relationship purposes including Anti-Money Laundering information collected or Know Your Customer (KYC) information. If this information indicates that the holder of the account is resident in a Reportable Jurisdiction, then the account will be treated as a Reportable Account.

For a pre-existing entity account to be marked as a Reportable Account the following must be present:

1. The entity account must have had an aggregate account balance or value of more than US$250,000 as at 31 December 2022. If the account balance is less than US$250,000 as at 31st December 2022, the Reporting Financial Institution has discretion on whether to review the account and identify it as a Reportable Account.

2. The account must be held by one or more entities that are Reportable Persons, or by Passive NFEs with one or more Controlling Persons who are Reportable Persons.

Special due diligence rules

The Regulations provide for alternative procedures for financial accounts held by individual beneficiaries. For example, an individual beneficiary of a cash value insurance contract or an annuity contract receiving a death benefit is not considered a reportable person, unless the reporting financial institution has actual knowledge, or reason to know, that the beneficiary is a reportable person guided by the indicators stipulated in the regulations.

Such indicators include identity of the account holder as a resident, current mailing or residence address, one or more telephone numbers, an effective power of attorney or signatory authority granted to a person in a reportable jurisdiction.

Rules on residency of financial institutions for reporting and due diligence purposes

A financial institution is “resident” in a participating jurisdiction if the jurisdiction can enforce reporting of the financial institution. A financial institution (other than a trust) does not have a residence for tax purposes, it is subject to the jurisdiction of a participating jurisdiction, if:

1. It is incorporated under the laws of the participating jurisdiction

2. It has its place of management (including effective management) in the participating jurisdiction

3. It is subject to financial supervision in the participating jurisdiction

If a financial institution (other than a trust) is resident in two or more participating jurisdictions, such institution shall be subject to the reporting and due diligence obligations of the Participating Jurisdiction in which it maintains the financial account(s).

Market outlook

Considering the fast-paced developments of the financial industry across the globe, the regulations will influence the banking, custodial, depository and insurance sectors.

Kenya joins over 30 other jurisdictions worldwide which have committed to have CRS documentation reports for both individuals and entities.

 

For additional information with respect to this Alert, please contact the following:

Ernst & Young (Kenya), Nairobi

• Francis Kamau
• Christopher Kirathe
• Hadijah Nannyomo
• Robert Maina
• David King’ori
• Stanley Maina
• Elizabeth Hellen
• Denis Maina
• Elsie Kimeli

Ernst & Young Société d’Avocats, Pan African Tax – Transfer Pricing Desk, Paris

• Bruno Messerschmitt

Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London

• Kwasi Owiredu

Ernst & Young LLP (United States), Pan African Tax Desk, New York

• Brigitte Keirby-Smith

• Dele A. Olagun-Samuel

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.