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The Principle Guiding Taxation of SACCOs in Kenya

Tax obligations: Does SACCOs pay value-added tax: Corporate Tax for SACCOs in Kenya: The Principle Guiding Taxation of SACCOs in Kenya

Kenya’s economy was on a rapid growth trajectory before the COVID-19 pandemic. In response to the economic disruption caused by the pandemic, the government has implemented various recovery measures to stabilize businesses and foster gradual economic growth. A key aspect of these measures is improving access to finance for all businesses, including small and medium-sized enterprises (SMEs).

Savings and Credit Cooperative Societies (SACCOs) play a crucial role in this financial landscape. Unlike traditional banks, SACCOs offer members better loan terms, such as lower interest rates and less complicated application procedures, making them a preferred choice for SMEs. In recent years, SACCOs have expanded their services beyond traditional loans to include savings and transaction accounts for both members and non-members, resembling banking services. This evolution in SACCO services has necessitated changes in the laws governing their taxation.

The Principle Guiding Taxation of SACCOs in Kenya

SACCOs in Kenya operate under the mutuality principle, which posits that an organization cannot derive income from trading with itself. Consequently, interest income earned from members is exempt from tax. The primary source of income for SACCOs is the interest generated from their members. However, there are specific instances where SACCO income is taxable:

  • 50% of interest income from non-members: This includes income from banks and treasury bills.
  • Rental Income: Any income SACCOs earn from renting out property.
  • Capital Gains: Arising from the transfer of property.
  • Other taxable income: As specified by the law.

When preparing financial statements and tax computations, SACCOs must classify income and expenses into Back Office Service Activity (BOSA) and Front Office Service Activity (FOSA). BOSA involves activities allowing members to deposit and obtain credit services, aligning with the traditional role of SACCOs. FOSA encompasses activities that allow both members and non-members to save and open transaction accounts, reflecting the banking role of SACCOs.

Previously Decided SACCO Cases

Several SACCOs have faced legal challenges related to taxation. Notable cases include:

  • Sheria SACCO vs. KRA: Sheria SACCO filed an income tax appeal (case no. 36B of 2017), which was dismissed by the Tax Appeal Tribunal. An audit revealed that Sheria SACCO failed to declare income from its FOSA activities for taxation purposes, resulting in outstanding corporation tax liabilities.
  • Nyeri Teachers SACCO vs. Commissioner Domestic Taxes: The dispute centered on taxable income from FOSA activities, such as holding deposits that earned interest from non-members. The tribunal ruled that these commercial services were taxable.
  • Muramati SACCO vs. KRA: The Commissioner determined that FOSA services were not the SACCO’s main business. Since FOSA services involved trading with non-members, the SACCO was liable for tax on the profits from such trading. The Tax Appeal Tribunal upheld this view, ruling that Muramati SACCO had to pay additional corporation tax, including penalties and interest.

 

Andrew Walyaula
Author: Andrew Walyaula

Andrew Walyaula is a seasoned multimedia journalist. waliaulaandrew0@gmail.com

Andrew Walyaula

About Author

Andrew Walyaula is a seasoned multimedia journalist. waliaulaandrew0@gmail.com

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