Kenya has gazetted new taxation regulations on donations to charitable organizations and their utilization to plug evasion of taxation. This follows the Income Tax, Charitable Organisations and Donations Exemption Rules, 2024, which came into effect last month and replace the 2007 rules.
Charity organisations, as acknowledged under the Income Tax Act, are exempt from income tax if they exist solely to relieve poverty, public distress, or advance religion or education.
The new regulations demand that entities exempt prior to June 18, 2024, comply with the requirements within 12 months, failure to which the KRA will cancel their exemption certificate. In addition to the impact report on current and future activities and beneficiary selection criteria.
Accumulated Surplus
A charity cannot have surplus funds exceeding its expenditure to income exceeding the average of 15% of its funds over any three consecutive years without applying the surplus for its charitable purposes. According to Bowmans attorneys, this targets charities holding large sums instead of putting them to the intended use.
The profits from unrelated business activities of charities will now be taxed. Only the income from donations and grants will be exempt. A separate tax identification number shall also be required for these activities.
Any entities funding or supporting other charities without conducting any activities in furtherance of charitable purpose shall not be exempt.
Stricter Conditions
New conditions for tax-deductible donations include the nonrefundability of the donation, no direct or indirect benefit accruing to the donor, and a receipt showing the purpose and amount of such donation. Donations that give rise to a taxable loss or which in aggregate exceed 50 percent of total donations made to a related entity in any year are not allowed.
Those provisions have been termed by Bowmans as discouraging donations under “unfair, unreasonable, and onerous” restrictions. Their contention is that the new rules are ultra vires—the powers of the Cabinet Secretary to amend the Act, which will only scare donors away from participating in any charitable activities.
An entity is also mandated to provide proof of its purpose and publicity work. In case it charges for its services, it must offer free services to at least 10% of patients or students, as the case may be. The KRA may withdraw a tax exemption certificate if an entity does not meet any of the above requirements.
While the KRA is mandated to revoke licenses and impose taxes on accrued funds, Bowmans explains that there is no legal precedent for them to tax donations or grants that have not been listed as income that is liable for taxation.
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