Kenya is poised to implement a groundbreaking shift in its tax framework with the introduction of the Tax Procedures (Amendment) (No. 2) Bill, 2024. This draft bill, published by the Kenyan Treasury, is designed to bring remote workers under the purview of the Kenya Revenue Authority (KRA), requiring all employees working for Kenyan employers—even those residing abroad—to register for tax compliance.

The bill mandates that all individuals working remotely for Kenyan companies, regardless of their physical location, must obtain a Personal Identification Number (PIN) from the KRA. Notably, the only exemption to this rule applies to those working for Kenya’s national airline, Kenya Airways, while stationed outside the country.

The Push for Tax Compliance Among Remote Workers

Treasury Cabinet Secretary John Mbadi emphasized that this bill aligns with Kenya’s broader goal of streamlining tax administration and improving transparency within the remote work sector. “As remote work becomes increasingly normalized, our tax policies must evolve to account for new work arrangements,” Mbadi stated. The intent is to ensure that tax obligations are met by all employees benefiting from employment opportunities in Kenya, regardless of where they perform their duties.

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A Closer Look at the Tax Procedures (Amendment) (No. 2) Bill

Key Provisions and Requirements

1. Mandatory KRA Registration for Remote Workers: The bill amends the First Schedule of the Tax Procedures Act, mandating KRA registration for remote employees linked to Kenyan companies.
2. Exemption for Kenya Airways Staff: Employees of Kenya Airways working abroad are excluded from this requirement, reflecting the unique status of the national carrier’s operations and compliance with international labor agreements.
3. Broader Tax Base: The bill aims to capture a previously untapped demographic within the tax net, potentially increasing Kenya’s tax revenue by targeting income earned from Kenyan-based employers by workers abroad.

Implications for Remote Workers and Employers

For remote employees of Kenyan companies living abroad, compliance with the new policy will entail the acquisition of a PIN and adherence to KRA regulations regarding income reporting. This may also necessitate adjustments to current contracts, with employers needing to provide the necessary support for employees to comply with Kenyan tax obligations. For Kenyan businesses, especially those in technology and consulting that employ a significant number of remote workers, there will be added administrative tasks to ensure that all staff—whether local or remote—are aligned with the new tax requirements.

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Kenya’s Digital Nomad Visa and Tax Reform Strategy

This tax bill follows closely on the heels of the Digital Nomad Visa, introduced by President William Ruto in October 2024. The Digital Nomad Visa allows foreign professionals to live and work remotely in Kenya, drawing more digital workers to Kenya’s economy. While the new tax law targets Kenyan remote workers employed abroad, the Digital Nomad Visa is a parallel initiative intended to attract international remote workers to Kenya.

President Ruto described the visa as a means to “welcome global digital professionals, allowing them to live and work in Kenya while enjoying the country’s natural beauty and high-quality lifestyle.” The visa initiative has specific eligibility requirements, including proof of a remote job, a clean criminal record, and a minimum annual income threshold of $53,922 (approximately Ksh 7 million), aimed at ensuring economic contribution from digital nomads.

Together, the tax bill and Digital Nomad Visa represent a dual-pronged approach to positioning Kenya as a hub for digital work while ensuring tax compliance from all professionals linked to Kenyan employers.

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Economic Implications of the New Tax Law

Enhancing Revenue Collection

The move to tax Kenyan employees working remotely from abroad is expected to bolster the country’s tax revenue, which has faced challenges in recent years. With a significant number of Kenyans increasingly working for Kenyan companies from international locations, particularly in sectors like technology, financial services, and marketing, the government sees an opportunity to capture taxes from income that may otherwise go untaxed. This is part of a broader fiscal strategy to reduce Kenya’s dependency on foreign debt by increasing domestic revenue sources.

Reducing Fiscal Deficits

Kenya’s fiscal deficit has been a longstanding concern, driven by high public spending and external debt obligations. According to recent reports, Kenya’s public debt exceeded 70% of its GDP in 2024. By expanding its tax base to include remote workers, the government aims to increase tax revenues, potentially reducing the need for external borrowing. The additional revenue generated through this policy could contribute to critical public services, including healthcare, infrastructure, and education, which are often underfunded due to budget constraints.

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Comparative Analysis with Other Countries

Kenya’s approach to taxing remote workers is not unique; several other countries have also implemented measures to regulate and tax their citizens working abroad. For instance:

• India: India’s Income Tax Act mandates that any Indian citizen earning income from Indian sources, regardless of where they reside, is subject to Indian income tax. This includes individuals employed by Indian companies while living abroad.
• Philippines: The Philippines taxes its citizens working abroad but provides certain exemptions for Overseas Filipino Workers (OFWs), with income tax applying primarily to income generated within the Philippines.
• United States: The U.S. taxes its citizens on their worldwide income, requiring expatriates to file annual tax returns with the IRS, though credits and deductions are available to avoid double taxation.

Kenya’s policy, however, targets only remote employees who work specifically for Kenyan employers, rather than imposing a blanket tax on all Kenyan citizens working abroad. This focused approach is designed to prevent a widespread burden on the Kenyan diaspora, while still ensuring that Kenyan companies with remote employees contribute to tax revenues.

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Challenges and Criticisms of the New Tax Policy

The new tax requirements have elicited mixed reactions from stakeholders and economists, with several potential challenges highlighted:

1. Double Taxation Concerns: Kenyan citizens living abroad may already be subject to local taxes in their country of residence. This raises the issue of double taxation, which could deter talent from working remotely for Kenyan companies. While Kenya has signed Double Taxation Agreements (DTAs) with some countries, these agreements are limited, and the potential for tax overlap remains a significant concern.
2. Administrative Burden for Companies: The responsibility of ensuring compliance with the new policy may fall on Kenyan employers, who will need to establish procedures to verify that their remote workers have registered with the KRA. This adds a layer of administrative complexity, especially for small and medium-sized enterprises (SMEs) that may lack the resources to manage these requirements.
3. Possible Talent Drain: The additional tax obligations could discourage skilled Kenyan professionals from working for local employers while based abroad. This, in turn, may hinder Kenyan companies’ access to a global talent pool, potentially impacting the country’s competitiveness in high-tech and knowledge-based sectors.

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Government’s Response to Potential Criticisms

To address these challenges, the Kenyan government may explore several solutions:

• Expansion of Double Taxation Agreements: The government could negotiate additional DTAs with key countries where many Kenyans reside, such as the U.S., U.K., and Canada, to minimize double taxation issues.
• Incentives for Compliance: Kenya might introduce tax credits or deductions to ease the tax burden on remote workers, especially those residing in high-tax jurisdictions.
• Digital Compliance Support: The KRA could develop an online platform to streamline the registration and compliance process for remote workers, making it easier for them to adhere to the new policy without the need for frequent in-person visits.

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Potential Long-Term Impacts

Strengthening Kenya’s Global Digital Economy Presence

As Kenya positions itself as a hub for remote work through initiatives like the Digital Nomad Visa, the new tax policy represents an effort to create a structured, accountable environment for both foreign and local digital workers. In the long run, the policy could increase the government’s ability to attract international digital workers while also retaining local talent, establishing Kenya as a leader in Africa’s growing digital economy.

Increased Investment in Tax Infrastructure

To support the expanded tax base, the Kenyan government may need to invest further in tax collection and monitoring technology. Enhanced digital infrastructure could facilitate compliance, minimize tax evasion, and provide the KRA with valuable data for future fiscal planning.

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Conclusion

Kenya’s proposed Tax Procedures (Amendment) (No. 2) Bill, 2024 marks a pivotal change in the country’s approach to taxing remote work. By mandating tax registration for all Kenyan employees working remotely abroad, the government aims to capture a previously untaxed segment, enhancing domestic revenue and supporting fiscal stability. Coupled with the recently launched Digital Nomad Visa, Kenya’s tax reform demonstrates its commitment to building a modern, adaptable economic framework that addresses the evolving nature of work. However, for the policy to be successful, careful attention will need to be paid to implementation, stakeholder support, and international cooperation to address potential challenges such as double taxation and compliance burdens.

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Photo source: Google

By: Montel Kamau

Serrari Financial Analyst

15th November, 2024