Kenya’s National Treasury and Economic Planning has recently announced a tax policy revision that will significantly impact Kenyans working remotely from overseas locations. Cabinet Secretary John Mbadi revealed that under the new policy, these remote workers will be required to obtain a Personal Identification Number (PIN) from the Kenya Revenue Authority (KRA). This move, embedded within the Tax Laws (Amendment) Bill, 2024, seeks to ensure tax compliance among Kenyans in the diaspora who maintain employment with Kenyan companies.

Background and Key Changes

This tax initiative is a component of a broader legislative push, which includes the Tax Procedures (Amendment) Bill 2024 and the Public Finance (Amendment) Bills, aimed at modernizing Kenya’s tax laws to address the evolving nature of global employment. The revised legislation will modify the First Schedule of the Tax Procedures Act to extend tax obligations to Kenyans working remotely from overseas, provided they are employed by Kenyan companies. The Treasury initiated public consultation on this requirement in September 2024, grounding its arguments in constitutional Articles 174 and 232, which emphasize accountability and transparency in public service and economic governance.

Implications for Remote Workers and Employers

One of the main concerns arising from this policy shift is the possibility of double taxation. Many Kenyans in the diaspora are subject to tax obligations in their country of residence, raising concerns that this policy may subject them to dual tax burdens. In response, the Treasury indicated that Kenyan employers may need to establish agreements with foreign governments to clarify tax residency guidelines and prevent double taxation. These agreements, typically structured as Double Taxation Avoidance Agreements (DTAAs), help ensure that individuals do not pay taxes on the same income twice by clearly defining tax jurisdictions and liability.

Under the policy, the onus will also fall on Kenyan employers to ensure their remote employees’ KRA PINs are active and compliant. This verification requirement extends to all parties involved in the employment relationship, including contractors and freelancers, who may also be subject to income tax if they meet residency criteria. The KRA has emphasized that the policy aligns with the authority’s shift from an enforcement-focused approach to a facilitative role, positioning itself as a global tax administration leader. This policy shift also aims to improve tax compliance and Kenya’s international reputation by demonstrating robust tax and customs compliance mechanisms, which in turn could attract foreign investment.

Technological Support and Infrastructure Developments

To facilitate this framework, the KRA is investing in enhanced digital infrastructure, which will include the development of an online portal for PIN registration and tax filing, specifically tailored to the needs of Kenyans abroad. This portal will streamline tax compliance, allowing individuals to register, file, and pay taxes online without needing to return to Kenya. The KRA’s digital transformation strategy also includes leveraging data-driven approaches for tracking compliance, which will enhance monitoring of overseas income flows and make the tax collection process more efficient.

International Comparison and the Rise of Remote Work Taxation

Kenya’s move to tax diaspora remote workers mirrors global trends as countries address the tax implications of remote work. For instance, in the United States, several states have implemented “convenience of the employer” rules, where employees working remotely are taxed based on the location of their employer. Similarly, the United Kingdom has introduced measures requiring remote workers with UK-based employers to report and pay taxes on income earned remotely. As international tax frameworks evolve, these policies are becoming commonplace as countries strive to capture revenue from the burgeoning remote work economy.

For Kenya, implementing similar policies represents a significant shift. With a large diaspora workforce, Kenya stands to benefit from these taxes, potentially boosting its tax revenue base. However, the challenge of managing cross-border tax compliance remains substantial, as countries differ in their definitions of tax residency and income sourcing rules. Addressing these complexities requires international coordination, with Kenya actively seeking agreements to avoid conflicts in tax obligations and ensure that its citizens do not face punitive tax burdens abroad.

Broader Impacts on Kenya’s Diaspora and Economic Goals

The new tax regulations align with Kenya’s broader economic objectives, including enhancing the country’s business environment and supporting the diaspora as a vital part of Kenya’s economy. Labour and Social Protection Cabinet Secretary Alfred Mutua has recently announced increased overseas job opportunities, particularly in Qatar, aiming to boost Kenya’s foreign remittance income. Remittances are one of Kenya’s largest sources of foreign exchange, contributing over $4 billion annually to the economy, according to Central Bank of Kenya data. The new tax framework could, therefore, strengthen Kenya’s fiscal position while ensuring fair tax contributions from all Kenyans employed abroad.

However, this policy has drawn mixed reactions among Kenyans in the diaspora. Many worry that the additional tax obligations could discourage overseas employment and remittance contributions, especially if double taxation agreements are not quickly established with key countries where Kenyans work. Countries like the United States, the United Kingdom, and Canada, which host large Kenyan populations, already tax worldwide income, which could mean higher compliance costs and a heavier tax burden for diaspora workers. Addressing these concerns may require extensive diplomatic engagement to establish DTAAs with these countries, balancing Kenya’s need for tax revenue with the economic realities faced by its diaspora.

Addressing Double Taxation Risks

A primary concern with Kenya’s new diaspora tax policy is the risk of double taxation, which could result in higher-than-expected tax burdens for Kenyans working abroad. Double Taxation Avoidance Agreements (DTAAs) are crucial to mitigating this issue, as they clarify how income is taxed across borders. Kenya currently has DTAAs with only a few countries, and expanding these agreements will be essential to prevent discouraging Kenyans from overseas employment.

For example, other African countries with significant diasporas, such as Nigeria and Ghana, have similar agreements in place to avoid tax conflicts. In recent years, Ghana has also attempted to expand its tax reach to diaspora citizens. However, it has faced resistance from its diaspora community due to the risk of double taxation. To avoid similar pushback, Kenya will likely need to negotiate additional DTAAs with key countries that host Kenyan citizens, including the U.S., Canada, and the U.K., where substantial Kenyan diaspora populations reside. Establishing these agreements could alleviate concerns among Kenyans abroad, making the policy more widely accepted.

Economic Rationale Behind the Policy

The Treasury’s focus on taxing remote workers is part of a broader strategy to diversify Kenya’s revenue sources, especially amid rising public debt and reduced development aid. As traditional revenue streams face pressure, tapping into diaspora income becomes a compelling option. In 2023, Kenya’s national debt reached over $70 billion, placing immense pressure on the government to enhance its revenue collection capabilities. By introducing new tax measures that target previously untapped revenue sources, including diaspora income, Kenya aims to strengthen its financial standing and reduce dependency on external financing.

Furthermore, the policy supports Kenya’s Vision 2030 goals, which emphasize economic inclusivity, innovation, and resilience. By ensuring that all Kenyans, regardless of residence, contribute to the national revenue pool, the government is positioning itself to meet infrastructure and social development targets. However, achieving these goals will require a delicate balance between fiscal ambitions and the economic realities faced by Kenyans in the diaspora.

Strategic Implications for Kenyan Employers

For Kenyan companies that employ remote workers abroad, the new policy brings additional administrative responsibilities. These companies will now need to verify the KRA PINs of their overseas employees, ensuring compliance with the new tax obligations. While this may seem like a straightforward requirement, the logistical and financial costs associated with compliance could be challenging for small to medium-sized enterprises, particularly those employing freelancers and contractors. Employers may need to engage in tax education for employees and offer resources to facilitate smooth registration and tax compliance.

In response, some Kenyan employers are considering adjustments to their workforce strategies, including transitioning employees to local contracts in their countries of residence or establishing independent contractor relationships. These changes could limit Kenya’s tax base but may be necessary to avoid the complexities associated with cross-border taxation. For Kenyan businesses aiming to remain competitive in the global talent market, finding a balance between compliance with local tax laws and employee satisfaction will be key.

Future Outlook and Potential Reforms

As Kenya moves forward with implementing this new diaspora tax policy, ongoing assessment and potential adjustments may be required to ensure its effectiveness. The policy’s success will hinge on the government’s ability to negotiate additional DTAAs, enhance digital tax infrastructure, and provide transparent guidance to both employers and employees. Moreover, Kenya’s approach to global taxation could serve as a model for other African nations facing similar fiscal pressures and seeking to leverage their diasporas as economic assets.

In conclusion, the National Treasury’s new tax rules for Kenyans working abroad mark a significant shift in Kenya’s tax policy, reflecting the country’s drive to adapt to the globalized nature of employment. While the policy could generate new revenue and support Kenya’s economic development, its ultimate success will depend on addressing potential challenges, such as double taxation and the administrative burden on businesses. With the right approach, Kenya could pave the way for a more equitable and efficient tax system that aligns with the evolving nature of work and the global Kenyan diaspora’s contributions to the national economy.

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Photo source: Google

By: Montel Kamau

Serrari Financial Analyst

5th November, 2024