The Cabinet Secretary for the National Treasury & Planning recently published the Common Reporting Standards Regulations (the Regulations). Common Reporting Standards (CRS) refer to reporting and due diligence international standards for the automatic exchange of financial account information prescribed by the OECD and the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum).

20 February 23

The Regulations were issued to give effect to Section 6B of the Tax Procedures Act (introduced by the Finance Act 2021), and are intended to provide designated financial institutions with the due diligence procedures and record-keeping requirements required to ensure Kenya is able to meet the international standards for automatic exchange of information with other jurisdictions.

The Regulations provide for the retrospective application from 1 January 2023 and are part of Kenya’s ongoing efforts to exploit global tax transparency instruments to mitigate against incidences of tax avoidance and evasion on an international scale by Kenyan residents.

Since Kenya joined the Global Forum in 2011 the government has taken steps to comply with international standards on the exchange of information in order to acquire the legal capacity to exchange information with other jurisdictions for tax purposes. A significant milestone was the signing of the Convention on Mutual Administrative Assistance in Tax Matters (the Convention) on 8 February 2016 when Kenya became the 12th African country to sign the Convention and the 94th jurisdiction to join it (a total of 141 countries have since signed the Convention). Kenya deposited the instrument of ratification of the Convention on 22 July 2020 which entered into force in Kenya on 1 November 2020. Now that the CRS Regulations are in force, Kenya will be expected to sign and activate the Common Reporting Standards Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (the MCAA). The MCAA is the multilateral framework that enables tax authorities of signatory jurisdictions to automatically exchange financial information on an annual basis.

A. Brief Summary of the Provisions of the Regulations
The Regulations prescribe the financial institutions covered, the types of financial accounts to be reported as well as the due diligence procedures that the reporting financial institutions should undertake to maintain the reportable financial information.

i. Financial Institution
This means ‘a custodial institution, a depository institution, an investment entity or a specified insurance company’. The regulations also define the terms “Depository Institution”, “custodial institution” and “investment entity.

ii. Reportable Financial Information
The information required to be reported includes the following:

In the case of an individual, the name, address, residence, Tax Identification Number (TIN) and date and place of birth of each Reportable Person that is an Account Holder;
in the case of an entity that is an Account Holder and has one or more Controlling Persons that is a Reportable Persons, the name, address, residence and TIN of the Entity together with the name, address, residence, TIN number and date and place of birth of each Reportable Person; the account number; the name and identifying the number of the Reporting Financial Institution;
the account balance or value as of the end of the relevant calendar year or another appropriate reporting period.

iii. Due Diligence Procedures
Financial institutions are required to undertake due diligence procedures as prescribed under the Regulations. The Regulations provide for a distinction in the procedures to be undertaken for both individuals and entities in respect of pre-existing accounts and new accounts.

Additionally, the Regulations provide for the requirement for self-certification as a key aspect of the due-diligence procedures to be undertaken by reporting financial institutions. Where self-certification is required, the Account Holder is required to provide a self-certification to establish their tax residence and where appropriate the tax residency of the Controlling Person of a reportable entity.

B. Impact on Taxpayers and Financial Institutions
Whereas tax authorities previously relied largely on the initial standards for exchange on request (EOIR), since 2017 the world has strengthened its cooperation by exchanging information automatically each year in relation to a wide range of financial assets held offshore. These exchanges are now based on the Standard for Automatic Exchange of Financial Account Information in Tax Matters (the AEOI Standard) developed by the OECD and the Global Forum subsequently tasked with monitoring the performance of the AEOI Standard, otherwise known as the CRS. The CRS sought to mirror the US introduction of the Foreign Accounts Tax Compliance Act (FATCA) in 2010. The FATCA law requires U.S. citizens living at home or abroad to file annual reports on any foreign account holdings they have. The main goal of CRS similar to FATCA is to stop tax evasion.

The CRS Regulations, are now subject to Parliamentary approval under the Statutory Instruments Act, and once enacted Kenya, will join jurisdictions that are already exchanging account information automatically on an annual basis. Therefore, individuals and entities who have accounts held with financial designated institutions in Kenya will need to ensure that their information held by reporting financial institutions are accurate and up to date. Kenyan tax residents with overseas holdings should also ensure that any relevant financial disclosures are fully regularised with the KRA to avoid hefty penalties associated with wilful material non-disclosure.

For reporting financial institutions that will shoulder most of the compliance burden under the CRS will need to develop systems that will review their existing customer base and introduce new client onboarding procedures to identify reportable accounts in line with the requirements of the Regulations. However, financial institutions already fully compliant with Anti-Money Laundering Know Your Customer Procedures will find that going smoother in implementing the requirements under these Regulations.


Should you have any questions on this legal alert, please do not hesitate to contact Daniel Ngumy, Kenneth Njuguna or James Karanja.

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Contributors
1. Robert Mabwa – Associate
2. Abdullahi Ali – Associate
3. Onyango Owino – Trainee Lawyer

Authors