Kenya banks enforce US law targeting tax evaders

Nairobi – Foreign banks operating in Kenya have started to comply with the requirement to submit details on American citizens to the tax authorities as the deadline looms. The alternative could be having a third of payments to the banks from the US frozen. Many foreign banks are asking new account holders, both foreign and local, to allow the institutions to share details with US Internal Revenue Service (IRS) and the Kenya Revenue Authority (KRA). The Treasury has formed a task force comprising its officials, Kenya Bankers Association (KBA), the Central Bank of Kenya (CBK) and financial sector experts to fast-track the process to final signing of an intergovernmental agreement (IGA) with US authorities. Bankers said they were keen on state facilitation in compliance for the entire industry rather than have each institution comply individually. This is in view of the risk that US-based banks will retain 30 per cent of payments to foreign entities in line with the newly enacted Foreign Account Tax Compliance Act (FATCA). “We want to meet the timelines to register with FATCA through an IGA between the US government and the Treasury,” said Habil Olaka, the KBA chief executive. In an earlier interview, a US embassy official, speaking on condition of anonymity, in Nairobi disclosed that there are about 20,000 American citizens in Kenya. “Foreign financial institutions realise they have to comply because they don’t want to risk their payments being retained in US banks as penalties,” said Olaka. The foreign banks will also share the information with KRA as an interested party in tax matters since the same people may owe local taxes. The local authorities may have insights on whether transfer pricing is taking place between local and foreign entities. However, this could have the potential to expose even Kenyan citizens who are tax evaders. The FATCA law was put in place by the US Congress last year as the authorities reckoned that the country was losing over $100b a year through tax evasion. The IRS wants details such as accounts owner’s name, address, tax ID number or social security number and balances of all offshore accounts. The compliance date has been set at July 1, though some experts think it could be extended. The law could hit businessmen who transact across borders especially through US-based banks, and remittances. Kenya receives over Sh100b in remittances from the Diaspora every year, with nearly half being from North America alone. Experts say banks in Kenya would be forced to fork out cash to people receiving remittances as 30 per cent would be withheld in the US, even when someone in the Diaspora has remitted the full amount. The transactions are normally effected through correspondent banking, which involves prior arrangements between Kenyan and foreign banks to receive or accept payments for transactions on behalf of each other when they are located in different jurisdictions. “While the transaction is being processed, the correspondent bank notes that the local bank is not registered for FATCA - and is effectively non-compliant – and withholds 30 per cent,” said experts from EY in a commentary. In an earlier interview, PricewaterhouseCoopers partner Richard Njoroge said withholdable cash under FATCA include dividends, interest payments, rents, salaries, annuities, proceeds from sale of properties in the US, and any US-sourced income, which includes remittances. Send shockwaves Even if the export and import business is not directly affected, banks in the US will probably ask to deal with only FATCA-compliant Kenyan banks, Njoroge said. “An institution in the US is to deduct 30 per cent of the cash destined to a Kenya-based bank that has not met the requirements. That will affect correspondent banking because banks in the US might deal only with compliant Kenyan banks,” said Njoroge. US-based investment advisor such as Gary D. Halbert, who runs Halbert Wealth Management, said in a May 6 note to clients that the law had the potential to shock markets and restrict investments abroad by US citizens. “The effect of these new regulations could send shockwaves through the financial system worldwide. Basically, the regulations that take effect July 1 will make it difficult and costly for Americans to hold money or investments outside the US,” said Halbert. The investment adviser said many foreign institutions are kicking out their US clients to avoid giving any information to IRS.