Kenya has introduced the Common Reporting Standard (CRS) to improve financial transparency and fight tax evasion. The CRS requires financial institutions to report information about their clients’ accounts to tax authorities, which helps identify individuals evading taxes.
In a bid to improve financial transparency in the country, Kenya introduced the Common Reporting Standard (CRS) through the Finance Act in 2021. The Tax Procedures Act was updated to include the CRS. To put the CRS into action, the cabinet secretary for treasury, Njuguna Ndung’u, was tasked with creating regulations officially implemented on 1st January 2023.
In 2014, the Organisation for Economic Cooperation and Development (OECD) created the Common Reporting Standard (CRS) due to the lack of transparency in financial account information. According to the OEDC, many organisations use offshore entities to stash taxable income while trading or holding financial assets. The CRS was implemented to require that Reporting Financial Institutions (RFIs), such as depository accounts and other financial institutions, report account information to tax authorities.
Why is the law important?
The CRS mandates RFIs, which include depository accounts and investment entities, to report account information to the Kenya Revenue Authority (KRA). It empowers the KRA to identify individuals who may have been evading taxes or hiding their wealth in offshore accounts. Besides, by sharing relevant financial data with other jurisdictions, Kenya strengthens international cooperation and becomes integral to the global fight against illicit financial activities.
The CRS requires RFIs to identify reportable accounts and share specific account information with the KRA. Reportable accounts include all financial accounts managed or administered by an RFI.
What information is exchanged between financial institutions?
By joining the CRS Multilateral Competent Authority Agreement (CRS MCAA), Kenya can exchange financial account information with 106 other countries via the OECD Common Transmission System (CTS). The financial institutions must provide details like names, addresses, jurisdictions, residences, and tax identification numbers (TINs) (or similar identifiers if TINs are unavailable) for account holders. According to the regulations, this collaboration builds transparency and international cooperation in the fight against tax evasion and financial malpractices.
It is all about compliance
Kenyan financial institutions now play a key role in ensuring tax compliance by submitting annual reports to the KRA. These reports contain the aforementioned essential details about specific financial accounts individuals and entities hold.
For entities with controlling persons, additional information is required, such as account numbers, names, identifying numbers, and account balances or values at the end of the reporting period. This comprehensive reporting mechanism strengthens the KRA’s efforts to identify tax evaders and individuals attempting to hide ill-gotten wealth in offshore bank accounts.
Data privacy and developments
The implications of the CRS for financial data privacy and security must not be overlooked. While exchanging financial information between countries is essential for ensuring global tax compliance, it raises concerns about protecting individuals’ sensitive data. It is crucial for Kenya and other participating nations to find a delicate balance between financial transparency and data privacy.
To ensure the effectiveness of the laws, Kenya’s treasury cabinet secretary has relinquished the authority to regularly amend the regulations on exchanging financial information with the 106 countries involved. This decision, made by the treasury ministry, comes from President Ruto’s government and the KRA’s collective efforts to crack down on tax evasion and individuals benefiting from ill-gotten gains. Reportedly, removing a clause that previously allowed unnecessary adjustments to the regulations aims to safeguard against potential loopholes for tax evaders.
As with any initiative, challenges remain. The responsibility lies with Kenya and all participating nations to ensure that the shared data is used exclusively for legitimate tax compliance purposes. Adequate data security measures must be in place to safeguard against any unauthorized access or misuse.
By requiring RFIs to report financial account information, Kenya is moving towards tackling tax evasion and offshore asset hiding head-on. The effectiveness of the CRS lies in identifying possible tax evaders and exchanging financial data between countries to ensure global tax compliance. However, the responsibility to uphold financial data privacy and security remains crucial in this process.