Taxation of Christmas Gifts & Other Donations | Audit and Accounting Firm in Kenya

Festive times are here again and as a tradition, there is the sharing of gifts between families, friends and corporations. However, as we engage in these holiday activities, we need to be mindful of the taxes around them.From time to time, employers provide gifts to employees, friends, spouses and other entities. These are usually in form of cash and non-cash gifts. As a consideration, nothing is expected back from the recipients and thus categorized as gifts.
When an employer issues gifts in form of cash benefits, then this renders itself as part of employment income. Thus, the taxation of such gifted amount follows the basic tenet of employment income. The amount will be subjected to PAYE on a graduated scale. Gifts issued as cash benefits may include items like bonuses etc.

On the other hand, some gifts are issued in form of non-cash benefits. Such may include shopping vouchers etc. The taxation of such follows the tenets of the non-cash benefits. In essence, any gift issued in form of non-cash and exceeds Kshs. 3,000 will be subjected to PAYE on a graduated scale.

As a norm, the chain of gift sharing may be extended to third parties. Such may include gifts from employees to their family members, spouses or to church members. Illustratively, whether one is an employee or an employer, an individual may gift a third party directly from their own income earnings. It is important to note that this individual had their income taxed at source through the PAYE that is deducted and remitted to KRA.

The amount that is gifted out is already from the net amount and cannot be taxed again in order to avoid double taxation. As a result, an individual who gifts out of his net earnings, then the gift shall not be subjectedto any further taxes.

For corporations that issue gifts to staff, clients and others, the considerations revolve around the deductible expenses and whether such gifts are allowable while computing for corporate tax. Usually, one is burdened with determining whether the gifts fall into the broader category of donations. As per the Income Tax Act, when a donation is made to a registered entity, then this entitles the gifting entity to a tax deduction while computing for corporate tax in that particular period that the gifts are issued. This construes that any gifts and donations issued to any entity that is not registered will be a cost that is disallowed when computing for corporate tax.

There are instances where a corporate may engage in internal competitions such as during a team-building, a company may engage its staffs in a reading and writing competition. Whoever emerges the best wins a certain set prize. This prize might be in cash or non-cash. Regardless of the form, it is still a benefit to the employee. An employer is required to deduct PAYE on the amount and remit it to KRA. Such is the case for bonuses. An employer will be required to gross up the bonus on the employee’s basic pay before computing the appropriate PAYE to remit to KRA. For non-cash benefits that exceed Kshs. 3,000, it is a taxable benefit on
the employee in total.

In the spirit of gifts and donations, it will be advantageous if a gifting entity donates to a registered entity or entity exempted as per the Income Tax Act.
Wishing you all the best during this festive season.

Merry Christmas and Prosperous New Year!

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