Loan/credit facilities come in handy with the need for that extra cash. Some employers offer loans/credits to their employees at interest rates lower than the market rate. This is an employment benefit to the employee(s) which is subject to a tax known as Fringe Benefit Tax (FBT).
Fringe benefit tax is payable by every employer in respect of a loan provided to an employee, director or their relatives at an interest rate lower than the market rate. The taxable value of fringe benefit tax is the difference between the market interest rate and the actual interest paid on the loan. Where the term of the loan extends beyond the date of termination of employment, it applies as long as the loan remains unpaid. Fringe benefits tax is charged on the taxable value of a fringe benefit provided by the employer in a month and is due and payable on or before the 9th of the following month. The prescribed rate of interest is based on the market lending rates as the Commissioner may prescribe every quarter of the year.
Ken gets a loan/advance/credit of Kshs. 3,000,000
Loan/credit amount: Kshs.3, 000,000
Interest charged: 0%
The market Interest rate for the month: 10%
Fringe Benefit is (10% – 0% = 10%) = Kshs.3, 000,000 x 10% =300,000 p.a
i.e. Kshs. 25,000 per month.
Fringe Benefit tax payable by employer is Kshs. 25,000 x 30%
= Kshs. 7,500/- for the month
NB: Same formula should be used to compute the balance fringe benefits for the monthly loan balances outstanding, however the annual interest rate should be pro-rated to reflect the monthly rate (i.e. 10/12=0.8333…%).
Fringe benefit tax is provided under section 12B of the Income Tax Act, which became effective from 12th June 1998 in respect of loans provided to an employee, director, or their relatives at an interest rate lower than the market interest rate.
Fringe benefits tax is paid by employers with PAYE obligation. Failure to remit attracts a penalty of 25% of the tax due and late payment attracts a penalty of 5% of the tax due.
For the purposes of Section 12B of the Income Tax Act, the Market Interest Rate is 10%. This rate shall be applicable for the three months of April, May, and June 2023.