The Voluntary Unclaimed Financial Assets Disclosure Programme: The waiver of penalties and the tax angle

The Unclaimed Financial Assets Act of 2011 (Act) provides for the reporting and dealing with unclaimed financial assets and establishes the Unclaimed Financial Assets Authority (Authority).

17 Nov 2022 4 min read Tax & Exchange Control Alert Article

The Act defines unclaimed assets as assets that have been presumed abandoned and have become unclaimed assets under the provisions of the Act, assets that have been transferred to the Authority as unclaimed assets under the Act, and assets that have been deemed under any other law to be unclaimed assets and payable to the Authority, including all income, dividends and interest, but excluding any lawful charges. The Act further defines a holder as any entity that holds assets on behalf of an owner or that is in possession of assets belonging to another.

The Act provides an obligation on a person holding unclaimed assets to make a report concerning the assets to the Authority, and at the time of filing the report to pay, deliver to, or hold to the order of the Authority such assets.

Penalties and waiver

The Act imposes penalties on a person who fails to pay or deliver unclaimed assets within the time prescribed by the Act. Such a person shall pay to the Authority interest at the current monthly rate of one percentage point above the adjusted prime rate per annum per month on the assets or value of the assets from the date the assets should have been paid or delivered.

The Finance Act of 2022 (Finance Act) amended the Act by providing that these penalties shall be directly recovered as civil debts and, in total, not exceed the value of the assets found to be reportable and deliverable. Additionally, The Finance Act also amended the Act by introducing a waiver by the Authority (with the approval of the Cabinet Secretary) of the penalties and fines where:

  • the waiver is intended to facilitate the holder of the asset disclosing and delivering the undeclared asset to the Authority;
  • in the opinion of the Authority there are justifiable reasons to do so; or
  • it is in the public interest to do so.

Further, the Act was amended to establish the Voluntary Unclaimed Financial Assets Disclosure Programme, which only applies to assets held up to 30 June 2022. The programme is for a period of 12 months from 1 July 2022. The purpose of establishing this programme is to grant relief of the penalties and interest in unclaimed assets where the holder discloses, reports or delivers the assets to the Authority in accordance with the Act.

Comparative analysis with the US equivalent of the voluntary disclosure programme

Certain states in the US offer similar voluntary disclosure agreement programmes to encourage holders to comply with their unclaimed property reporting obligations. Under new Wisconsin state laws, all businesses, organisations and government units holding unclaimed property in Wisconsin are given the opportunity to apply for an Unclaimed Property Voluntary Disclosure Agreement (VDA) with the Wisconsin Department of Revenue without late filing fees or penalties. As with Kenya’s programme, the VDA has been provided for a set period from 1 February 2022 to 28 February 2023.

The state of Wisconsin has the following conditions for holders to qualify for its voluntary disclosure programme:

  • They must have unclaimed property to report from any of the five most recent reporting periods.
  • They must have not been audited for unclaimed property since 1 July 2016, or received a notice of an upcoming audit.
  • They must not have a balance due on their unclaimed property holder account.

Other states such as Delaware, New York, Florida, Georgia, Ohio, Virginia and California also offer formal disclosure or compliance programmes.

All in all, holders should embrace and take part in the Voluntary Unclaimed Financial Assets Disclosure Programme as it benefits them to achieve compliance with their unclaimed assets reporting obligations while avoiding the imposition of penalties and fines that might apply in an audit. Finally, participation in a voluntary disclosure agreement programme may assist holders in proactively managing and maintaining their compliance with the Act going forward.

The tax angle on reporting unclaimed assets

Reporting unclaimed financial assets to the Authority can help taxpayers to clean up their books by getting rid of unclaimed payables when reporting and delivering them to the Authority.

Costs incurred in conducting a self-assessment on reportable unclaimed assets are deductible for tax purposes, however, fines and penalties incurred after failing to report unclaimed assets are not tax-deductible expenses. It is therefore important for taxpayers to take advantage of the programme because the penalties and fines can be waived.

Taxpayers can also explore tracing the owners of the unclaimed financial assets and getting express approval from them to forego the assets. Even though this is highly unlikely, in such a scenario, the taxpayer will be expected to recognise the foregone financial asset as a gain and account for corporate income tax.

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