85 percent of Kenyan firms fail to pay corporate taxes

At least eight in 10 companies in Kenya did not pay taxes on earnings last financial year, signalling a tough economic environment that hit sales, prompting some businesses to scale down operations.

Statistics obtained from the Kenya Revenue Authority (KRA) show a modest 129,313 out of 862, 336 firms registered for corporate income tax (CIT) for the year ended June 2023, which is a compliance rate of 15 percent.

This came when corporate managers battled flagging sales in a high-inflation environment, which squeezed earnings and hit purchasing power.

The KRA data indicates the share of registered companies which were compliant was slightly lower than the previous year ended June 2022 when a revised 123,030 out of 759,568 firms paid their taxes on profit.

“A compliant taxpayer is a company which registers for the relevant tax obligations if/when they meet the registration requirement, files all returns on time, makes payments of taxes due on time and reports accurate information regarding their business transactions,” KRA’s commissioner for domestic taxes Rispah Simiyu told the Business Daily via email.

Resident companies pay 30 percent on their annual profit, paid through quarterly instalments, while the rate for foreign firms is 37.5 percent.

The relatively low compliance levels signal that many companies could be reporting losses as a tax avoidance strategy, a gap that the Treasury has since 2020 been seeking to plug by introducing a minimum tax on corporate sales.

It could also point to the rising number of dormant companies, mainly start-ups registered in recent years with the target of supplying the national government, county governments and State corporations with goods and services.

The data shows some 102,768 new companies registered for corporate income obligations in the review year compared with 95,973 firms the year before.

More than a half (55.77 percent or 480,935 firms) of the registered firms filed annual returns during the review period, signalling they were active and keen on avoiding the five percent penalty for failing to comply by June 30.

This means a lowly 26.89 percent of the companies which file returns paid taxes on earnings. The KRA has in the past said it was difficult to establish the reason behind considerable variances between companies which file returns and those that pay.

The taxman received Sh263.82 billion in corporation taxes in the review period ended June 2023, a growth of 9.01 percent over Sh242.02 billion the year before.

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Kenyan firms have since last year been battling rising operating expenses which are estimated to be climbing at the sharpest pace in at least nine years, findings of the monthly Stanbic Bank Kenya’s Purchasing Managers Index (PMI) have suggested.

The high business costs are largely due to soaring fuel prices, relatively high electricity bills, and costly raw materials as a result of lingering global supply constraints amid a persistently weakening shilling against major global currencies and taxation pressures, including the 1.5 percent housing levy on gross payrolls.

“Most businesses are scaling down their operations in Kenya or even relocating due to the high cost of doing business in Kenya, thus escalating the level of unemployment,” Stephen Waweru, a senior manager for tax services at consultancy and audit firm KPMG, told the Business Daily in August.

“This, coupled with the global inflation, courtesy of the Russia versus Ukraine war, has forced businesses to observe austerity measures in order to stay afloat in the midst of these global economic shocks.”

In response to low compliance, the William Ruto administration has proposed to lower corporate income tax to 25 percent from 30 percent starting July next year in the draft Medium Term Revenue Strategy, currently undergoing public review.

Treasury Cabinet Secretary Njuguna Ndung’u has argued that reducing the CIT rate to below Africa’s average of 29 percent and closer to a global average of 23 percent will not only drive up compliance levels but also attract foreign investors to set up locally.

“Studies have shown that high rates of corporate income tax discourage foreign direct investments and encourage investors to lobby for lower rates or tax exemptions,” Prof Ndung’u wrote in the draft revenue strategy.

“Further, high rates contribute to increased tax planning and reduced compliance by taxpayers, which in the case of Kenya, has led to a decline in income tax as a share of GDP (gross domestic product).”

The Treasury is, at the same time, seeking to re-introduce the minimum tax which will ensure all companies pay a certain share of their annual sales revenue as corporate taxes whether in profit or loss positions.

The courts shot down a previous plan by the former Uhuru Kenyatta administration, which had required each company to pay at least a percentage of gross revenue to the taxman, on grounds that the move was based on a wrong assumption that all loss-making firms were evading taxes.

The Court of Appeal ruled that forcing all companies to pay a percentage of their gross sales income as opposed to profit to the taxman was contrary to Article 201 of the Constitution which requires a fair distribution of taxation burden.

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“The Government recognises the need for an entity to pay a minimum tax to facilitate the government to achieve its objectives. This is due to the fact that some entities prepare their accounts to depict perpetual loss position, thus evading taxation,” Prof Ndung’u wrote in the draft revenue strategy paper.

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