Revealed: Half of firms fail to pay corporate tax

The tax official has recently intensified his campaign against evasion among the wealthy, who typically use sophisticated accounting techniques that make it difficult to trace their wealth, including in offshore tax shelters.

This follows reports that the wealthy, especially those with political connections, have hidden their wealth in trusts and a maze of companies to evade taxes.

Analysis of KRA data from the financial year beginning July 2020 and the year ending June shows that the gap between companies filing returns and those paying corporate income tax (CIT) has steadily narrowed on the back of intelligence-led audits and tax prosecutions. to cheat.

The compliance rate jumped from 15.7 percent since June 2021 to the current 50.2 percent for companies that filed annual returns.

This trend is an indicator that the tax official could gradually catch up with companies that reported losses as a strategy to avoid taxes, a gap that the Treasury Department has sought to close since 2020 by imposing a minimum tax on corporate sales.

“KRA is investing in resources to collect and analyze intelligence to identify and address tax evasion schemes. Companies that deliberately evade taxes are subject to investigations and possible prosecution,” said Local Tax Administration Commissioner Risbah Simiu. Daily chores Via email.

“Both third-party data and internal data are used to identify companies that are not complying with tax laws. Audits and compliance checks are conducted to address non-compliance. KRA is also exploring integration opportunities with key stakeholders to enhance the effectiveness of using information to improve tax compliance.”

KRA received Sh276.94 billion in corporate taxes, remitted quarterly, in the audit year ending June 2024, an increase of 4.98 per cent from Sh263. 81 billion in the previous year.

Growth in corporate income, charged at a rate of 30 percent of corporate profits, was the slowest since the fiscal year ending June 2021.

It came in a period when business leaders complained of increasing tax pressures, including doubling the value-added tax on fuel to 16 per cent and the imposition of a 1.5 per cent housing tax on employees’ gross salaries, which is matched by employers, as key drivers of operating costs.

Companies also complained earlier last year of rising electricity bills and expensive raw materials as a result of continued global supply constraints amid the weak shilling that led to increased pressure on input costs.

However, KRA data shows a worrying trend where companies filing annual corporate tax returns have steadily declined in recent years.

For example, an analysis of data over the past four financial years shows that companies filing annual corporate tax returns have fallen from a peak of 509,058 in the year to June 2021 to 341,793 in the last financial year.

About 15.7 per cent of companies that filed their returns for the 2020-21 financial year paid ICT taxes, rising to 27.77 per cent, or 123,030 of the 443,087 companies that filed their returns in 2021-2022.

In the year ending June 2023, KRA data shows 122,907 out of 383,398 companies filed paid returns, a compliance rate of 32.06 percent.

As a percentage of the total of more than 900,000 businesses registered for corporate income tax, the taxman was struggling to drive compliance for a large number of filings or pay taxes owed on corporate profits.

The country has witnessed an increasing number of dormant companies, especially start-ups registered in recent years with the aim of supplying goods and services to the national government, provincial governments and government companies.

“We are still in an era where companies prefer not to pay the taxes owed, and I believe this is due to the lack of accountability regarding public funds, corruption and theft,” said Philip Muema, Managing Partner at Andersen Kenya. A tax and business consulting firm told… Daily chores On September 4th.

In response to low compliance, the William Ruto administration, through the Medium-Term Revenue Strategy, is seeking to reduce corporate income tax to 25 percent from 30 percent.

The Treasury says lowering the ICT ratio to below the Africa average of 29 per cent and closer to the global average of 23 per cent will not only raise compliance levels, but will also attract foreign investors to set up locally.

“Studies have shown that high corporate income tax rates discourage foreign direct investment and encourage investors to push for lower rates or tax breaks,” the Treasury wrote in its revenue strategy.

“Furthermore, high rates contribute to increased tax planning and reduced taxpayer compliance, which in the case of Kenya has resulted in lower income tax as a share of GDP.”

The Treasury, at the same time, is seeking to reintroduce the minimum tax, which would result in all companies paying a certain share of annual sales revenue as corporate tax in either profit or loss centres.

The courts struck down a previous plan by former President Uhuru Kenyatta’s administration, which sought to force every company to pay at least a percentage of gross revenues to tax officials.

The courts decided that the changes in tax law were based on the false assumption that all loss-making companies were evading taxes.

The appeals court ruled that forcing all businesses to pay a percentage of their gross sales income versus profit to tax officials conflicts with Section 201 of the Constitution, which requires a fair distribution of the tax burden.

“The government recognizes the need for an entity to pay a minimum amount of tax to facilitate the government achieving its objectives. This is due to the fact that some entities prepare their accounts to portray a permanent loss position and thus evade tax,” the Treasury said in the Revenue Strategy Paper.