Nearly half of the active companies that filed annual returns in the year to June did not pay taxes on corporate earnings, pointing to deepening losses and the rise of tax avoidance plans.
Statistics obtained from the Kenya Revenue Authority (KRA) show that 171,585 out of 341,793 companies that filed tax returns for the year ending June paid their fair share to the taxman, representing a compliance rate of 50.2 percent.
The taxman has recently launched an effort to crack down on the super-rich who routinely use sophisticated accounting techniques that make it difficult to track their wealth, including offshore tax havens.
This follows reports that the super-rich, especially those with political connections, have hidden their wealth in trusts and corporate labyrinths to evade taxes.
Analysis of KRA data from the financial year from July 2020 to the end of June shows that the gap between companies filing returns and those paying corporate income tax (CIT) continues to narrow behind intelligence-led audits and tax demands. lie.
The compliance rate has increased from 15.7 percent since June 2021 to 50.2 percent now that companies file annual returns.
The trend is an indication that the taxman may be phasing out companies reporting losses as a tax avoidance strategy, a gap that the Treasury has closed from 2020 by imposing a minimum tax on corporate sales.
“KRA is investing in resources to gather and analyze intelligence to identify and tackle tax evasion schemes. Companies that deliberately avoid taxes should be investigated and potentially prosecuted,” said Inland Revenue Department Commissioner Rispah Simiyu. Everyday Business via email.
“Third-party and internal data are used to identify businesses that do not comply with tax laws. Audits and compliance checks are conducted to address non-compliance. KRA is also exploring integration opportunities with key stakeholders to improve the effectiveness of information use to improve tax compliance.
KRA received Sh276.94 billion in corporate tax, remitted monthly, in the year under review ending June 2024, an increase of 4.98 per cent over Sh263. 81 billion years ago.
Growth in corporate income receipts, which are charged at 30 percent of corporate income, was the slowest since the financial year ending in June 2021.
It came at a time when business leaders complained of increased taxation pressure, including the doubling of the value added tax on fuel to 16 percent and the enforcement of 1.5 percent housing levy on the gross payrolls of employees matched by the employer, as a key driver of operating costs.
Companies at the start of the year under review also complained of rising electricity bills and expensive raw materials due to ongoing global supply constraints amid a weakening shilling that has added pressure on input costs.
However, KRA data shows a worrying trend where companies filing annual returns for corporate tax have continued to decline in recent years.
Analysis of data over the past four financial years, for example, shows companies filing annual returns for company tax fell from a peak of 509,058 in the year ending June 2021 to 341,793 last financial year.
About 15.7 percent of companies filing returns for the 2020-21 financial year paid CIT tax, rising to 27.77 percent, or 123,030 of the 443,087 companies filed in 2021-22.
In the year ending June 2023, KRA data shows that 122,907 out of 383,398 companies submitted their paid returns, a compliance rate of 32.06 percent.
As a percentage of more than 900,000 total companies registered for corporate income tax, tax officials have struggled to comply with the amounts submitted or pay taxes due to corporate income.
The country has witnessed many inactive companies, especially startups registered in recent years with the goal of supplying goods and services to the national government, district governments and state companies.
“We are still in an era where businesses prefer not to pay taxes, and my instinct is that the reason is irresponsibility of public funds, corruption and theft,” said Philip Muema, managing partner at Andersen Kenya, a tax and advisory business firm, told the Everyday Business on September 4.
In response to low compliance, the William Ruto administration, through its Medium Term Revenue Strategy, sought to reduce corporate income tax to 25 percent from 30 percent.
Treasury said reducing the CIT rate below the African average of 29 percent and closer to the global average of 23 percent would not only improve compliance rates, but also attract foreign investors to set up locally.
“Studies have shown that the high rate of corporate income tax discourages foreign direct investment and encourages investors to lobby for lower rates or tax exemptions,” wrote Finance in the revenue strategy.
“Furthermore, high rates contribute to increased tax planning and reduced compliance by taxpayers, which in the case of Kenya, results in lower income taxes as a share of GDP (gross domestic product).”
The Treasury, at the same time, is seeking to re-introduce a minimum tax, which will result in all companies paying a certain proportion of their annual sales revenue as company tax whether they are in a profit or loss position.
The court took down the previous plan by former President Uhuru Kenyatta’s administration, which sought to force each company to pay at least a percentage of gross revenue to the taxman.
The court determined that the change in taxation law was based on the false assumption that all loss-making companies avoided taxes.
The Court of Appeal ruled that forcing all companies to pay a percentage of gross sales revenue instead of profit for the tax is contrary to Article 201 of the Constitution, which requires a fair distribution of the tax burden.
“The government recognizes the need for entities to pay minimum taxes to facilitate the government to achieve its goals. This is due to the fact that some entities prepare accounts to reflect the position of continuous losses, thus avoiding taxes,” said the Treasury in the revenue strategy paper.
