Kenyan firms bear heaviest tax burden in East Africa

Kenyan firms will carry the heaviest cost when East Africa launches its common market next year, analysts said, citing the high level of taxation in the country compared to its partners.

Unlike other EAC member states, Kenyan businesses are hamstrung by many levies and pay the highest total corporate tax rate, a joint tax report by PricewaterhouseCoopers (PwC) and the World Bank says.

Tax experts at PwC say the total corporate tax burden in Kenya currently standing at 49.7 per cent compared to Tanzania’s 45 per cent, Uganda’s 32 and Rwanda’s 31 per cent has raised the cost of doing business in the region’s biggest economy reducing the competitiveness of its firms.

“The total tax rate in Kenya is the highest in the region. This is not only affecting the rate at which businesses are registered, but also the overall compliance level”, said Steve Okello, head of tax services at PwC.

Mr Okello reckons that despite levying a uniform 30 per cent corporate income tax across the region, Kenyan firms have to contend with other levies whose ultimate impact raises the overall tax burden.

The report says multiplicity of taxes is to blame for the low level of compliance in Kenya because businesses are forced to look for ways of evading some of the taxes to reduce administrative costs associated with tax filings.

Kenyan firms have to contend with 41 different tax payments cutting across 16 tax regimes and take 417 man hours to file tax returns.

The difference in the treatment of refunds associated with Value Added Tax payment (VAT) regime in Kenya and her neighbours is identified as yet another operational hurdle that Kenyan firms have to overcome to remain in business.

While in Kenya refunds associated with VAT have to be claimed, Tanzania and Uganda levies reverse VAT.

This is a mode of operation where firms make VAT entries in their books and simply recover it directly from expected VAT payment.

The continued pile-up of VAT refunds has been a persistent cause of friction between Kenya’s businesses and the taxman that the government has only recently agreed to help resolve through enhanced payments.

To clear the backlog, the government last month agreed to raise the monthly refund payment to Sh1 billion from Sh750 million, opening a new window of Kenyan firms to ease a liquidity crunch that has persisted in the economy since the onset of global economic recession late last year.

Caroline Otonglo of the World Bank said the tax regimes have reduced the pace at which firms are setting up operations in Kenya, locking out the much-needed foreign direct investment (FDI).

“A punitive tax regime tends to lock out potential investments and the overall benefit expected to be derived from increased investment is lost,” said Ms Otonglo, who works for the World Bank’s Doing Business project.

The annual Doing Business reports have singled out Kenya as a difficult environment and pressed the government to reform licensing to ease the burden.

The report uses indicators such as ease of starting a business, obtaining construction permits, registering property, and accessing credit as parameters of measurement.

Other indicators used are protection of investors, paying taxes, enforcing contracts, and the ease of closing a business.

Ms Otonglo, while alluding to the various tax reforms being implemented in the country such as online filing, she indicated that the administrative burden of compliance remains the biggest challenge to traders.

“The ongoing reform programme needs to consider the use of smart regulation which entails the use of one tax regime per base and simple tax administration.”

A one tax base regime is applicable where all other tax levies other than income tax are lumped together and charged as one.

Under such a regime, levies like social security, fuel tax, land rents and rates, and training and business permits are lumped attracting a single charge.

Other proposed measures under the smart regulation are to widen the tax net to increase the number of businesses paying tax.

This is expected to lead to a review of tax charges as hence further raising the compliance level.

Widening the tax base also offers the country the means to offset potential revenue decline from the ongoing global economic recession that has eroded profitability in all segments of the economy.

“The global recession has meant falling tax revenues and difficult tax policy choices such as raising tax rates will worsen the situation hence the need to bring more tax payers into the tax bracket,” said Rajesh Shah a Tax partner at PwC.

To counter the declining revenues, KRA spanned off a Medium Tax Payer Department from the Domestic Tax Department to cater for the Small and Medium Enterprises (SMEs).