KenGen takes Sh2bn tax hit after Treasury dividend arrears pay

Power producer Kenya Electricity Generating Company (KenGen) has taken a Sh2.4 billion tax hit after paying dividend arrears to the Treasury, in a year when the firm froze payout to shareholders.

The Sh5.7 billion dividend payment, which had accrued over four years, prompted the tax payment to the Kenya Revenue Authority.

The levy, known as a compensating tax, cut KenGen’s profit by nearly half.

The tax is a secondary levy that is charged upon the distribution of untaxed income. It largely arises when dividends are paid out of untaxed profits or reserves.

KenGen managing director Albert Mugo said in an interview the tax became payable after the company paid dividends to the Treasury yet it had benefited from massive investment deductions on its capital projects in recent years.

“We have enjoyed investment allowances when building projects outside Nairobi including those in Olkaria,” he said.

“At the time you are enjoying that tax investment allowance, you are not supposed to pay a dividend. But immediately you pay a dividend, the government charges you the compensating tax.”

Compensating tax, which is meant to discourage the distribution of a tax incentive, is currently at pegged at rate of 42.8 per cent of the dividend payout.

According to Mr Mugo, the government owed KenGen Sh5.4 billion and the power firm in turn had accumulated Sh5.7 billion in dividends due to the Treasury since 2012.

In June, around the time of the KenGen’s rights issue, the government settled its debt to the power firm which in turn wired the accumulated payout to the Treasury.

KenGen said it did not have the funds to make this payment earlier. “To pay the government’s dividend backlog, we would have had to take a bank overdraft which we could not do,” said Mr Mugo.

“Because of paying that dividend, our liability on compensating tax came to about Sh2.4 billion. There is no way we would have avoided paying the tax.”

The Nairobi Securities Exchange-listed KenGen paid compensating tax of Sh57.4 million in 2012 and another Sh96.5 million in 2014 arising from dividend payouts to its minority shareholders.

READ: KenGen’s no dividend ends near decade of shareholder payouts

Investments of at least Sh200 million used to construct a building or purchase and install machinery outside Nairobi, Mombasa and Kisumu are eligible to an investment deduction of 150 per cent of the capital expenditure recoverable over 10 years.

For instance, if a company makes Sh250 million investment that qualifies for 150 per cent capital allowances, such as the power plants KenGen installed in Olkaria, the company will commence operations with Sh375 million eligible tax deduction.

This means that a company could still make profit and not pay corporate tax but they would be liable to paying the compensating tax.

KenGen owns more than 30 power generating plants with an installed capacity of 1,623 megawatts.

KenGen this year made a decision not to pay its shareholders a dividend for the first time since going public in 2006, marking a departure from a near decade-long tradition.

The power firm, which paid its shareholders a dividend of 65 cents per share in 2015 and 40 cents apiece in 2014, is implementing several power projects that it says will inject an additional 706 megawatts into the grid by 2020.

Mr Mugo said while the compensating tax and the lack of a tax credit dented its bottom-line, the decision not to pay dividends this year was made to help it build a war chest for upcoming power projects.