Ideas & Debate

Tax on business transfers likely to stifle economy

Taxing businesses already in distress is likely to strain scarce capital further and potentially inhibit business recovery. FILE PHOTO | NMG 

Faced with the gravity of the current health and economic situation, governments worldwide have had to swiftly pronounce a raft of containment measures. Such measures are primarily intended to support public health and contain adverse impacts on economies. In Kenya, the government has implemented and proposed laudable health sector-related measures as well as fiscal policy measures. However, it is not clear that all of these measures will achieve their intended purpose of serving and supporting the wananchi.

One such change, introduced in the recently enacted Tax Laws Amendments Act, 2020, may adversely affect ongoing business transactions as well as prospective deals even after the Covid-19 crisis abates. In our view, the extent and the rate of the economic recovery will depend substantially on the measures we take now.

Ordinarily, when a business sells its assets, Value Added Tax (VAT) or Goods and Services Tax (GST) is chargeable on the assets transferred, subject to any exemptions and reduced rates that apply to the specific assets. For many jurisdictions worldwide, an overriding tax principle allows the transfer of business assets to occur outside of the scope of VAT provided that some conditions are met. This is widely referred to as ‘Transfer of Business as a Going Concern (TOGC)’ relief.

Business transfers can be cash intensive and therefore VAT exemption associated with TOGC relieves the buyer from the burden of financing VAT as part of a purchase. In addition, sellers are saved the need to evaluate the VAT status of each asset and potentially value the assets separately.

The recent amendment seeks to tax TOGCs at the current standard VAT rate of 14 percent and so buyers will have to dig deeper to finance business acquisitions. By extension, sellers may be forced to taper their price expectation to cushion the 14percent cost burden saddled on the buyers. This follows another change in 2018 that exempted TOGCs from VAT that were hitherto zero rated. Prior to 2018, both the buyers and sellers could claim any VAT incurred to complete transactions involving the sale of a business as a going concern thus making such transactions less expensive.


The current health and economic situation has adversely affected businesses and not many businesses are expected to emerge unscathed. Business leaders predict not only a decrease in profitability but also acute cashflow problems which could lead to distress.

From experience, this will occasion the larger, well capitalised businesses to consider acquiring smaller businesses left vulnerable by the crisis. Distressed businesses may also be forced to restructure existing facilities or consider mergers.

Taxing businesses already in distress is likely to strain scarce capital further and potentially inhibit business recovery. Whilst it could be argued that the buyers of distressed business assets can claim the VAT incurred on the transaction, the reality is that such assets may not quickly produce adequate revenues to facilitate immediate VAT recovery. Furthermore, it is preferable for business that the cash is injected into operations to quickly revitalise the business as opposed to the cash being locked in as a long-term VAT receivable asset.

Secondly, the global deals market has slowed in recent months with many transactions placed on hold until markets stabilise. In the meantime, some of the market players are building up uncommitted capital waiting to be deployed and it is expected that in due course a wave of mergers and acquisitions will ensue. Whereas tax is not the principal deal driver, it is a key consideration that can derail a deal and investors may be forced to look for cheaper deals elsewhere thus costing our country a fortune in lost investments. The recently published PwC Africa VAT Guide shows that a number of economies in Africa including South Africa and neighbouring Uganda and Tanzania exempt TOGCs from VAT and may end up being more attractive to investors.


In the process of enacting the Finance Bill, 2020, it is imperative for the government to consider reversing the taxation of TOGCs and instead introduce long-term incentives that will help businesses to recover and ultimately contribute to the exchequer. Revitalised businesses are likely to translate into much needed job opportunities, thus leading to more payroll and transaction taxes.

Granted that such incentives could impact government revenue and the fiscal deficit in the short term, the public and private sectors should work together to identify other avenues for fuelling the economy, since raising more revenue from taxes is currently not a very viable option.

Kabochi is a Partner with PwC Kenya and PwC’s Africa Indirect Taxes Leader. Musau is a Senior Manager with PwC Kenya’s Deals Tax Team.