LETTERS: What it means when a firm reports a tax loss

The Kenya Revenue Authority has been trying hard lately to squeeze whatever it can, and rightfully so because government needs funding to meet its social obligations, and also to try and nab the mysterious 60percent who do not contribute to tax in the country. It is probably time for more innovation.

Most companies in Kenya that have been incentive-driven do not pay any income tax for long periods of time, some for up to two decades, and sometimes wind up without ever paying income tax. Thanks to special economic zones and other fiscal exemptions that give them such leeway.

Whereas incentives are great in attracting investments, its ineffectiveness has been documented by the Organisation for Economic Co-operation and Development (OECD) as being largely questionable, taking much more than it gives, and that a modern investor prefers a stable and predictable fiscal and political regime rather than incentives, ranking it 11 out of 12 parameters. With the betting sector in mind, this makes sense because of the gross uncertainty they have been subjected to.

It is an interesting dynamic to see many companies recording an impressive turnover but report a net tax loss. Though some could be due to creative accounting and imaginary provisions, there are many cases that have to do with huge capital allowance claims and VAT refunds. In simple terms, their loss position is not due to trading operations but rather other external factors.

Take an instance of a factory or a hotel investing Sh1 billion and claims 100 percent or 150 percent capital deduction, it could mean that it might never remit any tax to the Exchequer in form of income tax for many years until it has offset the one billion, yet it will be recording huge turnovers. Essentially, these will be paper losses which are simply losses on the accounting books but not reflecting the economic reality.

The Treasury has noted this in the past and sought to restrict any losses carried forward to ten years, but this seems to inflict unnecessary punishment on companies which are entitled to claim capital allowances in full. Fair enough, losses resulting from trading operations can be excused. In any case they have actually overspend, so where are they expected to get funds to remit? A loan? Certainly not.

The current trend is to impose a small turnover tax of say, 0.5 percent or one percent subject to a minimum amount, but this is claimable as a credit once the company starts reporting profits.

The rationale for this is that many companies are not paying income tax despite ‘doing well’ with impressive turnovers, yet the government deploys significant resources in enabling these companies.

Arguments against such policy include that such practices amount to taxing capital, and that a loss position necessarily means that a company is in a negative cash flow position. Maybe, but maybe not.