Nine in 10 companies operating in Kenya did not pay taxes in the year to June, pointing to widespread avoidance that leaves a few firms to shoulder the burden of funding the government.
Data from the Kenya Revenue Authority (KRA) shows a modest 84,428 out of the 759,164 firms registered for corporation tax paid their dues for the year ended June 2022, reflecting a compliance rate of 11.12 percent.
This signals that many companies could be reporting losses as a tax avoidance strategy, a gap that the State sought to plug by introducing a minimum tax on corporate sales.
It could also point to the rising number of dormant companies, mainly start-ups registered in recent years with the target of supplying the national government, county governments and State corporations with goods and services.
KRA data show that 504,036 or 66.39 percent of registered firms filed returns by June, but only 16.75 percent of those paid corporation taxes, an indication they either suffered an operating loss or avoided duty payment.
The large share of firms filing ‘Nil’ income tax returns was behind the government’s unsuccessful push to impose a minimum one percent tax on corporate sales.
While the government wanted to ensure companies that report losses as a tax avoidance strategy over years also contribute to the exchequer, those opposed to the policy said it was punitive to firms that are genuinely losing money.
They cited the move by the Treasury to exempt some companies from paying the tax, including Kenya Airways Plc, whose business was hit by pandemic-related lockdowns.
Businesses whose pricing is controlled by the government, such as fuel marketers and Kenya Power, were also exempted.
“A compliant taxpayer is a company which registers for the relevant tax obligations if/when they meet the registration requirement, files all returns on time, makes payments of taxes due on time and reports accurate information regarding their business transactions,” Commissioner for Domestic Taxes Department Rispah Simiyu told the Business Daily via email.
Resident companies, corporations and trusts pay 30 percent on their profits through quarterly instalments, while the rate for foreign firms with operations in Kenya is 37.5 percent.
The push for the imposition of the minimum tax was defeated at the High Court, which termed it unconstitutional.
Ms Simiyu reckons compliance levels have “improved over the years”.
For the year ended June 2019, some 33,426 of 401,306 registered companies paid taxes, reflecting a compliance rate of 8.33 percent.
This means the number of firms paying taxes on their profit have increased to 84,428 from 80,000 in the year to June 2021 and 33,426 in 2019 — a jump of 152.58 percent in four years.
Despite the small share of firms paying duties, corporate tax receipts in the year to June climbed 32.7 percent to Sh242.02 billion and exceeded target by Sh23.86 billion.
The taxman has attributed the over-performance to increased remittances from firms in finance and insurance, manufacturing, wholesale and retail trade as well as transport and storage sectors.
“We are a rich country and that’s the reality. We just need to tighten the screws and close revenue leakages,” Philip Muema, a partner at Andersen Kenya, a tax and business advisory firm, said on the phone.
“We also need to deploy technology a bit more heavily to be able to get smart tax information.”
The taxman is racing to bring more people into the tax bracket and curb tax cheating and evasion in the quest to meet revenue targets.
The taxman has in recent months been investigating rich people’s sources of income and their expenditure against their tax remittances.
It has also been analysing companies’ financial dealings, especially firms doing business with the national government and county governments, to unearth tax cheats through matching their payments with income declared to the KRA.
The KRA enforcement unit has been using various databases to pursue suspected tax cheats, including bank statements, import records, motor vehicle registration details, Kenya Power records, water bills and data from the Kenya Civil Aviation Authority (KCCA), which reveals individuals who own assets such as helicopters.
Car registration details are also being used to smoke out individuals who are driving high-end vehicles but have little to show in terms of taxes remitted.
Kenya Power meter registrations are helping the taxman to identify landlords, some of whom have been slapped with huge tax demands.
The KRA says a sharp increase in imports of luxury items and multi-million shilling investments in real estate has opened its eyes to a potentially massive tax leakage, which if tapped could yield billions of shillings in additional revenues to the Exchequer.
Editor's note: Resident companies pay 30 percent on profits. An earlier version of this story erroneously reported that resident companies, corporations and trusts pay 30 percent on their annual corporate income.