President Ruto plans corporate tax cut to woo foreign investors

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National Treasury and Economic Planning Cabinet Secretary Prof Njuguna Ndung’u (left) confers with State Department for Economic Planning Principal Secretary James Muhati on August 18, 2023. PHOTO | BONFACE BOGITA | NMG

Kenya plans to cut corporate income tax (CIT) on earnings by five percentage points in a bid to drive compliance and align with average international rates in a bruising global battle to attract foreign investors.

Treasury Cabinet Secretary Njuguna Ndung’u has disclosed the Ruto administration will be seeking to reduce the standard CIT rate for resident firms to 25 percent from the current 30 percent.

The reduction, which is expected to come into force from the financial year starting July 2024, will, nonetheless, see firms in certain sectors that pay preferential tax rates as low as half the standard rate on profit gradually lose those benefits.

Prof Ndung’u says in the draft Medium Term Revenue Strategy — which will run between July 2024 and June 2027 — that Kenya’s rate, which is higher than the global average of 23 percent and Africa’s 29 percent, has led to low compliance among eligible companies.

The Kenya Revenue Authority is as a result collecting about two-thirds of the potential revenue from corporate income tax, the Treasury chief says citing a study done in 2020.

“Studies have shown that high rates of corporate income tax discourage foreign direct investments and encourage investors to lobby for lower rates or tax exemptions,” Prof Ndung’u wrote in the draft revenue strategy.

“Further, high rates contribute to increased tax planning and reduced compliance by taxpayers, which in the case of Kenya, has led to a decline in income tax as a share of GDP [Gross domestic product].”

The latest KRA statistics show that of 759,164 firms registered for corporation tax for the year ended June 2022, only 84,428 paid the dues remitted quarterly.

That translates to a compliance rate of 11.12 percent, perhaps the lowest among various tax heads like pay-as-you-earn for workers as well as value-added tax and excise duty for consumers.

A compliant company registers for the relevant tax obligations if and when they meet the registration requirement, files all returns on time, pays taxes due, and reports accurate information regarding their business transactions, according to KRA.

Kenya has, on the other hand, struggled to attract foreign direct investments, trailing regional peers such as Ethiopia, Tanzania, and Uganda.

For example, FDIs were estimated at $759 million (about Sh111.09 billion under prevailing exchange rates) in 2022 compared with Ethiopia’s $3.67 billion (Sh537.14 billion), Uganda’s $1.53 billion (Sh223.93 billion) and Tanzania’s $1.11 billion (Sh162.46 billion), according to UNCTAD’s World Investment Report 2023.

Firms on a preferential 15 percent CIT rate include those that build at least 100 residential units annually, assemble motor vehicles locally, operate a shipping business in Kenya, and run a carbon market exchange.

“These preferential rates have contributed to the erosion of the tax base,” Prof Ndung’u writes. “To address the situation, the government will gradually phase out the preferential corporate tax rates, while focusing on other investment promotion measures over the strategy period.”

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