Frequent changes in tax laws are bad for business stability

Within nine months (April 2020 – December 2020), Kenya enacted five key tax laws with far-reaching implications for business.

The legislations resulted in considerable changes to the tax base (amount on which tax liability is calculated) and tax rates (the ratio at which a business/person is taxed) for payers in Kenya.

The tax changes were effected on 25th April 2020. It introduced tax reliefs to businesses and individuals in Kenya in the wake of Covid-19 scourge. Key changes included reduction in the corporate income tax (CIT) rate for locally incorporated companies from 30 percent to 25 percent, Value Added Tax (VAT) rate from 16 percent to 14 percent and the top Pay As You Earn (PAYE) rate from 30 percent to 25 percent.

Two months later, the Finance Act, 2020 (Finance Act) was signed into law on 30 June 2020. It introduced Minimum Tax and Digital Services Tax (DST), which became effective on 1 January this year.

Minimum tax is charged at the rate of one percent of gross business revenue and is payable regardless of whether a business makes profit or not. On the other hand, DST is payable on income derived or accrued in Kenya from services offered through a digital marketplace. It is payable at the rate of 1.5 percent of the gross transaction value.

Minimum tax and DST significantly alter the tax base to include gross revenue, resulting in incremental tax and tax compliance costs particularly for low-margin and loss-making entities.

On 24th December 2020, the Tax Laws (Amendment) (No.2) Act, 2020 (second TLAA) was enacted and became effective on 1 January 2021. It reversed the tax reliefs introduced by the first TLAA by reinstating CIT rate to 30 percent, VAT to 16 percent, and the top PAYE rate to 30 percent. The majority of the businesses that had made trade decisions in the light of the first TLAA were forced to re-evaluate and possibly reverse such decisions nine months later.

Other tax provisions introduced in the second half of 2020 include Value Added Tax (Digital Marketplace Supply) Regulations, 2020 and Income Tax (Digital Services Tax) Regulations, 2020.

On 19 January 2021, the Kenya Revenue Authority issued guidance on how businesses should apply tax changes introduced in 2020 for incomes earned in 2020 and 2021. According to the guidance, incomes earned before 31st March 2020 will be taxed at 30 percent. Incomes earned between 1st April 2020 and 31st December 2020 will be taxed at 25 percent while incomes earned after 1st January 2021 will be taxed at 30 percent.

This means that resident companies will have to prepare different sets of tax records for each of the above periods prior to paying taxes and filing their returns. Businesses will further prepare additional documentation for Minimum Tax and DST purposes from 1 January 2021. Maintaining multiple tax records is likely to create confusion for businesses and increase tax compliance costs.

Tax certainty is a fundamental principle of an efficient tax system. When businesses are making investment and operational decisions, they benefit from being able to predict the long-term tax impact of these decisions. In particular, the ability of a business to budget sensibly is dependent on its ability to accurately forecast the after-tax cash flows accurately, especially in high tax jurisdictions.

The above legislations have caused multiple shifts in the tax base and tax rates for businesses in Kenya within a considerably short period. Owing to the increase in the number of taxes businesses here have to pay, and the number of times these taxes are payable, the administrative burden has undoubtably increased.

These incremental costs and uncertainties create an unstable business environment by diminishing the ease of doing business in Kenya. The more frequent the changes in the tax laws, the greater the economic cost to the taxpayers. Consequently, investors increasingly lose trust and confidence in the tax system. Maintaining a steady tax regime will allow businesses to plan without worrying about uncertain tax changes.

Samuel Maina and Josphat Njuguna are tax advisers at KPMG Advisory Services Limited. The views expressed herein are the authors’ and do not necessarily represent the views and opinions of KPMG Advisory Services Limited.