Kenya is one of the jurisdictions in the world that operate a self-assessment tax administration regime.
Primarily, this kind of regime is purely based on trust where the taxman trusts that the declarations of income are a true reflection of the income generated.
At a secondary level, the taxman may issue an assessment as well as other remedial measures in case there is suspicion of under-declaration.
Kenya is one of the jurisdictions in the world that operate a self-assessment tax administration regime. Primarily, this kind of regime is purely based on trust where the taxman trusts that the declarations of income are a true reflection of the income generated.
At a secondary level, the taxman may issue an assessment as well as other remedial measures in case there is suspicion of under-declaration.
Although the self-assessment regime works perfectly well in the case of withholding taxes such as Pay As You Earn (Paye), the regime can be precarious where taxes on business incomes are concerned.
According to conventional principles of taxation, taxes levied on business incomes are based on the profit margin of the said businesses. This means that when a business makes losses in a given period, the loss is declared and consequently there is no tax payable.
However, declaration of losses can be abused at times with the aim of avoiding payment of taxes such as corporation tax. There have been cases of business enterprises that in a bid to avoid paying corporation taxes, they have perennially declared losses in their tax declarations to the Kenya Revenue Authority (KRA).
The million-dollar question for such cases has been, how can a business enterprise perpetually post losses and still remain afloat for a long period of time?
The introduction of the minimum tax on January 1, 2021 will help the government seal such loopholes. As stipulated in the Finance Act 2020, the minimum tax will be charged at the rate of one percent of the gross business turnover.
Just like instalment tax, the minimum tax will be payable by the twentieth day after every quarter of the accounting year, that is, after the fourth, sixth, ninth and twelfth month.
Although the minimum tax will now be charged alongside instalment tax, the former will only be applicable if it is more than the instalment tax.
There will, therefore, be no cases of double taxation as misinterpreted by some circles. Only the higher of the two taxes will be payable to KRA. Implementation of the minimum tax will to a significant extent curb cases of tax cheats under the guise of business losses.
In most jurisdictions, the minimum tax is also known as the alternative minimum tax (AMT). This type of tax has been implemented in other jurisdictions around the world as a revenue collection enhancement measure.
Notably, according to various studies, the alternative minimum tax is charged at a relatively higher rate than Kenya’s rate of one percent. In South Korea, for instance, the rates of alternative minimum tax vary from 10 percent to 17 percent, depending on the value of the turnover.
Compared to the aforementioned rates, Kenya’s rate of one percent is relatively fair and within the reach of the target taxpayers. It gives every sector that qualifies for the minimum tax a fair chance to contribute towards building the nation.
Failure to remit one’s rightful share of taxes is tantamount to unfairness to the compliant taxpayers.
PAYE Tax Calculator
Note: The results are not exact but very close to the actual.
