Optimising taxes in turbulent times

A client seeking services at KRA headquarters in Times Tower, Nairobi on February 23, 2024. 

Photo credit: File | Nation Media Group

As the government intensifies its domestic resource mobilisation efforts, the emphasis on tax collection is expected to continue as a primary revenue source.

This push comes amid a challenging economic climate that has placed businesses under considerable strain.

There is need to explore strategies for businesses to optimise their tax position, helping them navigate and potentially thrive despite economic turbulence.

Tax compliance begins with understanding and meeting the tax obligations set out in the law.

For businesses, being well-informed about applicable tax requirements is essential to staying compliant and avoiding the high costs of non-compliance, which can lead to revenue loss through penalties and interest on unremitted taxes.

Additionally, defending against tax assessments can drain valuable resources. To stay compliant, businesses should remain up to date with legislative changes and assess how these changes impact their operations.

Conducting regular tax health checks can help identify any compliance gaps or areas needing attention before audits or assessments by the tax authority.

In essence, proactive compliance can be compared to a healthy lifestyle: just as regular exercise and balanced eating reduce health risks, proactive tax compliance mitigates the risk of financial losses from penalties and costly disputes with tax authorities.

Kenya's tax laws include various exemptions, benefits, and allowances that businesses can leverage to lower their tax burden. Familiarity with these incentives can help conserve cash that would otherwise go to taxes.

Some notable incentives include:

Infrastructure and Green Bonds:Interest income on infrastructure bonds and certain green projects with a minimum maturity of three years is exempt from income tax.

Special Economic Zones (SEZs): SEZ enterprises, developers, and operators enjoy benefits such as reduced corporate tax rates and lower withholding tax rates on qualifying payments.

Accelerated Investment Deduction: Businesses investing outside Nairobi and Mombasa in specific areas like manufacturing and hotel construction may qualify for accelerated investment deductions, given they meet certain conditions.

In addition to these incentives, Kenya’s Double Taxation Agreements (DTAs) with various countries, including the United Kingdom, South Africa, and India, are also worth noting.

While DTAs primarily allocate taxing rights between countries to prevent double taxation, some also offer exemptions, exclusions, or reduced tax rates on specific transactions like royalties, dividends, and interest. Businesses making payments to entities in DTA countries should consider the DTA provisions to reduce their tax liability.

When funding investments, businesses typically weigh commercial and legal factors, but tax implications should also be carefully considered.

Common funding options include debt, equity, and mixed financing. Each option has distinct tax costs:

Debt Financing: Associated taxes include deductibility of interest for corporate tax purposes and withholding tax on interest payments.
Equity Financing: This involves withholding tax on dividends and, sometimes, stamp duty on increases in share capital.

Evaluating these options is crucial, as each impacts tax expenses differently. Modelling the tax implications of each funding choice can guide businesses in choosing the most tax-efficient option.

During tough economic times, optimising tax positions can make a critical difference for businesses. However, while the measures discussed above apply broadly, each business faces unique challenges.

Decisions around investment and financing also involve commercial, legal, and operational considerations beyond tax implications. A holistic approach is therefore essential to balance immediate tax optimisation with long-term business objectives.

By applying these strategies, businesses can potentially enhance their resilience in a turbulent economic environment, using tax optimisation as a lever to free up cash and support their financial health.

The writers are tax consultants at PwC

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