In the last financial year, approximately eight out of ten firms in Kenya failed to pay their taxes on earnings, signaling a harsh economic environment that affected their sales and forced some businesses to reduce their operations.
According to statistics from the Kenya Revenue Authority (KRA), 129,313 firms out of 862,336 firms registered for corporate income tax for the year ended June 2023, which is a compliance rate of 15%. This happened when corporate managers struggled to flag sales in a challenging economic environment characterized by high inflation, which squeezed earnings and reduced purchasing power.
KRA statistics show that the share of registered companies in compliance was lower than in the previous financial year, which ended in June 2022, when 123,030 companies out of 759,568 companies paid their taxes on earnings.
According to KRA’s Commissioner for Domestic Taxes, Rispah Simiyu, a compliant taxpayer is a firm that registers for the relevant tax obligations after meeting the registration requirements, pays taxes on time, and reports accurate information about their business transactions.
In Kenya, resident companies pay 30% of their yearly profit through quarterly installments, while foreign firms pay 37.5%.
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The low tax compliance levels of Kenyan companies could indicate that some businesses may be reporting losses as a tax avoidance strategy. This is a problem that the Treasury has been trying to solve since 2020 by introducing a minimum tax on corporate sales.
It could also indicate the increasing number of dormant start-up companies that have been registered in recent years with the main aim of supplying county governments, national governments, and state corporations with products and services.
According to the monthly Stanbic Bank Kenya’s Purchasing Managers Index (PMI), Kenyan companies have been struggling since last year with rising operating expenses, which are estimated to be growing at an exponential pace in at least nine years.
The high operational costs could be attributed to rising fuel prices, costly raw materials, and high electricity bills caused by lingering global supply constraints amid a weakening shilling against international currencies and taxation pressures.
The senior manager for tax services at KPMG, Stephen Waweru, said many businesses are either reducing their operations in Kenya or relocating because of the high business operational costs in Kenya, which in turn increases the level of unemployment.
In response to the low tax compliance, the government has proposed to reduce corporate income tax to 25% from 30% starting from June next year in the Medium-Term Revenue Strategy draft, which is currently under public review. Treasury Cabinet Secretary Njuguna Nding’u said reducing the corporate income tax to below Africa’s average of 29% and closer to the global average of 23% will not only boost compliance levels but also encourage foreign investors to set up their businesses locally.
In the draft revenue strategy, Professor Ndung’u said studies show high rates of CIT discourage foreign direct investments and encourage investors to lobby for tax exemptions or lower rates. Furthermore, high rates contribute to reduced compliance by taxpayers, which has, in turn, led to the decline in income tax as gross domestic product(GDP).