Current Tax Policy is Not Supporting Kenya’s Banking Sector -PwC Report 

Current Tax Policy is Not Supporting Kenya’s Banking Sector -PwC Report 

KRA Policy and Tax Advisory Deputy Commissioner Caxton Ngeywo, KBA CEO Habil Olaka and PwC tax services director Titus Mukora in review of Total Tax Contribution of the Kenya Banking Sector Report I Courtesy KBA

Banks and  micro-finance institutions paid Kenya Revenue Authority KSh 207.2 billion in 2017 and 2018

Kenya Bankers overwhelmingly think the current tax policy is not supportive of the industry according to the latest state of the banking industry report.

The study by PricewaterhouseCoopers (PwC) revealed that a majority of the bankers feel excluded from the tax policy setting where 81.1% of the survey participants either disagreed or strongly disagreed with the statement that there is predictability in the process of making changes to the tax framework and inclusion of industry stakeholders in the process.

“This lack of engagement of the stakeholders is evident from numerous tax proposals over the last few years that have either been blocked by the courts or dropped altogether,” said PwC.

As a result, the KBA chief executive Habil Olaka asked the Government to support the development of a tax policy specifically for the banking sector. “A comprehensive banking industry tax policy that would seek to address some of the sticky issues around taxation while taking a long-term view on the industry. We envision this policy would be informed by data.”

The study which covered 2017 and 2018 financial years with 38 banks participating, made a total tax contribution of KSh 108.1 billion and Ksh 99 billion for 2017 and 2018 respectively indicating high compliance said Titus Mukora, Director Tax Services, PwC. 

Titus Mukora, Tax Partner at PwC Kenya, said the purpose of the study was to quantify the tax contributions and draw connections between taxes and economic developments such as the interest rate caps and the adoption of technology by banks.

“Our analysis uses the Total Tax Contribution framework, where tax contribution is segmented into taxes borne and taxes collected. Taxes borne are those which are direct costs to a business such as corporation tax and irrecoverable VAT. Taxes collected are those that a business collects from taxpayers on behalf of the government such as PAYE and withholding tax,” said Mr. Mukora.

According to the report, in the two years, banks contributed a total of Ksh207.2 billion in taxes. However, there was a decline in tax contribution from 2017 to 2018 attributable to a reduction in taxes borne by banks, and in particular, a reduction of corporation tax paid. This was a result of low profits reported in 2017 relative to 2016.

“The reduction in 2017 profits corresponds with the full year of interest rate cap coupled with a prolonged electioneering period,” the report states.

The result was large corporate tax over-payments in 2017 were utilized against the 2018 corporate tax due leading to a decline in corporate taxes paid in 2018.

The decline in taxes arising from declined profitability in 2017 is reflected in the reported year on year decline of the industry’s net income (of – 4.79 percent) for the period 2016 to 2017. This is also reflected in the decline in the growth of net assets in the sector in 2017 of 6.8 percent down from an 11 percent growth in the previous year.

The report shows that taxes collected grew by 10% from 2017 to 2018 (46.1 billion shillings to 50.7 billion shillings). This growth was largely due to a 40 percent increase in excise duty which resulted from an increase in excisable fees and commissions charged by banks to customers as well as an increase in the excise duty rate charged by the sector from 10 percent to 20 percent within 2018.

The report further shows that, for every Ksh4 of corporation tax paid in Kenya, approximately Ksh1 was paid by the banking sector. This translates to 26 percent of the corporate taxes collected by the Kenya Revenue Authority (KRA).

“Banks operate in a highly regulated environment and this has led to very high levels of transparency,” Olaka said.

“It is our view that a data-led discussion can lead to outcomes that are satisfactory for all key stakeholders and lead to informed decisions. We must safeguard Kenya’s pole position as the region’s financial services hub. We have some of the most innovative and ambitious banks on the Continent, and as such, the proposed banking industry tax policy will play an enabling role to ensure that our banks remain competitive and are enabled to expand outside of Kenya with the attendant benefits for the Kenyan economy,” added Olaka.