Corporate Taxes: Why Loss-making Businesses Will Be taxed 1 percent of Turnover

Kenya’s National Treasury has reopened three bonds to raise Ksh 60 billion in October for budgetary support.

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Kenya’s National Treasury says loss-making firms will still have to pay taxes to the tax collector in a raft of proposals contained in the Finance Bill 2020.

Treasury Secretary Ukur Yatani on Thursday told the Parliament that if the firms are compelled to pay taxes to the Kenya Revenue Authority, they will generate new revenue to partly fund the KSh3.2 trillion budget for the 2020-21 fiscal year.

“In order, to ensure all taxpayers, contribute to the construction and maintenance of our infrastructure, I have proposed to introduce a minimum tax at a rate of 1 percent of their turnover, which will be paid by all companies,” said Yatani.

The intention to tax them according to Yatani is because “…these companies enjoy facilities, such as infrastructure, whose cost of construction and maintenance is serviced by the Government through tax revenues contributed by other patriotic taxpayers.”

“The intention of this is to bring onboard companies who earn income from Kenya, but end up declaring losses perpetually to avoid payment of corporate taxes,” Yatani explained.

Pwc Kenya in its, ‘Tax and Regulatory Alert’ is based on the changes in respect of corporate taxes which introduced the minimum tax and the digital service taxes. 

“Given the recent changes to the Income Tax Act in respect of the turnover tax, it means that the number of taxation regimes for companies under the Income Tax Act has now significantly increased.”

The Bill proposes a new tax to be known as minimum tax which shall be payable by a person if the person’s:

  1. a) income is not exempt under the ITA;
  2. b) income is not from employment, residential rent, capital gains, mining or oil exploration, capital gains or subject to turnover tax; or
  3. c) minimum tax payable is lower than the installment tax payable.

The minimum tax is based on 1 percent of gross income and paid on the 20th day of the fourth, sixth, ninth, and twelfth months.

The minimum tax levy will take effect in January 2021.

“The question remains on whether the minimum tax would be considered an advance tax as is the case for the installment tax regime,” George Maina, Tax Partner, Rodl & Partner, Kenya

Audit firm, KPMG Kenya, says the minimum tax is an attempt to tax businesses that are in a loss-making position and borrows from provisions in other countries where businesses that make losses are subject to a minimum tax. 

“However, in those countries, the businesses must have been loss-making for a number of years and the tax rate is much lower,” says KPMG Kenya.

“From a policy perspective, the minimum tax bridges the differences in taxation that may arise between the turnover tax applicable to medium and small business and other businesses. However, the introduction of the minimum tax may result in unintended economic effects in respect of businesses, especially where it represents an additional cost to the business rather than a tax on actual income earned by the business. In particular, the following policy considerations need to be taken into account,” comments PwC Kenya.

Consequently, they advise that the proposed taxes should not apply to newly established firms as it may present cash flow problems in the initial years of business but have a progressively significant turnover particularly capital intensive businesses.

“The minimum tax should be payable as a balance of tax rather than an installment tax to avoid the complexities that arise from estimation of gross turnover and profits,” Pwc Kenya advises.