Kenya is one of the jurisdictions in the world that operates a self-assessment tax administration regime. Primarily, this type of scheme is purely based on trust; the tax authorities expect that the tax returns filed by taxpayers accurately reflect the income generated.
At a secondary level, the tax authorities can issue an assessment as well as other corrective measures provided for by law in the event of a suspicion of under-declaration of income by a given taxpayer.
Although the self-assessment regime works great for payroll deductions such as Pay As You Earn (PAYE), the regime can be precarious when it comes to business income taxes such as companies.
According to the conventional principles of taxation, the taxes levied on the income of companies are based on the profit margin of said companies. This means that when a company makes losses during a given period, the loss is declared and, therefore, there is no tax payable at the end of the day.
However, the declaration of losses can sometimes be abusive, with the aim of avoiding the payment of the respective professional taxes such as corporation tax. There have been cases of business enterprises which, in an attempt to avoid paying corporation tax, have systematically declared losses in their tax returns to the Kenya Revenue Authority (KRA).
The million dollar question for such cases has been, how can a business enterprise perpetually record losses and stay afloat for a long period of time?
The introduction of the minimum tax on January 1, 2021 will help the government close these loopholes. As provided for in the 2020 finance law, the minimum tax will be levied at the rate of 1% of the company’s gross turnover.
Like the installment, the minimum tax will be payable on the twentieth day after each quarter of the accounting year, that is to say after the fourth, sixth, ninth and twelfth month.
Although minimum tax is now charged alongside the installment, the former will only apply if it is greater than the installment. There will therefore be no cases of double taxation, as some circles misinterpret it. Only the higher of the two fees will be payable to KRA. The introduction of the minimum tax will greatly reduce cases of tax evasion under the guise of business losses.
In most jurisdictions, minimum tax is also known as alternative minimum tax (AMT). Notably, according to various studies, the alternative minimum tax is charged at a relatively higher rate than the 1% rate in Kenya. In South Korea, for example, alternative minimum tax rates range from 10% to 17% depending on the value of turnover.
According to santandertrade.com, companies with a turnover of less than 10 billion South Korean won pay the alternative minimum tax at a rate of 10%, while those with a turnover between 10 billion and 100 billion South Korean won are imposed an alternative minimum tax at a rate of 12 percent.
Kenya’s one percent rate is relatively fair and within reach of target taxpayers.
Failure to remit its fair share of taxes to the government is an injustice to docile taxpayers. In particular, cases of tax evasion and tax evasion lead to a decrease in government revenue, a resource necessary for the proper functioning of the country.
-The author is the Acting Commissioner of Internal Tax Department at KRA.
