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92 percent of firms ‘fail to pay corporate taxes’

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92 percent of firms ‘fail to pay corporate taxes’

Times Tower. FILE PHOTO | NMG 

More than 90 percent of companies failed to pay corporation tax in the year to June in what has puzzled the Kenya Revenue Authority (KRA) and pointed to evasion of paying duty.

Data from the Kenya Revenue Authority shows that out of 401,306 companies registered for corporation tax in Kenya in the period to June, only 33,426 paid taxes on their net income.

That translates to a compliance rate of 8.3 percent of the firms eligible to pay taxes from business profits, and worst performing category when compared to segments like personal income duty.

About 168,428 of the firms or 42 percent of them filed their tax returns, signalling they were active, but 80 percent of them did not pay the taxman a shilling, underlining the pressing problem of few Kenyans and companies shouldering the tax burden.

KRA told Parliament it was puzzled by the variance between the firms filling for return and taxpayers — pointing to a tax evasion trend among corporate citizens.

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“At this point, it is not clear why such variances especially in corporation tax,” said KRA. “It is imperative to both raise overall filing and payment compliance as well as bring up payment compliance to the filing levels.” KRA has continuously underperformed in meeting the collections targets set by the Treasury. KRA did not disclose the strategies it is going to employ to drive up compliance levels.

The tax paying corporate bodies appeared to have gone down from 78,000 in the year ended June 2018, according to the KRA three-year Corporate Plan which ends in June 2021. Filling tax returns has emerged as one of the taxman’s preferred way to netting tax cheats and growing the income tax segments.

The law requires individuals and companies with a PIN to file their annual returns irrespective of their employment status or mode of operation.

The taxman has failed to meet revenue targets in recent years on tax defaulters and a small tax bracket that fails to capture the self-employed and those working in the informal sector.

Analysts reckon that the low compliance levels could be the product of depressed corporate earnings and firms inflating their costs to report losses in the quest to cheat the taxman and hence fail to pay duty.

Payment compliance for corporation tax was the lowest followed by domestic value added tax (VAT) at 23.3 percent, taxpayers with payroll obligations (36.6 percent), while those with domestic excise duty obligations such as alcohol and cigarette makers had the highest compliance of 79.4 percent.

Resident companies pay 30 percent on their annual income corporate income, paid quarterly, while the rate for foreign firms with operations in Kenya is 37.5 percent.

Francis Kamau, lead tax partner at audit and consultancy EY East Africa said the falling tax compliance levels is reflective of depressed corporate earnings in the last three years.

Companies paying taxes more than halved in the year to June compared to the same period a year earlier

“The KRA data actually reflects the situation on ground. Companies have been experiencing depressed earnings in the last two and a half years,” Mr Kamau said.

“Most of them, especially those listed on Nairobi Securities Exchange, have reported reduced profit, some are in losses while others are on verge of collapsing.”

The Kenya Private Sector Alliance (Kepsa) said earlier in the year Kenyan firms are yet to recover from a generally “tough economic environment” that started in late 2016 with a biting drought and legal caps on loan charges which hurt access to credit.

The umbrella body for businesses indicated some of the businesses have been forced freeze new investments and hiring to remain profitable.

Such cost-cutting measures, Kepsa’s head of head of policy research analysis and public-private dialogue Victor Ogalo said, are temporary and could not be sustained for years.

“Normally, companies try to cushion their employees during hard economic times albeit in the short-term,” Kepsa’s head of head of policy research analysis and public-private dialogue Victor Ogalo said in an earlier interview.

“However if the situation persists, they are forced to make the hard decisions including downsizing, restructuring of operations, job cuts, suspending some projects, or closure and relocation. This is the risk we are staring at as a country.”

Kepsa has listed persistent high power costs for large factories, increased tax and levies burden and extended logistical challenges in clearing and moving cargo along the Mombasa-Nairobi standard gauge railway as some of the challenges keeping cost of doing business high.

Others are prolonged delays by national and county government in remitting payments for goods and services supplied by private firms, continued influx of cheap illicit imports into the country and a slowdown in orders from Kenya’s East African Community partners partly due to trade barriers.

“For investors seeking to invest in the country, this negative investment environment scares them away, denying even more Kenyans potential new jobs,” Mr Ogalo said.



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