Banks contribute 24 percent of total corporate taxes

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Banks contribute 24 percent of total corporate taxes

Friday September 03 2021

Kenya Bankers Association (KBA) CEO Habil Olaka. FILE PHOTO | NMG

By PATRICK ALUSHULA
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Summary

• Commercial banks’ contribution to total corporate taxes in Kenya stood at 24.1 percent last year, dropping from 29.7 percent in 2019.
• The reduced contribution highlights the impact of reduced profitability and temporary lowering of the tax rate in the Covid-19 environment.

Commercial banks’ contribution to total corporate taxes in Kenya stood at 24.1 percent last year, dropping from 29.7 percent in 2019.

The reduced contribution highlights the impact of reduced profitability and temporary lowering of the tax rate in the Covid-19 environment.

A report released Thursday by PricewaterhouseCoopers (PwC) on behalf of Kenya Bankers Association (KBA) shows that banks accounted for Sh41.2 billion of the Sh170.5 billion total corporate tax paid in Kenya last year. This was a drop from 2019 when the sector contributed Sh52.3 billion out of the total of Sh175.9 billion.

“The contribution indicates the industry has remained resilient, navigated the challenges occasioned by the Covid-19 pandemic, and continued supporting the economy,” said Habil Olaka, KBA’s chief executive.

PwC said the decline was partly due to reduction of corporate tax rate from 30 percent to 25 percent, pay as you earn (PAYE) top tax rate from 30 percent to 25 percent and a cut in value added tax rate from 16 percent to 14 percent.

“Considering a total population of six million registered taxpayers countrywide, this is indeed a very significant contribution,” said Alice Muriithi, associate director at PwC Kenya.

The taxes also plunged in the period when banks saw a 30.9 percent drop in 2020 gross profits to Sh107.3 billion—the lowest returns since 2012.

Corporate tax and PAYE are the largest contributors of the total tax contribution of the sector, standing at 42.5 percent and 16.5 percent respectively.

The study, which covered 32 banks, puts the cumulative ratio of taxes paid to profits earned at 48.5 percent meaning that banks pay out Sh48.50 tax on every Sh100 profits.

Kenya Revenue Authority usually applies strict criteria on which provisions pass as tax deductible.

Banks therefore pay higher taxes since the gross earnings for tax purposes are usually higher than what they report to Central Bank of Kenya.

“There is misalignment between provisioning for accounting purposes and the deductibility of the same provisions for tax purposes, and this continues to drive up the effective tax rates for banks,” said Ms. Muriithi.