Revealed: Half of firms fail to pay corporate tax

The taxman has recently stepped up a crackdown on evasion amongst the super-rich who usually use sophisticated accounting techniques that make it difficult to trace their wealth, including offshore tax shelters.

This follows reports that the super-rich, especially those with political connections, have hidden wealth in trusts and a labyrinth of companies to evade taxes.

Analysis of KRA data from the financial year starting July 2020 and the year ended June shows that the gap between firms that file returns and those who paid corporate income tax (CIT) has steadily narrowed on the back of intelligence-led audits and prosecution of tax cheats.

The compliance rate has jumped from 15.7 percent from June 2021 to the current 50.2 percent of firms that filed annual returns.

The trend is a pointer the taxman could be gradually catching up with the firms reporting losses as a tax avoidance strategy, a gap that the Treasury has since 2020 been seeking to plug by enforcing a minimum tax on corporate sales.

“KRA is investing in resources to collect and analyse intelligence to identify and address tax evasion schemes. Companies that deliberately evade taxes are subject to investigations and potential prosecution,” Commissioner for Domestic Taxes Department Rispah Simiyu told the Business Daily via email.

“Both third-party and internal data are used to identify businesses that are not adhering to tax laws. Audits and compliance checks are conducted to address non-compliance. The KRA is also exploring integration opportunities with key stakeholders to enhance the effectiveness of information use for improving tax compliance.”

The KRA received Sh276.94 billion in corporation taxes, remitted quarterly, in the review year ended June 2024, a rise of 4.98 percent over Sh263. 81billion the year before.

The growth in corporate income receipts, charged at the rate of 30 percent of corporate earnings, was slowest since the financial year ended June 2021.

It came in a period business leaders complained of increased taxation pressures, including doubling of value added tax on fuel to 16 percent and enforcement of a 1.5 percent housing levy on gross payrolls of employees which is matched by employers, as key drivers of operating costs.

Firms earlier in the review year also complained of a rise in electricity bills and costly raw materials as a result of lingering global supply constraints amid a weakening shilling which piled pressure on input costs.

The KRA data, however, shows a worrying trend where firms filing annual returns for corporation taxes has been falling steadily in recent years.

Analysis of data over the past four financial years, for instance, shows firms filing annual returns for corporation taxes have dropped from a peak of 509,058 in the year ended June 2021 to 341,793 last financial year.

About 15.7 percent of the firms which filed returns for financial year 2020-21 paid CIT taxes, rising to 27.77 percent, or 123,030 of 443,087 firms which filed in 2021-22.

In the year ended June 2023, the KRA data shows 122,907 of 383,398 companies which filed returns paid up, a compliance rate of 32.06 percent.

As a percentage of more than 900,000 total firms registered corporate income tax, the taxman has been struggling to drive compliance with a significant number filing or paying up due taxes on corporate earnings.

The country has witnessed a rising number of dormant companies, mainly start-ups registered in recent years with the target of supplying the national government, county governments and State corporations with goods and services.

“We are still in an era where businesses prefer not to pay due taxes, and my instincts are that the reason behind this is the lack of accountability with regard to public funds, corruption and pilferage,” Philip Muema, managing partner at Andersen Kenya, a tax and business advisory firm, told the Business Daily on September 4.

In response to low compliance, the William Ruto administration is, through the Medium Term Revenue Strategy, seeking to lower corporate income tax to 25 percent from 30 percent.

The Treasury says reducing the CIT rate to below Africa’s average of 29 percent and closer to the global average of 23 percent will not only drive up compliance levels, but also attract foreign investors to set up locally.

“Studies have shown that high rates of corporate income tax discourage foreign direct investments and encourage investors to lobby for lower rates or tax exemptions,” the Treasury wrote in the revenue strategy.

“Further, high rates contribute to increased tax planning and reduced compliance by taxpayers, which in the case of Kenya, has led to a decline in income tax as a share of GDP [gross domestic product].”

The Treasury is, at the same time, seeking to reintroduce minimum tax, which will result in all companies paying a certain share of annual sales revenue as corporate tax whether in profit or loss positions.

The courts shot down a previous plan by the former President Uhuru Kenyatta’s administration, which sought to compel each company to pay at least a percentage of gross revenue to the taxman.

The courts determined that the changes in the taxation law were based on a wrong assumption that all loss-making firms were evading taxes.

The Court of Appeal ruled that forcing all companies to pay a percentage of their gross sales income as opposed to profit to the taxman was contrary to Article 201 of the Constitution, which requires fair distribution of the taxation burden.

“The government recognises the need for an entity to pay a minimum tax to facilitate the government to achieve its objectives. This is due to the fact that some entities prepare their accounts to depict perpetual loss position thus evading taxation,” the Treasury states in the revenue strategy paper.