By Stephen Kyande
Kenya is one of the jurisdictions in the world that operate a self-assessment tax administration regime. Primarily, this kind of regime is purely based on trust where the taxman trusts that the declarations of income made by taxpayers are a true reflection of the income generated. At a secondary level, the taxman may issue an assessment as well as other remedial measures stipulated in the law in case there is suspicion of under-declaration of income by a given taxpayer.
Although the self-assessment regime works perfectly well in the case of withholding taxes such as Pay As You Earn (PAYE), the regime can be precarious where taxes on business incomes like corporation taxes are concerned. According to conventional principles of taxation, taxes levied on business incomes are based on the profit margin of the said businesses. This means that when a business makes losses in a given period, the loss is declared and consequently there is no tax payable at the end of the day.
However, declaration of losses can be abused at times with the aim of avoiding payment of respective business taxes such as corporation tax. There have been cases of business enterprises that in a bid to avoid paying corporation taxes, they have perennially declared losses in their tax declarations to the Kenya Revenue Authority (KRA). The million dollar question for such cases has been, how can a business enterprise perpetually post losses and still remain afloat for a long period of time?
The introduction of the minimum tax on 1 st January, 2021 will help the government seal such loopholes. As stipulated in the Finance Act 2020, the minimum tax will be charged at the rate of one per cent of the gross business turnover. Just like instalment tax, the minimum tax will be payable by the twentieth day after every quarter of the accounting year, that is, after the fourth, sixth, ninth and twelfth month. Although the minimum tax will now be charged alongside instalment tax, the former will only be applicable if it is more than the instalment tax. There will therefore be no cases of double taxation as misinterpreted by some circles. Only the higher of the two taxes will be payable to KRA. Implementation of the minimum tax will to a significant extent curb cases of tax cheats under the guise of business losses.
In most jurisdictions, the minimum tax is also known as the alternative minimum tax (AMT). This type of tax has been implemented in other jurisdictions around the world as a revenue collection enhancement measure for years. Notably, according to various studies, the alternative minimum tax is charged at a relatively higher rate than Kenya’s rate of one per cent. In South Korean, for instance, the rates of alternative minimum tax vary from 10 per cent to 17 per cent depending on the value of the turnover.
According to santandertrade.com, businesses with a turnover of up to 10 billion South Korea won pay the alternative minimum tax a rate of 10 per cent while those with a turnover of between 10 billion and 100 billion South Korean won are charged alternative minimum tax at a rate of 12 per cent. The alternative minimum tax for a business that has a turnover in the excess of 100 billion South Korea won is charged at the rate of 17 per cent. India and Taiwan charge alternative minimum tax at a rate of 15 per cent and 12 per cent respectively.
Compared to the aforementioned rates, Kenya’s rate of one per cent is relatively fair and within the reach of the target taxpayers. It gives every sector that qualifies for the minimum tax a fair chance to contribute towards the development of this nation without much of a strain. Failure to remit one’s rightful share of taxes to the government is tantamount to unfairness to the compliant taxpayers. Notably, cases of tax avoidance and tax evasion result in dwindling government revenue, a requisite resource for successfully running the country. Introduction of the minimum tax will therefore not only create a level playing ground for taxpayers in the target sector but also seal revenue loopholes.
The writer is the Acting Commissioner of Domestic Taxes Department at the Kenya Revenue Authority (KRA)