The treacherous journey of Kenya’s minimum tax

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Ideas & Debate

The treacherous journey of Kenya’s minimum tax


times-tower

Summary

  • The overarching policy objective was to ensure that as many people as possible share in the taxation burden in Kenya, in line with the constitutional edicts.
  • Recently, the US came out in support of minimum tax globally to address the fiscal attractiveness of low tax jurisdictions and, more importantly, facilitate fair tax obligations in countries where companies derive economic benefit.

Winston Churchill quipped that there is no such thing as a good tax.

I think it is fair to say that given an option, most people would not pay a cent in tax. Tax, as the word suggests, is taxing. It is rarely a voluntary contribution by citizens to the funding of government operations. Indeed, in most jurisdictions, non-compliance with one’s tax obligations will usually trigger punitive penalties, if only to remind taxpayers of the need to pay to Caesar what is due and on time.

For this reason and others including one’s sense of patriotism and morality, most taxpayers will try their utmost to be tax-compliant. This includes paying their taxes and filing their tax returns on time. This civil obligation is supported when the tax regime lends itself to easy implementation and understanding. The reality, however, is that tax is often anything but simple.

Take minimum tax. And a lot has been said about it in Kenya. The overarching policy objective was to ensure that as many people as possible share in the taxation burden in Kenya, in line with the constitutional edicts.

Recently, the US came out in support of minimum tax globally to address the fiscal attractiveness of low tax jurisdictions and, more importantly, facilitate fair tax obligations in countries where companies derive economic benefit.

There is no arguing that at a subliminal level, shoring up tax revenues is a good thing for any country, Kenya included. However, how this is done will determine the success of expanding the tax base as the government hopes or not.

In Kenya’s case, as taxpayers grapple with complying with minimum tax obligations this week, a number of practical concerns arise, in addition to the normal concerns around margins of traders, relevance of capital allowances and loss carry forward capping provisions.

First, is what constitutes “gross turnover” which is the basis of one percent minimum tax.

The Commissioner’s Guidelines helpfully define gross turnover to include “gross receipts, gross earnings, revenue and sales. The question arises for a bank, whether it should consider gross interest income or net interest income where it pays interest on deposits mobilised from customers. The same question arises for commission agents — should they be taxed on their commission earnings/margins or on the full transaction value?

SELF ASSESSMENT

Secondly, should taxpayers with overpayments from prior years use these overpayments to settle the minimum tax? In my view, taxpayers should be permitted to use their overpayments based on their self-assessment. In the event that the Kenya Revenue Authority (KRA) determines that no overpayment exists, then the KRA can assess such a taxpayer. This is the essence of a self-assessment regime.

Denying taxpayers the right to use their tax credits occasions significant cashflow hardships, especially at a time businesses are struggling to conserve cash, retain employees and stay afloat.

In addition, overpayments do not earn a taxpayer any interest until the KRA audits and confirms the refund as due and payable. Perhaps to level the playing field, the law should be amended to require the KRA to pay refunds within a specified time as happens in Rwanda and Ethiopia. That way, even where a tax overpayment arises, taxpayers can get their refunds expeditiously.

Third, there is no consensus on separate sourcing of income.

The Income Tax Act requires taxpayers to separate their income sources and account for tax on these separate sources. This was designed to ensure that taxpayers do not offset taxable gains from one source of income for example rent with tax losses from another, say agriculture.

The question that taxpayers will grapple with is whether in paying one percent minimum tax they should also separate source of their income or should they consider the total income from the business where some sources are in a tax loss and others would otherwise pay the normal instalments?

It doesn’t help matters that both the minimum tax and separate sourcing provisions in the Income Tax Act start with the phrase “notwithstanding any other provision in this Act…”

Even as the debate around minimum tax rages and government assesses the effectiveness of the controversial minimum tax, all stakeholders should come together to address these teething problems. Not doing so will lead to varying interpretations and disputes.

Jean-Baptiste Colbert, the French statesman and economic reformist said that “the art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing.”

Minimum tax is producing a lot of hissing and it would do Kenya a lot of good to address these hisses.

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