In an aggressive international competition to draw foreign investors, Kenya aims to reduce corporate income tax (CIT) on earnings by five percentage points to promote compliance and align with average international rates.
The Ruto administration would aim to lower the normal CIT rate for resident enterprises from the current 30 percent to 25 percent, according to Treasury Cabinet Secretary Njuguna Ndung’u.
The reduction, which is anticipated to take effect with the start of the fiscal year in July 2024, will cause businesses in some industries to gradually lose the benefits of paying preferential tax rates on profits that can be as low as 50% of the regular rate.
According to Prof. Ndung’u, the low compliance among eligible enterprises is a result of Kenya’s rate, which is higher than the global average of 23 percent and Africa’s rate of 29 percent. The draft Medium Term Revenue Strategy will run from July 2024 to June 2027.
According to the Treasury head, citing 2020 research, the Kenya Revenue Authority is as a result only collecting around two-thirds of the possible corporate income tax revenue.
In the proposed revenue strategy, Prof. Ndung’u stated that “studies have shown that high rates of corporate income tax deter foreign direct investments and encourage investors to lobby for lower rates or tax exemptions.”
Furthermore, high rates lead to increased tax planning and decreased compliance by taxpayers, which, in the case of Kenya, has resulted in a reduction in income tax as a percentage of GDP.
Only 84,428 of the 759,164 enterprises registered for corporate tax for the year ending in June 2022 paid the dues, according to the most recent KRA statistics.
Concerning various tax headings, such as pay-as-you-earn for employees and value-added tax and excise duty for customers, it results in a compliance rate of 11.12%, which is possibly the lowest.
According to KRA, a compliant business registers for the necessary tax requirements submits all returns on time, pays any taxes that are due, and reports accurate information about its business dealings.
On the other side, Kenya has had difficulty luring foreign direct investments, falling behind regional rivals like Ethiopia, Tanzania, and Uganda.
According to UNCTAD’s World Investment Report 2023, FDIs were estimated to be $759 million (roughly Sh111.09 billion at current exchange rates) in 2022, compared to Ethiopia’s $3.67 billion (Sh537.14 billion), Uganda’s $1.53 billion (Sh223.93 billion), and Tanzania’s $1.11 billion (Sh162.46 billion).
Companies that construct at least 100 residential units annually, make cars locally, maintain a shipping company in Kenya, or operate a carbon market exchange are among those who receive a preferred 15 percent CIT rate.
“These preferential rates have contributed to the erosion of the tax base,” writes Prof. Ndung’u. The government will progressively phase out the favorable corporation tax rates to solve the issue, concentrating instead on other investment promotion initiatives during the strategy period.
