PwC says Kenya firms pay less tax than their African peers

Money Markets

 

Taxpayers queue to file their income tax returns in Nairobi on June 30. PHOTO | SALATON NJAU 

By CHARLES MWANIKI, cmwaniki@ke.nationmedia.com

In Summary

• A Kenyan company in total pays an average tax rate of 37.1 per cent, using a mean 202 hours to comply with its taxes while making 30 payments.
• Kenya retains a competitive tax position in Africa with the continental average for the total tax deductions standing at 46.9 per cent.
• Companies take 313 hours to prepare, file and pay their tax obligations on average in Africa.

Kenya is emerging as a tax-friendlier destination with businesses paying nearly 10 percentage points less tax than the continental average and spending less time filing returns thanks to a
technology-based tax system, according to a new PricewaterhouseCoopers report.

The PwC data capturing tax payment trends for the one year to December 2014 shows a Kenyan company in total pays an average tax rate of 37.1 per cent, using a mean 202 hours to comply with its taxes while making 30 payments.

According to PwC, Kenya retains a competitive tax position in Africa with the continental average for the total tax deductions standing at 46.9 per cent. Companies take 313 hours to prepare, file and pay their tax obligations on average in Africa.

“Electronic filing continues to have a significant impact in easing the burden of tax administration. Economies which have invested in online filing and payment infrastructure are reaping a digital dividend from these systems.

“Going forward we expect to see a more efficient and effective tax collection process as Kenya continues to harness technology in the tax practice” said PwC Kenya tax leader Steve Okello.

The total tax rate measures the overall burden borne by a company as a percentage of its commercial profit, which includes corporate tax, labour taxes and other taxes such as municipal levies and fees.

Kenya can leverage on its relatively favourable tax regime to attract investment, mitigating against the higher cost of power and transport that have led to manufacturing companies relocating to other countries in the region.

The report titled Paying Taxes 2016 is based on company tax data for the one year to December 2014, and therefore does not yet capture the full impact of the electronic filling of tax returns through the I-Tax system that has simplified the process, according to PwC.

“The focus has moved from reducing tax rates for companies to embracing technology and relieving their compliance burden….low-income economies (however) continue to face the biggest reform challenges,” says the PwC report.

The Kenya Revenue Authority (KRA) has pegged its hopes on the electronic tax system to capture a wider tax base — especially SMEs — which would increase tax revenues and reduce pressure on the taxman to increase taxes for both companies and individuals.

In October, KRA chairman Marsden Madoka said higher compliance by SMEs would raise collections to a minimum of Sh2.5 trillion in the next three years from Sh1.08 trillion in the last fiscal year that ended on June 30.

READ: Taxman targets SMEs in push to raise revenue collection

The KRA has a tax target of Sh1.36 trillion this financial year, although it missed the first quarter (July to September) target of Sh328 billion by Sh28 billion.

The taxman attributed the revenue shortfall to lower corporate taxes as companies posted lower earnings due to higher financing costs and a tough business environment as interest rates rose in the quarter.

In East Africa, Kenya is, however, ranked behind Uganda and Rwanda in terms of tax rate, with the companies in the two countries paying at 36.5 and 33 per cent respectively, while Tanzania’s rate is 43.9 per cent.