The primary goal of any revenue authority is collect the taxes and duties payable in accordance with the law and to do this in such manner that will sustain confidence in the tax system and its administration. The actions of taxpayers — whether due to ignorance, carelessness, recklessness, or deliberate evasion — as well as weaknesses in a tax administration mean that instances of failure to comply with the law are inevitable. Therefore, tax administration should have in place strategies and structures to ensure that non-compliance with tax law is kept to a minimum.
Kenya’s tax legislation is rather punishing when it comes to issues of non-compliance. For instance, non-payment or underpayment of instalment taxes gets you a penalty of 20%. If the penalty and the principal are not settled by the fourth month after the company’s financial year has ended, an extra penalty of 2% accrues each other month on the amount that was due for submission.
So just how does a company remain compliant with limited funds for investments? According to the article Cash Flow Versus Compliance by Ilyas Khan, a Tax Senior and Anne Onsongo a Tax Consultant, both from Deloitte, there is no one way to answer that question since every company’s situation is unique. A company will simply have to practice tax planning into its strategy, because failure to comply will obviously lead to huge cost complications.
Tax Planning
Tax planning allows for companies to take good advantage of the funds available in the short term. The article says that one could, for instance, invest in securities such as infrastructure bonds that are exempt from corporate tax. These bonds have a positive effect of reducing the corporate tax since their interest is not subject to tax. Again, no other tax such as withholding tax will be applied on this form of income. A company could as well opt to invest in securities to obtain capital gains, that is, purchase the sale of securities to obtain capital gains, because capital gains in Kenya are presently not taxable.
The article goes on to state:
“a company can also reduce its tax burden by investing in shares and thus receiving dividend income. If company X for instance purchases shares of another company Y, such that company X holds at least 12.5% of the voting power of company Y, then the dividend income that accrues to company X is exempt from tax and thus goes to reduce the taxable income by the dividend so accruing.”
While planning for investments, companies should always consider tax credits that can accrue. The Finance Act 2009, introduced investment deductions at the rate of 150% for investments above KES 200 million on construction of buildings or purchase of machinery outside Nairobi or Mombasa and Kisumu. Previously the maximum deduction was 100%.
Still, if a company offers any donations or sponsorship, then it should be to registered charitable organisations so as to obtain exemptions because with effect from January 2007, donations made to charitable institutions registered by the authorities and whose income tax is exempt were deductible.
However, Kenya’s tax structure is complex with because of numerous systems of waivers, exemptions, zero ratings, tax refunds and debt write-offs with constant changes and amendments notwithstanding. Then again that’s why tax advisers exist.