By Thura Nira

On January 1, 2021, Kenya’s tax landscapes significantly changes. The minimum tax, introduced through the Finance Act 2020, will come into force. This tax will be charged at the rate of one per cent of the gross business turnover, a huge departure from the existing tax practice.

Declare me a zero!

Kenya tax administration is based on a self-assessment tax. A tax payer declares their income from their business activities, and consequently computes and submits payable tax.

This model is anchored on trust with tax authority moving on presumption that the declarations of income by taxpayers are a reflection of the income generated. The tax authority only intervenes where there are doubts or suspicions as to the income revealed, where they may issue additional assessments.

Factory for losses!

In a capitalistic environment where making savings is cherished, self assessment on certain business incomes, such as corporation incomes, has been challenging. In view that the business incomes are based on the profit margin, a loss making entity would not pay any taxes.

But often losses are a creature of accounting, and not trading inadequacies. The tax rules creates an incentives for declaring losses to avoiding payment of taxes. This has led to certain companies forever being in loss positions. A debacle arises. Where an enterprise perpetually post losses. Yet, it remains a going concern. This is deceitful!

The introduction of the minimum tax cures this ping pongs curb and nails tax cheats operating under the guise of business losses. A minimum tax is charged on turnover, whether you will make loses or profits, is immaterial.

Mark my dates!

The rate of Kenya’s minimum tax is one per cent of the turnover. This is relatively fair. Certain countries, such as Korea, have a rate as high as 12%. The minimum tax will be payable by the 20th day after every quarter of the accounting year, that is, after the fourth, sixth, ninth and twelfth month. This is the same modality used for the installment tax for corporation.

Administratively, the minimum tax will be charged alongside installment tax. However, the minimum tax will only be paid if it is more than the installment tax, to prevent instances of double taxation. That is, only the higher of the two taxes will be payable.

The writer is a senior consultant with the Journal.