Statistics obtained from the Kenya Revenue Authority (KRA) reveal a troubling economic landscape for Kenyan businesses, as an alarming 85 per cent of companies operating in the country failed to pay taxes on their earnings during the previous financial year, signalling the harsh impact of economic challenges on their financial health.

The findings underscore the immense difficulties faced by corporate managers, who grappled with declining sales in an environment characterized by high inflation, which eroded profits and weakened purchasing power.

In the fiscal year ending June 2023, only 129,313 out of the 862,336 firms registered for corporate income tax (CIT) met their tax obligations, translating into a compliance rate of a mere 15 per cent.

This rate was slightly lower than the previous year, where 123,030 out of 759,568 firms paid their taxes on profit.

Risper Simiyu, the Commissioner for Domestic Taxes at the Kenya Revenue Authority (KRA), explained the criteria for being considered a compliant taxpayer.

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"A compliant taxpayer is a company that registers for the relevant tax obligations if/when they meet the registration requirement, files all returns on time, makes payments of taxes due on time, and reports accurate information regarding their business transactions," explained KRA’s commissioner for domestic taxes, Rispah Simiyu.

Resident companies in Kenya are required to pay 30 per cent on their annual profit, paid through quarterly instalments, while foreign firms face a 37.5 per cent tax rate.

The low compliance levels may suggest that many companies are reporting losses as a tax avoidance strategy, a gap that the Treasury has been attempting to address since 2020 by introducing a minimum tax on corporate sales.

The data also highlights a surge in new company registrations, with 102,768 new firms registering for corporate income tax obligations in the reviewed year, compared to 95,973 the previous year.

However, only 55.77 per cent of the registered firms filed their annual returns during this period, indicating their active status and their intent to avoid a five per cent penalty for non-compliance.

This translates into a mere 26.89 per cent of the companies that filed returns actually paying taxes on their earnings.

The vast discrepancies between companies filing returns and those paying taxes have proven challenging for the KRA to decipher.

In response to the issue of low compliance, the William Ruto administration has proposed a reduction in corporate income tax from 30 per cent to 25 per cent, starting from July next year.

The Treasury argues that this reduction will encourage compliance and attract foreign investors.

Treasury Cabinet Secretary Njuguna Ndung’u believes that lower corporate income tax rates can discourage tax planning and improve compliance, thereby enhancing Kenya's economic stability.

“Studies have shown that high rates of corporate income tax discourage foreign direct investments and encourage investors to lobby for lower rates or tax exemptions,” Prof Ndung’u wrote in the draft revenue strategy.

“Further, high rates contribute to increased tax planning and reduced compliance by taxpayers, which in the case of Kenya, has led to a decline in income tax as a share of GDP.”

The Treasury is also working to reintroduce a minimum tax requirement that ensures all companies contribute a certain portion of their annual sales revenue as corporate taxes, regardless of whether they are profitable or incurring losses.

These efforts align with the government's recognition of the need for companies to pay a minimum tax to support the country's fiscal objectives.

The Treasury aims to prevent entities from preparing their accounts to depict perpetual loss positions as a means of evading taxation.

 “The Government recognises the need for an entity to pay a minimum tax to facilitate the government to achieve its objectives. This is due to the fact that some entities prepare their accounts to depict perpetual loss position, thus evading taxation,” Ndung'u proposed.

Kenyan businesses, weighed down by rising operating expenses due to factors such as soaring fuel prices, high electricity bills, and costly raw materials, are navigating a challenging economic environment.

As firms grapple with these cost pressures, the question of tax compliance remains central in the country's broader economic stability and growth prospects.