KENYA: Confused about Your Corporate Tax Liabilities?
Wednesday, 11 January 2012
You’re probably not the only one. Ramah Nyang had a chat with the tax experts at Deloitte’s Nairobi office – and they warn that if you underpay in the current confusion over which tax regime actually applies, you’re unlikely to get your money back.

The side-effects from the emotional spat we saw at the end of 2011 over the Finance Bill continue to be felt. Deloitte Kenya released an analysis of the position on tax changes introduced in June 2011 by the Finance Minister and their legality. The note focused on two questions:

  • Are the tax changes proposed by the Finance Minister still applicable beyond December2011?
  • What happens to the excess taxes paid between July and December 2011?

The Finance Bill, as you would expect, is the entrée in this little piece – containing the changes to income tax, excise duty and so on, which the Treasury seeks to put in place for any given financial year.

However, Chapter 12 of the constitution provides for safeguards in case the Finance Bill is not passed, and similar ‘safety valves’ were also put in place in Cap 415 of the Laws of Kenya, the Provisional Collection of Duties and Taxes Act.

According to Deloitte, this law gives Finance Minister Uhuru Kenyatta legal authority to put his tax changes into effect if the Finance Bill is not passed by parliament over a six-month window (see Section 8.1 of Kenyatta’s budget speech).

Should this window end with the Finance Bill not signed into law, we automatically revert to the prior tax regime. The only way Uhuru Kenyatta can then have his proposed tax measures back in place is if

  1. Parliament approves them via provisions in Cap 415, and
  2. Parliament approves the Finance Bill of 2011.
Deloitte argue that, with Cap 415 in mind, the higher taxes levied between July and December are legal. But since the six-month window lapsed on 31 December 2011, the tax regime applicable from January onwards is the previous one, i.e. the one that was in force before June 2011.

However, let’s assume that parliament reconvenes in February. Treasury and parliament kiss and make up, and the Finance Bill is finally passed. In March, KRA knock on your door and tell you that you owe back taxes for the month of January – what then?

You’d have legal ground to tell them to back off, according to Deloitte.

But, let’s say, as a hedge, or for whatever other reason, you paid taxes in January as per the rates outlined by the Finance Minister in June 2011, even though they had no legal basis. Could you get a refund? According to Maurice Wangusi from Deloitte, you might be legally right, but you’re still unlikely to succeed:

“In practice, getting money out of KRA as a refund is impossible. The delays are so many…and lots of other methods are employed to make sure taxpayers don’t get that money or don’t get it as speedily as they should.”

And what stalling tactics would they then employ? It starts with an audit. According to Maurice, this is how it works:

When KRA “come in to look at your books, they’re obviously looking at extra ways of raising additional funds from you. What happens in practice is, in very many cases, they end up coming up with an extra bill which is then knocked off against what you’re supposed to demand …”

And even if they admit that you would legally be entitled to it, practical reasons win out: “Even where you are legally entitled to it, you will be told there is no money to refund”

If you thought you were getting a raw deal on that front, hang on, it gets worse.

On 14 June 2011, parliament approved the withdrawal of KES368bn from the Consolidated Fund via a motion, not an Act of Parliament, as stipulated in the constitution (check Chapter 12). The legality of this is disputed in court, and a ruling’s due around 19 January 2011.

Take the following data into account:

Government spending by end-September 2011 was KES192bn. At the same time, we were KES400m or so away from maxing out the overdraft facility that government has with the central bank, which is roughly KES25bn. That gives Uhuru Kenyatta about KES176bn to spend between October and December 2011.

Whatever spending he is making beyond this ceiling is borrowed from public via short-term debt. If this hypothesis is to be proven, the data for it will be in T-Bill yield and auction volume data.

Comparing actual debt load to the planned domestic borrowing for FY 2011/12 should have some interesting revelations. With yields on 91, 182 and 364 day paper rising above 20% last week, taxpayers may be hung out to dry in order to finance government operations.

And that revenue target of KES713bn for FY 2011/12 looks increasingly unlikely to be met, between inflation at an average of 14% for 2012, the KES in the mid-nineties, and delays in passing the VAT Bill of 2011.

Can we realistically expect Uhuru Kenyatta to magically achieve a 17% increase in ordinary tax revenue? I wouldn’t be surprised if the ordinary revenue target is revised downwards between April and June 2012.

In a firm, if cash is tight, spending goes down, and the focus is on getting as much bang for the buck as possible. Not so in government. It’s an election year, and if past years are anything to go by (remember 2007/08?), spending will rise, not drop. It’s just not a good time for fiscal austerity – and the quality of public spending isn’t good at the best of times, and will deteriorate in an election year when everyone is hunting for money to finance their campaigns and dish out favours to voters.

Also, if treasury ratchets up spending while CBK continues efforts to tighten monetary policy, then the two stewards of public finances will be working at cross purposes.

As @RenaldoDsouza put it on Twitter: “2012 [is] not a year for the faint hearted.”

You can say that again, mate.

 About the Author

Business journalist Ramah Nyang is Anchor/Editor at KISS TV, and previously worked as an news anchor and producer for KTN.

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