NAIROBI, KENYA: A dip in corporate earnings this year has placed a huge hurdle in the way of Kenya Revenue Authority’s projections on tax collections, and dimmed hopes it will attain its targets.

Already, more than 75 per cent of listed companies have announced that they expect a significant slump in their 2015 earnings, citing a difficult operating environment caused by high input and finance costs.

Income taxes from corporations and salaried workers form the biggest component of Government revenues, making up more than 60 per cent of collections.

The anticipated drop in earnings is expected to compound the massive tax evasion by some corporations that have invented complex ways to reduce or even dodge taxes altogether.

Speaking to Business Beat, Treasury Cabinet Secretary Henry Rotich expressed his fears that Government earnings could be lower if there are no profits to be taxed.

“Obviously, lower profits would translate to reduced corporate tax collections,” he said.

Corporate taxes are charged at a flat rate of 30 per cent of declared profits, while Pay As You Earn (PAYE) is levied on a graduated scale of between 10 and 30 per cent, depending on an individual’s income.

Total PAYE collections versus corporations’ taxes are roughly in the 60:40 ratio, according to Mr Rotich.

KRA collected about Sh630 billion in income tax out of total collections of just over Sh1 trillion in the 2014-15 financial year.

This could, however, come in lower this year going by the number of employees who have been laid off across several economic sectors as companies look to run leaner operations in a tough business environment.

Profitability drop

Collectively, corporation taxes total about Sh250 billion, but could be the most important revenue source for KRA if compliance was at acceptable levels. Still, even with low compliance, Sh250 billion is a significant revenue stream, but is now under strain.

Kurwitu Ventures, an investment firm, which is also the newest entrant to the Nairobi Securities Exchange (NSE), became the latest firm to file a profit warning notice last week, joining a long list of companies that include Uchumi Supermarkets, Express Kenya, East Africa Cables, Mumias Sugar, Car & General, Home Afrika, Crown Paints, Pan African Insurance and TPS Serena.

Several other firms have reported significant drops in profitability, including insurance firms Britam and UAP. Insurance and investment firms are especially exposed to the sharp devaluation of investment assets, including bonds and shares of other listed firms.

“We will get a clearer picture of how collection of corporation taxes will have changed in April next year,” the CS said.

The performance of listed firms is generally an indicator of the financial health of an entire economy, and of other companies that are not listed and, therefore, not obligated to publicly declare their operating results.

Companies work with an April deadline to file their annual tax returns after reconciling their projected earnings and actual profits. Payments are, however, paid quarterly and tied to firms’ own estimated profits.

Often, KRA officials carry out audits to determine the accuracy of filed numbers amid extraordinary measures employed by some firms to depress earnings, and effectively, payable taxes.

While tax evasion is more complex and often difficult to unravel due to limited capacity at the revenue collection agency, reporting of lower-than-anticipated corporation earnings presents a major scare.

This is particularly because Kenya is running its most ambitious Budget yet at Sh2.1 trillion, with projected collections estimated at about Sh1.3 trillion for the year.

Huge resources have been directed towards huge infrastructure projects, such as the on-going construction of the Standard Gauge Railway and mega power initiatives.

New and unplanned items, such as the disputed pay hike for teachers, have also arisen, threatening to upset the budget balance. Indications are that the State could be forced to settle the wage dispute with tutors, considering the major political and social implications their ongoing strike could have. Other trade unions have also threatened to call for a nationwide strike for workers in the public sector.

Proving just how cash-strapped the Government is, National Treasury Permanent Secretary Kamau Thugge has said there is no possible way the enhanced wages can be paid as there is no money for this.

“In view of the foregoing, the National Treasury is unable to provide the additional funding required to implement the salary award,” Mr Thugge said last week, warning that the options left for the State should the higher wages to be granted would be introducing new taxes or borrowing.

But at the Government’s current borrowing rate, every Kenyan child born next year will have to shoulder a debt of Sh71,000, up from Sh62,000. The International Monetary Fund and World Bank have already cautioned the country on its debt load, saying it could destablise the economy’s growth path if it keeps growing.

Major headaches

Therefore, with borrowing limits already at dangerous levels, corporation taxes almost certain to tumble and key sectors of the economy struggling, times could get more difficult for households, which may be forced to bear the weight of the Government’s revenue needs.

Yet, consumption taxes are already too high for the average household, and there is little headroom for more increments.

Rotich said his ministry’s sights will now be trained on going after corporations and ensuring they are paying their fair share of taxes. However, this would still not solve the problem at hand, as the planned measures are both ambitious and largely long-term.

Firms involved in cross-border transactions, the CS said, are a source of major headaches for both his ministry and KRA.

“Profit shifting through misrepresented invoicing means Kenya is unable to tax most of the profits generated here,” said Rotich, referring to the tax avoidance tactics employed by some multinational corporations.

Another avenue that firms have used to beat taxes is underdeclaration of the value of exports at the point of exit.

Examinations of past records reveal that Kenya’s exports to two key markets — the US and the European Union (EU) — between 2009 and 2014 were under-reported by about Sh200 billion, meaning KRA was denied the taxes payable on the products.

The difference represents the value of the products at the point of exit from Kenya and at the port of entry at their destinations.

In 2012, for instance, Kenyan exports to the EU and US were estimated to be worth Sh108.4 billion and Sh26 billion, respectively.

The values booked at the receiving ports, however, were Sh139.4 billion and Sh33 billion, respectively.

This underdeclaration and misinvoicing have caught the interest of the taxman.

In the last financial year alone, intensified audits had revealed over Sh25 billion in lost revenue from multinational companies, according to the KRA.

The agency estimates that Sh100 billion worth of dodged corporate tax was being siphoned out the country by these firms every year. To tackle this problem, a new tool developed by the African Union will be piloted by the tax agency within the current financial year to detect tax cheating.

Thabo Mbeki, the former South African president and chairman of the High Level Panel of Illicit Finance Flows for Africa, is expected in the country this week to launch the piloting phase for the transfer pricing detection tool.

His panel has conducted various surveys and now reports that as much as $50 billion (Sh5.3 trillion) is fraudulently siphoned out of Africa through avenues like transfer pricing, proceeds of criminal activity, corruption, and poaching of endangered wildlife like rhinos and elephants.

Rotich concedes that detecting tax cheating and the subsequent process of collecting the lost revenues will not happen immediately, but the benefits will definitely accrue in the future.

mmichira@standardmedia.co.ke