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Companies that are notorious for abusing tax regulations, especially through transfer pricing, are set to be forced to pay up as the Treasury proposes new legislation.

In the Finance Bill 2020, the Treasury has proposed a one per cent minimum levy on revenues for companies that are currently not paying taxes pegged on profitability.

The tax is targeted at businesses whose tax liability is lower than one per cent of their gross turnover.

Most of the targeted companies have over the years used clever mechanisms, such as trading with their sister companies registered in tax havens, to dodge paying taxes locally.

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The Bill, if passed in its current form, is expected to bring into the tax bracket these firms that have dodged taxes through the abuse of transfer pricing and other tax guidelines.

The companies use legal mechanisms to avoid paying taxes or substantially reduce their local tax burden.

There have been instances in the past when local arms of multinationals registered in tax havens have sold products to their sister companies at ridiculously low prices.

The local subsidiaries have then reported losses, therefore avoiding taxes pegged on profitability.

The Treasury’s proposals for a minimum tax of one per cent on revenues, as opposed to profit, is expected to make the companies pay taxes on sales rather than profit.

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The tax, according to the Finance Bill, “shall be paid in instalments which shall be due on the twentieth day of each period ending on the fourth, sixth, ninth and twelfth month of the year of income.”

In an analysis of the Finance Bill, KPMG noted that: “The minimum tax is an attempt to tax businesses that are in a loss-making position and borrows from provisions in other countries where businesses that make losses are subject to a minimum tax.”

“However, in those countries, the businesses must have been in a loss-making position for a number of years and the tax rate is much lower.”

Minimum tax

This year, many firms expect to be affected by the slowdown in the economy occasioned by the coronavirus outbreak.

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Anjarwalla & Khanna, a Nairobi-based law firm, noted that the law could become effective at a time when many firms will be reporting declining profits.

Instead of being cushioned, they will be required to pay a minimum tax.

“As currently drafted, the proposed amendment is expected to have far-reaching effects, especially on businesses which are negatively affected by the Covid-19 pandemic and are currently in financial distress.

They are likely to be required to pay one per cent of any income earned as a minimum tax,” said the law firm.

“Entities with high revenues but low margins will also be adversely affected as they may be required to pay tax, while they would have ordinarily either paid a lower tax or not been in a tax-paying position from a corporate tax perspective.” 

The law firm continued: “Further, entities in tax losses arising out of reliance on various capital allowances will also be required to pay the minimum tax, eroding any benefits realised from the capital allowances.”  

Minimum tax Finance Bill Tax evasion KRA Tax Treasury
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