The Finance Act, 2020, introduced a minimum tax of 1% on gross turnover of companies filing tax losses1 through a new Section 12D of the Income Tax Act. The High Court declared the tax unconstitutional on 20 September 2021; on 2 December 2022, the Court of Appeal upheld that decision. The Kenya Revenue Authority (KRA) has since appealed to the Supreme Court, where the case is still pending.
Both the appellants’ (KRA) and the respondents’ arguments had merit. KRA defended the minimum tax as a means to increase revenues. The minimum tax would achieve this by widening KRA’s net to include corporations that regularly file tax losses even while making real profits. If implemented, this move would increase government revenue from corporate income tax, which, as of 2022, accounted for 11% of Kenya’s tax revenues2 – and Kenya’s tax revenues were themselves below national targets over the past decade.3 To put this into perspective, personal income tax accounted for 26%, while VAT accounted for 23%. Social security contributions accounted for a paltry 6%.4 However, according to the respondents, the minimum tax would compel businesses which are making real losses to pay taxes on their capital. It was primarily for this glaring defect of the amendment to the Income Tax Act that both the High Court and the Court of Appeal sided with the respondents, citing Article 201(b)(i) of the Constitution of Kenya.5KRA’s argument has merit, and not only because of the increase in government revenue. Not only do corporations make use of public services, but the land that they own also derives part of its value from the work done by those situated around that land. 6 This is one reason why the prices of land in an area and the population of that area tend to increase in parallel. Corporations owe a share of the value that they generate to the community around them; this moral duty is ordinarily fulfilled by paying taxes, among other things. Only if land is held under the assumption that landowners have the moral right, if not the legal right, to the absolute use and abuse of their property (a distant echo of the ius utendi et abutendi granted by the Roman Republic to her senators over conquered lands)7 does the avoidance of the moral duty to pay taxes become widely accepted.
The use of the corporation as a vehicle for the avoidance of taxes is certainly not without precedent. In the late 19th century, American legislators introduced the corporate income tax (CIT) into their jurisdiction because property held by companies was beyond the reach of the taxman. The CIT served as a sword against shareholder evasion – imperfect, but reasonably effective.8 In the 20th century, companies began the practice of retaining earnings as opposed to paying dividends to shareholders. The CIT prevented companies from indefinitely deferring dividends by subjecting corporate income to current taxation. However, it also protected corporations from higher individual tax rates by subjecting them to a separate tax rate structure. The CIT had transformed from a sword against shareholders to a shield for corporate earnings.9 Other practices emerged as well, including the use of corporate tax shelter schemes, transfer pricing, and the use of pass-through entities such as partnerships to reduce taxes due.10
Profit maximization as a motive bodes ill for many. Employees’ wages, product quality, fair prices, and just taxes – all of these are casualties incurred to an extent that parallels the leeway which landholders are granted the right to absolute use and abuse of their property.11 Even though the KRA’s argument fails to address the gaping hole that the respondents pointed out in the Court of Appeal, the concern is not one that should remain unaddressed. Indeed, it may warrant reforms to the current corporate tax regime, albeit reforms that are more nuanced than the undifferentiated tax on gross turnover that Section 12D would have introduced to the Income Tax Act.
The Court of Appeal urged the KRA to undertake the administrative reforms necessary to increase its capacity to detect and prevent tax evasion. According to the Court, imposing the minimum tax was a way for KRA to abdicate its duty to investigate deviant behavior.
Aside from this, however, there are other possibilities, especially considering the urgent need to increase revenue and the present high cost of living.12 A number of these possibilities could be grouped together under the heading, “broadening the corporate tax base”. One such possibility is requiring book and tax conformity in the calculation of income – this would significantly reduce the divergence between “tax losses” and “real losses” in the calculation of income. When taken together with the proposed minimum tax, this measure could satisfy the concerns raised about compelling companies making real losses to pay taxes from their capital. Another such possibility would make further clarifications regarding what expenses may be deductible when calculating income for the purposes of the minimum tax.
By Adrian Nyiha, LLB Hons, Strathmore University and a legal assistant at Nyiha, Mukoma & Co. Advocates.
- See the interpretation of this provision by the Court of Appeal in Kenya Revenue Authority vs Stanley Waweru and 3 others; Institute of Certified Public Accountants and 2 others (Interested Parties)  eKLR, para. 36.
- Organisation for Economic Co-operation and Development (OECD) (2022). Revenue statistics in Africa: Key findings for Kenya. Accessed at https://www.oecd.org/tax/tax-policy/revenue-statistics-africa-kenya.pdf on March 9, 2023.
- Republic of Kenya (June 2022). National Tax Policy (Draft), p. 18. Accessed at https://www.treasury.go.ke/wp-content/uploads/2022/07/DRAFT-NATIONAL-TAX-POLICY-16.06.-2022-.pdf on March 9, 2023.
- Organisation for Economic Co-operation and Development (OECD) (2022). Revenue statistics in Africa: Key findings for Kenya.
- Kenya Revenue Authority vs Stanley Waweru and 3 others; Institute of Certified Public Accountants and 2 others (Interested Parties)  eKLR, para. 77.
- Borruso S., (2019). “El Cesar y lo que es del Cesar” [Caesar and what belongs to Caesar], 577-578 Verbo, pp. 619-631, at 630.
- ibid. at 627.
- Bank S. A., (2010). From Sword to Shield. The Transformation of the Corporate Income Tax, 1861 to Present. New York: Oxford University Press, p. xxiv.
- ibid., pp. xxiv-xxv.
- ibid., p. xxv.
- Jones E. M., (2014). Barren Metal: A History of Capitalism as the Conflict Between Labor and Usury. South Bend, Indiana: Fidelity Press, pp. 21-22.
- World Bank (December 2022). Kenya Economic Update. Continued Rebound, but Storms Cloud the Horizon: Policies to Accelerate the Productive Economy for Inclusive Growth. Accessed at https://documents.worldbank.org/en/publication/documents-reports/documentdetail/099400212072220291/p1797690ba796602b092ba0149f48220ed7 on March 9, 2023.