Banks opine – current tax policy not supportive of the industry
In this segment...
11.1: Survey participants feel excluded from the tax policy setting
11.2: Misalignment in accounting and tax definitions
11.3: Banks believe more could be done by the government to encourage regional expansion
11.1: Survey participants feel excluded from the tax policy setting
81.1% of the survey participants either disagreed or strongly disagreed with the statement that there is predictability in the process of making changes to the tax framework and inclusion of industry stakeholders in the process.
Participants noted that stakeholder opinion if at all solicited, is not considered in the process of making changes to the tax framework. This lack of engagement of the stakeholders is evident from numerous tax proposals over the last few years that have either been blocked by the courts or dropped all together. Examples include the housing levy which is currently facing a challenge in court and the Robinhood[1] tax which was contained in the Finance Bill 2018 but was not legislated as part of Finance Act 2018.
Some of the responses:
“There is limited consultation and inclusion on tax policy changes. Most of the changes are heard when the Finance Bill or Budget is presented at the National Assembly”.
“Surprises are introduced in the Finance Bill which necessitates lobbying or court processes for KBA members' position to be considered. This causes disruptions in the business environment and impacts investment.”
“The proposal to tax businesses whose profits exceed Kshs 500 mn in year at 35% is also punitive, and is likely to have serious implications to the inflows of proposed investments in the long term.”
“Based on experience in 2018 and 2019 Finance Bill/Act, the government is making [a] genuine attempt to include industry stakeholders in the process of amending/introducing new/existing laws”
One of the survey participants however noted attempts by KRA to include industry stakeholders in policy making.
11.2: Misalignment in accounting and tax definitions
83.8% of bank participants either disagreed or strongly disagreed with the statement that there is alignment between accounting and tax definitions which makes the tax framework easy to implement. In particular, the survey participants expressed reservations on the treatment of provisions for Non-Performing Loans (NPLs) and bad debts provisions.
Some of the comments from survey participants:
“This is largely lacking with huge negative impact on the banking industry. A case in point is the introduction of IFRS 9 and the huge impact is has on the tax numbers. An alignment between accounting and tax in this direction will be a huge relief to the industry.”
“IFRs guidelines and Tax guidelines are not aligned leading to adjustments when computing the tax. Key among them is on allowability of bad debts provisions, IFRS9 provisions and WHT on accrued interest.”
“There's limited alignment between accounting and tax definitions leading to disputes and higher compliance costs e.g. under IFRS 9 NPL provisioning and tax computations differ quite significantly.”
The lack of alignment between deductibility for bad debt provisions for tax purposes and IFRS 9 provisioning requirements was a recurring concern raised by survey participants which is indicative of the tax costs and complexity associated and with this misalignment.
11.3: Banks believe more could be done by the government to encourage regional expansion
55.5% of survey participants either strongly disagreed or disagreed with the statement that the tax framework supports expansion into the region. 45.5% of the participants agreed that the tax framework supports expansion into the region. Most notable among the issues raised with regard to regional expansion was the lack of double tax treaties among East African member states and the lack of tax incentives for entities setting up in the region.
Some of the survey comments from participants that thought that tax policy does not currently support regional expansion:
“There is no known tax incentives for entities intending to set up shop in the region or regional entities coming into the country.”
“The Income Tax Act, and its proposed amendments, do not give enough importance to this agenda and do not speak to it. Harmonising various laws and enabling further cross border trade would greatly assist in increased business opportunities that can be exploited by businesses.”
“We haven't observed an initiative to harmonise the tax laws across East Africa. There are still challenges in taking advantage of the advantage of the East African market trade agreements.”
“The Kenyan tax framework does not support regional expansion. Each of the COMESA member states have their own tax framework.”
Some participants indicated that there were some identifiable efforts being made by government which were geared towards facilitating regional expansion. One of the participants stated:
“But for a few hitches, Kenya Tax Framework support regional expansion. The issue of PIN for all customer[s] opening an account in Kenya was really has a negative impact in terms of facilitating regional integration. With the proposed PIN exemption in the Finance Act for specific cases, I see the government trying to remove this bottleneck. Kenya taxes and rates are also not significantly different to those charged by countries in the Region. In some instances like VAT, Kenya has the lowest rate. Also, the position of Kenya on the East Africa Tax Treaty is [a] huge step toward supporting regional expansion”