Corporation Tax

5.2: 26% of corporate taxes paid in Kenya are from the banking industry

In both 2017 and 2018, corporate tax represented the highest component of taxes borne by banks. This was 84.1% in 2017 and 79.6% in 2018.

Over the period 2017 and 2018, for every KES 4 of total corporation tax collected by the KRA from all taxpayers, approximately KES 1 was paid by the banking sector. The corporate tax paid by the 38 banks in this study represented 28% and 23% of total corporate taxes paid in Kenya in 2017 and 2018.

The decline in tax contribution is attributable to reduction in taxes borne by banks and in particular a reduction of corporation tax paid. This was a result of low profits reported in 2017 relative to 2016.

The reduction in 2017 profits corresponds with the first full year of the interest rate cap coupled with a prolonged electioneering period. The result was large corporate tax over-payments in 2017 which were utilized against 2018 corporate tax leading to a decline in corporate taxes paid in 2018.

The decline in taxes arising from declined profitability in 2017 is reflected in the reported year on year decline in the industry’s net income of -4.79% for the period 2016 to 2017. This is also reflected in the decline in growth of net assets in the sector in 2017 of 6.8% down from 11% growth in the previous year.[1]

In 2018, the financial services sector’s contribution to GDP growth ranged from 0.1% to 0.2%.[2] Having in mind that the sector is not a significant driver of GDP growth, the high corporate tax contribution is an indication of high levels of regulation and compliance in the industry.

The industry’s high contribution to corporate taxes is also as a result that unlike other industries like manufacturing that enjoy a raft of tax incentives, there are hardly any corporate tax incentives for banks. On the contrary, one of the industry’s core expenses, bad debt expense, has very strict requirements for deductibility which invariably leads to the high corporate taxes paid by the sector.

One of the industry’s core expenses, bad debt expense, has very strict requirements for deductibility which invariably leads to the high corporate taxes paid by the sector.