Executive Summary
In this segment...
2.1: Purpose and Scope of the study
2.2: 1.1. In the two years, banks contributed 207.2bn in taxes
2.3: 1 in every 4 KES of corporate taxes in Kenya is paid by banks
2.4: Government is the largest beneficiary of value distributed
2.5: 43.5% of banks’ operating profits was spent in taxes
2.6: 1.1. Banking sector’s PAYE per capita is five times higher than the PAYE per capita in the country
2.7: 42% increase in excise taxes!
2.1. Purpose and Scope of the study
The purpose of the study is to quantify the tax contribution made by the Kenyan banking sector. The study draws connections between taxes and economic developments such as the interest rate caps and the adoption of technology by banks. Our analysis uses the Total Tax Contribution framework, where tax contribution is segmented into taxes borne and taxes collected. Taxes borne are those which are direct costs to a business such as corporation tax and irrecoverable VAT. Taxes collected are those that a business collects from taxpayers on behalf of the government such as PAYE and withholding tax. This study covers the 2017 and 2018 calendar years.
38 banks and microfinance institutions participated in this study. Using net assets as a market share indicator, this represents approximately 95.1% of the market share. The key findings of the report are outlined below.
2.2. In the two years, banks contributed 207.2bn in taxes
The Total Tax Contribution of the study participants over the two years of the study (2018 and 2017) was KES 207.2bn. The breakdown in terms of taxes borne and taxes collected in each of the years is shown below.
The decline in tax contribution from 2017 to 2018 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 were utilized against 2018 corporate tax due 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 of 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 an 11% growth in the previous year.[1]
Taxes collected grew by 10%from 2017 to 2018 (46.1bn to 50.7bn). This growth was largely due to a 40% increase in excise duty which resulted from an increase in excisable fees and commissions charged by banks to customers as well as an increase in the excise duty rate charged by the sector from 10% to 20% within 2018.
2.3. 1 in every 4 KES of corporate taxes in Kenya is paid by banks
The study revealed that, for every KES 4 of corporation tax paid in Kenya, approximately KES 1 was paid by the banking sector. This translates to 26% of the corporate taxes collected by KRA in Kenya. In 2018, the financial services sector’s contribution to GDP growth ranged from 0.1% to 0.2%.[1] Having in mind that the sector is not a significant driver of GDP growth, the high corporate tax contribution is also an indication of high levels of regulation and compliance in the industry.
The industry’s high contribution to corporate taxes can also be attributed to the fact that unlike other industries such as 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
The industry’s high contribution to corporate taxes can also be attributed to the fact that unlike other industries such as 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.
2.4. Government is the largest beneficiary of value distributed
“Value distributed” consists of the sum of taxes paid, employee salaries paid[1] and dividends paid to shareholders. These categories of persons – government, employees and shareholders – represent the key stakeholders in any corporate organisation.
For both 2017 and 2018, at 52.2% and 49.8% respectively, the government was the greatest beneficiary of the value distributed by banks (in the form of taxes) followed by employees (in the form of employee emoluments) and lastly, shareholders (in the form of dividends).
The value distributed in 2017 and 2018 is depicted below.
2.5. 43.5% of banks’ operating profits was spent in taxes
The ratio of taxes borne by banks to profits was 43.5% for the 2017 and 2018 years. Taxes borne include categories of taxes that are not necessarily computed based on profitability such as irrecoverable VAT and withholding tax borne. These taxes are incurred by banks when the banks incur expenditure and not necessarily when they make profits. Reliance on consumption taxes as a tax collection avenue may not be sustainable in the long run as banks will inevitably reduce expenditure, where such taxes are increased.
Irrecoverable VAT, which is the VAT that a taxpayer incurs but does not offset against output VAT, is primarily driven by the VAT exempt status of the industry’s income categories. The ratio of irrecoverable VAT to total taxes borne increased from 10.5% in 2017 to 14.1% in 2018.
One of the activities that gives rise to significant irrecoverable VAT is investment in technology. In this way, the tax policy is not supportive of the digitalisation of the sector.
2.6. Banking sector’s PAYE per capita is five times higher than the PAYE per capita in the country
Over the period, the banking sector’s PAYE per capita was KES 660k. This is over five times higher than the country’s PAYE per capita. The high PAYE per capita is reflective of the high compliance levels by banks as a result of being in a highly regulated industry. This is also indicative of relatively high value jobs and higher wages in the sector compared to other sectors of the economy.
In 2017, banks contributed 6% of all PAYE receipts collected in Kenya. This compares to 5% of PAYE collected in 2018.
2.7. 42% increase in excise taxes!
There was a 42% increase in excise taxes collected by banks in 2018 as compared to the prior year. This corresponds to the rising prominence of excisable non-funded income. In 2018, there was a 2% rise in fees and commissions charged by the banking industry[1]. In addition, in 2018, the excise duty rate for non-funded income increased from 10% to 20%. This also contributed to the high growth of excise duty collected by banks.
Banks contributed 6% of all PAYE receipts collected in Kenya