PwC Kenya in partnership with the Kenya Bankers Association (KBA) has released a report on the Kenya banking sector’s total tax contribution.
The first of its kind in Kenya, the report outlines the tax contribution of the banking sector in forms of taxes borne by the banks such as corporation tax, irrecoverable VAT, Pay As You Earn ( PAYE), excise duty and withholding tax.
The report covers the 2017 and 2018 financial years and involved 38 banks and microfinance institutions which made a total tax contribution of Kshs. 108.1 billion and Kshs. 99 billion in 2017 and 2018 respectively. This demonstrated the critical contribution of the industry to the country’s revenue.
Titus Mukora, tax partner at PwC Kenya, said the purpose of the study was to quantify the tax contributions and draw connections between them and economic development such as the interest rate caps and the adoption of technology by banks.
“Our analysis segments tax contribution 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,” said Mr. Mukora.
According to the report, in the two years, banks contributed a total of Kshs. 207.2 billion in taxes. However, there was a decline in tax contribution from 2017 to 2018 attributable to reduction in taxes borne by banks, and in particular a reduction of the corporation tax paid. This was a result of low profits reported in 2017 relative to 2016.
“The reduction in 2017 profits corresponds with the full year of interest rate cap coupled with a prolonged electioneering period,” the report states.
The result was large corporate tax over-payments in 2017 were utilised 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.
The report shows that taxes collected grew by 10% from 2017 to 2018 (Ksh46.1 billion to Ksh50.7 billion). 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.
Further, it indicates that for every Kshs. 4 of corporation tax paid in Kenya, approximately Kshs. 1 was paid by the banking sector. This translates to 26% of the corporate taxes collected by the Kenya Revenue Authority (KRA).
Kenya Bankers Association (KBA) chief executive officer Dr. Habil Olaka while speaking during the launch said they were pleased that PwC has underscored their findings from an internal review. “KBA’s shared value report has understated the industry’s tax contribution, and PwC has facilitated in providing an even clearer picture in terms of how banks lead in the area of tax compliance and contribution to the national budget,” Dr. Olaka observed.
“Banks operate in a highly regulated environment and this has led to very high levels of transparency,” he further said adding that when transparency levels are elevated, inevitably the levels of tax compliance become very high and the relative and absolute quantum of tax paid to the government is enhanced. In 2018, the financial services sector’s contribution to the gross domestic product ( GDP) growth ranged from 0.1% to 0.2%. 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.