Minimum Tax is arguably one of the most significant operational reforms to the Kenyan tax system in years. Kenya amended the Income Tax Act, Chapter 470, Laws of Kenya (the ITA) through the Finance Act, 2020 to introduce Minimum Tax. The tax will be payable at the rate of 1% of the gross turnover effective 1 January 2021.
Most developing countries have been walking a tightrope in recent years as they try to raise enough domestic revenue to finance their development and growth plans. The goal of the Minimum Tax regime was for every year of taxation, all taxpayers to pay at least 1% of their gross turnover in tax. Only taxpayers whose instalment taxes are less than the Minimum Tax would be subject to the tax.
The aim of major economies is to deter multinational corporations from moving income and tax revenues to low-tax countries regardless of where their sales are made. Intangible income from drug patents, software, and intellectual property royalties is increasingly migrating to these jurisdictions, enabling businesses to avoid paying higher taxes in their source or resident countries.
“We are working with G20 nations to agree to a global minimum corporate tax rate that can stop the race to the bottom. Together we can use a global minimum tax to make sure the global economy thrives based on a more level playing field in the taxation of multinational corporations, and spurs innovation, growth, and prosperity”. These were remarks made by United States Secretary of the Treasury, Janet L. Yellen on April 5th, 2021.
The tax will be payable in instalments by the 20th day of the 4th,6th, 9th, and 12th month during a year of income. Effectively, this makes 20th April 2021, the first due date for Companies with December year end.
The minimum tax provisions have exempted the following persons and types of income from the tax:
- Persons undertaking mining or upstream oil and gas activities.
- Persons engaged in a business whose retail price is controlled by the Government.
- Persons engaged in insurance business.
- Employment income.
- Residential rental income.
- Persons paying turnover tax.
- Capital gains.
- Income of an airline company in which the Government owns at least 45 percent of its shares.
- Any other Exempt income under the ITA.
The Minimum Tax provisions, as currently drafted, are expected to have far-reaching consequences, particularly for businesses that have been negatively impacted by the COVID-19 pandemic and are currently in financial distress, as they are likely to be required to pay 1% of all income earned as Minimum Tax. Entities with high revenues but low margins will be adversely affected as they may be required to pay tax when they would normally have paid a lower tax or not been in a tax-paying position from a corporate tax standpoint.