Minimum Corporate Tax will hurt businesses

Wednesday, December 9th, 2020 00:00 |
Digital tax.

Mucai Kunyiha & Rose Mwaura       

The introduction of a Minimum Alternative Tax at the height of the largest health and economic crises of our generation is simply confounding.  

Globally, governments have taken steps to shield their economies from the economic storms and hurricanes of 2020.

Such steps have included tax moratoriums, wage support and even direct cash injections, in some cases.

These steps have been expensive, but the economic and policy consensus is that the alternative – closure of businesses (especially SMEs) and large-scale loss of jobs – would risk  economic collapse from which it would take decades to recover.

Best practice has, therefore, been to support businesses’ cash flows through these difficult times so they can live to fight another day.

In this context and given our ‘pre-existing conditions’ of narrowing fiscal space and heavy debts, our government started off well with some measures to give some relief to citizens and businesses.

A reduction in Value Added Tax (VAT) and change in Pay as You Earn (PAYE) bands ensured there was a little more cash in the hands of consumers.

Payment of outstanding bills owed to suppliers and VAT refunds was also a welcome boost as were the measures taken by Central Bank of Kenya to increase bank liquidity and allow some space for re-scheduling of loans.

However, other changes that more than reversed all the ‘goodies’ the private sector had been handed were tagged on.

In particular, the business community considers the Minimum Alternative Tax (MAT) as an egregious over-reach.

MAT was introduced by the Finance Act, 2020 and proposes the introduction of a minimum corporate tax of one per cent on gross turnover before taking into account the operating overheads and other costs of doing business for a company.

This means that a business must pay corporate taxes above  one per cent of its turnover, irrespective of its profit position – that’s right, even loss-making companies will be required to pay the tax.

The tax was ostensibly introduced to redress the situation where some companies are in perpetual loss making positions and pay no, or minimal corporate tax, but as is sadly the case in many of our laws, a blunt instrument has been applied on the broad economy where only a sharp tool was required to target a few. 

By targeting all corporates, the MAT ignores the multitude of business sectors, economic structures and market determined margins.

Lumping an insurance company, a manufacturer, airline and Fast Moving Consumer Goods distributor into one tax category requiring a minimum net profit of four per cent, is a gross failure to appreciate the complex nature of our economy. 

Given the challenges of 2020, many businesses are already in loss making positions and will have to access their equity or find additional financing to survive into 2021.

A minimum tax of one per cent of turnover will be a further raid on the scarce resources they need to keep the business alive and Kenyans in employment, and in effect, a tax on investment.

As we sail into the aftermath of the storms of 2020, it would have been comforting for the private sector to have an ally and champion in the government.

As it stands, the government is crowding out the private sector in its borrowing from the markets, building up debts to the private sector and now attempting to squeeze out the last drops from entities struggling to survive and provide sustained employment to Kenyans.

For the good of our country and our ability to recover from the devastation of 2021 we recommend and urge that the application of the MAT be suspended and the tax be permanently removed from our fiscal regime. — Mucai is chairman of Kenya Association of Manufacturers  ([email protected]) — Rose is chairperson of the Institute of Certified Public Accountants of Kenya ([email protected])

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