Kenya’s Latest Tax Pitch

In the wake of Kenya’s failed finance bill, several think pieces have asked what went wrong.

The Economist detailed how the Kenyan government will have to offer its citizens more services if it wants to increase their taxes. (“The Lessons of Africa’s Tax Revolts,” The Economist (Aug. 15, 2024).) An Africa Center policy position paper partially blamed the debacle on political incompetence and called on President William Ruto to resign. (Naila Aroni, “Kenya’s Finance Bill Protests,” The Africa Center (July 31, 2024).)

The Financial Times explained that some Kenyans lay the blame at the feet of the IMF, which had advised the government on its tax policy in exchange for financing. (Andres Schipani and Aanu Adeoye, “Kenya’s Mass Protests Expose African Fury With IMF,” Financial Times (July 4, 2024).) The New York Times outlined how Kenya, entangled in billions of dollars of debt, is going to endure a difficult passage out of that situation. (Patricia Cohen and Keith Bradsher, “Behind the Deadly Unrest in Kenya, a Staggering and Painful National Debt,” The New York Times (June 26, 2024).)

There’s a lot of self-reflection to be done, but in the short term, not much time to do it. The Kenyan government needs to enact a finance bill this year, even if it’s not the one that citizens roundly rejected this summer during the weeks of countrywide protests that resulted in damage to the Parliament building and several deaths.

When Ruto withdrew the finance bill, he promised that the government would return with a new bill that better reflected the will of the people. It took the government several months to seek public input and draft legislation, but it recently made good on that promise, albeit to subdued fanfare. At the end of October, the Kenyan government released three tax bills to shore up the country’s finances.

In total the bills won’t raise as much revenue as Parliament’s original $2.7 billion (about KES 390 billion) package, but they will raise some money for Kenya’s cash-strapped government. What is still missing, however, is a coherent message from legislators on how they will use tax enforcement as a tool to grow the country’s revenue, given Kenya’s low tax compliance rates.

Background

Kenya has a massive debt problem. Nearly 70 percent — or about $82 billion — of the country’s GDP is locked up in public debt according to government figures. (Kenya National Treasury and Economic Planning, Public Debt Management Office, “2024 Medium-Term Debt Strategy” (Jan. 2024); Kenya National Treasury and Economic Planning, “Annual Public Debt Management Report 2023/2024” (Sept. 2024).) That debt has led to overwhelming debt service payments because the country is spending nearly 60 percent of its revenue on its external loans. This untenable landscape put Ruto and his administration in a deeply difficult position, as it became clear that the government needed to raise tax revenue (and quickly).

In May Parliament released a $2.7 billion (about KES 390 billion) finance bill that proved to be immediately unpopular. The government planned to raise taxes across the board on individual and corporate taxpayers, but individual taxpayers reacted strongly because the government sought, among other things, to tax vehicle purchases, remove VAT exemptions from everyday food items, and impose a mobile money transfer tax. Taken together, these measures would have increased consumption taxes on many ordinary Kenyans. Kenya already imposes heavy consumption taxes; VATs are the largest contributor to Kenya’s tax revenue. However, as I mentioned in a previous article, the government has said little about tax enforcement, which it arguably needs just as much as — if not more than — tax hikes. (Prior analysis: Tax Notes Int’l, July 29, 2024, p. 661.) It turns out Kenya’s Parliamentary Budget Office thinks similarly.

Kenya Asks the People

In September Kenya’s National Treasury asked taxpayers to provide their opinions on a few key issues, including:

• Legislative and administrative reforms to improve [the] social and economic well-being of all Kenyans taking into account the current debt situation and the need for a sustainable public debt position without putting more burden on Kenyans;
• Legislation to ensure equity and fairness in taxation, provide tax amnesty where justified and rationalize tax expenditures that erode revenue that would otherwise be used for implementation of projects that improve the welfare of all Kenyans; and
• Reforms to enhance tax administration and compliance to ensure each taxpayer pay[s] the rightful share of tax through reducing tax evasion and avoidance.

The government received only 35 responses from stakeholders, including private sector businesses, civil society, professional organizations, and nongovernmental organizations. That is a disappointingly low number considering the widespread depth of the protests and anger that swept across Kenya.

Despite this low number, it appears the input influenced the government to change course. The new tax measures floated by lawmakers shift away from taxing everyday Kenyans and focus more heavily on taxing tourism and corporate activity as well as the digital economy. However, the corporate and digital measures are likely to generate some pushback from the business community, which has been concerned about the cost of doing business within Kenya.

New Measures

There are four new tax bills that have been floated, some of which address tax procedures and public finance management. However, the majority of Kenya’s proposed tax measures are in the Tax Laws (Amendment) Bill, 2024. In total, it’s a significantly pared-down package, and according to Citizen TV Kenya, it’s intended to raise KES 170 billion, which is a little less than half of the government’s previous proposal.

In its new tax package, Kenya wants to expand its definition of digital marketplaces. The country currently levies a 1.5 percent digital services tax applicable to a list of digital content and services, including downloadable e-books, films, and mobile applications; digital content streaming; subscription-based media; electronic ticketing sales; services provided through digital marketplaces; and online distance training. There is no revenue threshold.

The government now wants to expand its digital tax base by adding ride-hailing services, food delivery services, freelance services, and professional services within its digital marketplace umbrella. This is important because the government wants to replace its DST with a significant economic presence (SEP) tax.

The government floated a SEP tax in its original Finance Bill 2024, which sparked backlash from some digital operators. The initial proposal intended to hit nonresident digital service providers with a 30 percent income tax on 20 percent of a firm’s gross turnover. That amounted to a 6 percent tax rate. However, companies like Uber and Bolt said the move might drive some companies away from the Kenyan market, leading the country’s National Assembly to reduce the SEP tax to a 3 percent rate in the bill Ruto eventually rejected.

The government is now returning to the 3 percent rate, and it says the SEP tax will “align the [country’s] taxation of digital services with international best practice.”

Another repeat measure between the Finance Bill 2024 and the new tax package is the introduction of a 15 percent minimum top-up tax in keeping with the OECD’s pillar 2. Kenya is planning to adopt a global minimum tax that would apply to multinationals with at least €750 million in consolidated annual turnover.

Regarding VAT, the Kenyan government has executed a complete about-face compared with the Finance Bill 2024. For example, the Finance Bill 2024 sought to remove a zero VAT rating for bread and subject it to standard VAT rates. The government wanted to impose a 25 percent excise duty on various cooking oils and impose a so-called eco levy that would apply new taxes to manufacturers of certain goods. The government also proposed a 2.5 percent vehicle tax that would be assessed on the value of the vehicle once its owner signed up for insurance. Vehicle owners would have to pay at least KES 5,000 and up to KES 100,000; insurers would have to collect the amount. Vehicle owners who failed to pay would be subject to a 50 percent penalty.

Also, the government sought to apply a 16 percent VAT on a slew of financial transactions that are currently exempt, including credit and debit card issuances, telegraphic money transfer services, and foreign exchange transactions.

Those were some of the most controversial provisions in the Finance Bill 2024, and none of those measures have been included in the new tax package. Under the proposed legislation, the following VAT exempt goods would become taxable: national parks entry fees and tour operator services; betting, gaming, and lottery services; direction-finding compasses, instruments and appliances for aircraft; aircraft hiring, leasing, and chartering, excluding helicopters; specially designed and locally assembled motor vehicles for tourist transportation; spacecraft, including satellites.

Enforcement

There’s an enforcement-related measure in a separate bill, the Draft Tax Procedures (Amendment) Bill, 2024. Under that bill, the government would reinstate a previous tax amnesty under section 37E of the Tax Procedures Act until June 2025. The amnesty, which ended June 30, applied to taxpayers who failed to pay their taxes that accrued up to December 31, 2022. It also applied to taxpayers who paid their taxes due by December 31, 2022, but had not yet paid their penalties and interest. In those cases, the government automatically waived the owed interest and penalties.

This is a good addition; the original finance bill sought to extend the amnesty for a shorter amount of time, until March 2025. However, a detailed enforcement plan to address Kenya’s waning tax compliance problem is still missing. Kenya’s Parliamentary Budget Office recently warned the government that its tax hikes would do very little to raise revenue without enhanced enforcement.

In a budget watch report, the Parliamentary Budget Office emphasized that Kenya particularly needs to improve its revenue collection and rethink its expenditures in the wake of the failed finance bill. For fiscal 2024, the Kenyan government expects to collect KES 3.1 trillion, about KES 2.5 trillion of which are expected to come from income tax, VAT, excise duties, and import duties. But the Parliamentary Budget Office seems skeptical that the country will hit that target, pointing out that the government, because its fiscal 2022 and fiscal 2023 years fell short of its targets by nearly KES 124 billion and KES 205 billion, respectively.

Enforcement woes were largely to blame for these shortfalls, including poor implementation of new tax policies, weak enforcement, and lack of taxpayer compliance, according to Kenya’s National Treasury.

“Despite the country witnessing annual changes in tax policies over previous years, these have not always translated into higher revenue collections. This points to a fundamental problem, in that simply introducing new tax policies does not guarantee better compliance or higher revenue,” the Parliamentary Budget Office report said. It continued:

Therefore, the indirect effects of tax policies should be carefully considered before introducing new amendments. . . . Additionally, the government should prioritize alternative approaches to revenue enhancement over new tax proposals, including closely monitoring current tax administration systems and ensuring their full implementation and effectiveness to achieve improved tax compliance.

Although the loss of the finance bill was a blow for the Kenyan government, the entire experience provided an opportunity for reflection and redirection. The Parliamentary Budget Office cautioned the government to tread lightly on VAT, given that it accounts for the largest share of tax expenditures and any reforms could hurt taxpayers’ purchasing power.

The office also advised that the government double down on enforcement and streamline its tax administration. “Rather than relying on the introduction of new tax policies that are likely to create new tax burdens on Kenyans, the government may focus on improving tax administration through better enforcement of current tax policies, enhanced data analytics, and increased use of technology to simplify tax processes and improve tax compliance,” the Parliamentary Budget Office said.

Kenya is already planning to do some of this in the coming year, as it intends to roll out an electronic tax invoice management system, integrate the Kenya Revenue Authority’s systems with the country’s county and government entities, and promote its tax amnesty. However, the Parliamentary Budget Office thinks the government should center its efforts around the authority’s Ninth Corporate Plan, which is its multiyear agenda for fiscal 2024 fiscal through fiscal 2028. That plan has four main goals: enhancing revenue collection, increasing taxpayer customer satisfaction, digitizing the country’s revenue administration, and strengthening the Kenya Revenue Authority’s human resource management.

At the center of this, Kenya wants to dramatically increase its tax-to-GDP ratio — which hovers around 14 percent — to 27 percent by 2030. That can’t happen without significantly stepped-up enforcement, and the Ninth Corporate Plan calls on lawmakers to enact legislation that will enable the revenue authority to achieve its goals. Although the current tax package is light on enforcement-related legislation, hopefully it will be the start — and not the end — of a series of conversations on how Kenya can increase tax compliance and grow its tax base.