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Kenya Wants a Bigger Cut of Corporate Profits. Should KRA Start Acting Like a Shareholder?

As Kenya considers extracting more revenue from highly profitable companies and top earners, this feature challenges the adversarial relationship between the tax authority and private enterprise. It argues that if government shares directly in corporate profits through taxation, KRA should behave less like an external enforcer and more like a partner in business growth, potentially taking a formal role in corporate governance to improve compliance, reduce disputes and align tax policy with the profitability of the companies expected to fund the state.

By Robert Yawe β€” 𝐺𝑒𝑒𝑠𝑑 πΆπ‘œπ‘™π‘’π‘šπ‘›π‘–π‘ π‘‘.Tax & Regulation Β· 5 min read
Kenya Wants a Bigger Cut of Corporate Profits. Should KRA Start Acting Like a Shareholder?

Credits: Robert (Linkedin)

Over the past few weeks there have been a number of interesting proposals by the government on how it intends to raise revenue, first was the proposal to increase the corporate tax for very profitable companies from 30% to 35% and then came the increase in income tax rate of highly paid individuals.

On the other end was a judgement by the courts that KRA cannot confiscate or even attach properties with an intention to recover unpaid taxes, to say that an investor in a company has actually been behaving like a creditor.

Why do I say this, because in principle the government of a country is not a creditor to the businesses that it facilitates to operate but an equity partner in the business, the revenue authority is in effect the oversight agency whose responsibility it is to represent government interest on company boards.

I am reliably informed that in Ethiopia the revenue authority effects its interest in companies by appointing all Chief accountants as its officers, what this does is make sure that decisions made by any trading entity will always be equitable when dealing with issues of taxation.

Since the government of any country is an equity investor in every business that operates within its boundaries is why they collect a percentage of the profit that a business makes. They actually own preferential shares as they are paid their dividend before any other shareholder.

In addition, the government also participates in a revenue share arrangement with the businesses which they collect through value added tax (VAT). For Kenya it is 16% of the sales price, assuming you have no other vatable expenses as would happen with a street hawker. If you have other Vatable inputs the government allows you to deduct the same from what would have been due to them.

After working out your gross profit the government allows you to deduct any monies paid towards meeting its own social responsibilities such as income to the members of the public such as salaries, medical cover, meals, transport, charitable contributions and even tooling by allowing depreciation.

The government allows for this as the business is actually carrying out these activities on its behalf, in effect all VAT registered companies are agents of the government for direct collection of a share of revenue in advance, read VAT. .

After clearing these costs, you arrive at a net profit before tax at which point you first pay the government, in the case of Kenya it is 30%, before making payments to all other shareholders. What this implies is that the government is a 30% shareholder in your business.

So, if government is a 30% shareholder in my company does it not make sense that they should be represented on the board of directors?

I believe this should be the case as this is the only way they can have a direct contribution to how the business is performing which would also enable them to create policies based on the impact they will have on the profitability of the companies into which they have invested.

It is foolhardy to issue policies that then affect the same organisations into which you have invested and are also sharing in revenue, sadly this will continue to happen so long as government treats private enterprise as an entity to be wrestled into submission and not as one that they are investors.

So long as government, through the revenue authorities, continue to believe that they are enforcers instead of partners we shall never be able to grow this economy. A paradigm shift in this perspective would allow for them to concentrate on growing the profitability of the tax payer as opposed to spending most of its energy on broadening the tax base which will usually result in diminishing returns.

Therefore, the proposed directive to collect higher dividend, aka corporate tax, from the more successful businesses would only make sense if there is a direct participation by the government in the running of the business so as to provide a conducive environment for organisations to become more profitable.

What I am proposing here is that government, through its revenue authority or any other agency it selects, needs to take its place within the boardrooms of all companies to provide support in compliance and also enforce the boards fiduciary responsibility to all shareholders which includes the government.

Tax compliance is a complex process that only the taxman fully understands, so instead of the back and forth at end of the quarter or year why not have a taxman chair the tax committee of the board of directors especially following the recent statement by the commissioner general that it is the taxman who will ascertain whether a deduction qualifies as avoidance or evasion at the point of filling.

With the digitalisation of most of its processes it means that the revenue authority, KRA, has reduced the amount of work done by its officers which means they can be deployed to directly participate in growing businesses thus increasing the profitability represented in higher taxes, better paying jobs and as an offshoot widening of the tax base as the larger organisation would get its smaller suppliers to be fully tax compliant.

I am sure this is something that many have thought about and continue to think about but due to the depiction of the revenue authority as an enforcer and not a partner many must have shied away from airing their feelings publicly, I hope by taking the first step I have allowed for this conversation to come to the fore for the benefit of all parties.

In conclusion, KRA, it is time you took your seat at the board room table to make sure that the governments investment is put to the best use possible with the least friction.

π‘‡β„Žπ‘–π‘  π‘ƒπ‘Ÿπ‘’π‘π‘’π‘Ÿπ‘ π‘œπ‘Ÿ π‘“π‘’π‘Žπ‘‘π‘’π‘Ÿπ‘’ π‘‘π‘Ÿπ‘Žπ‘€π‘  π‘œπ‘› π‘Žπ‘› π‘œπ‘Ÿπ‘–π‘”π‘–π‘›π‘Žπ‘™ 2019 π‘Žπ‘Ÿπ‘‘π‘–π‘π‘™π‘’ 𝑏𝑦 π‘…π‘œπ‘π‘’π‘Ÿπ‘‘ π‘Œπ‘Žπ‘€π‘’, β€œπΎπ‘…π΄! π‘ π‘‘π‘œπ‘ π‘Žπ‘π‘‘π‘–π‘π‘Žπ‘‘π‘–π‘›π‘” π‘¦π‘œπ‘’π‘Ÿ π‘ β„Žπ‘Žπ‘Ÿπ‘’β„Žπ‘œπ‘™π‘‘π‘’π‘Ÿ π‘Ÿπ‘’π‘ π‘π‘œπ‘›π‘ π‘–π‘π‘–π‘™π‘–π‘‘π‘¦,” π‘€β„Žπ‘–π‘β„Ž π‘Žπ‘Ÿπ‘”π‘’π‘’π‘‘ π‘‘β„Žπ‘Žπ‘‘ πΎπ‘’π‘›π‘¦π‘Žβ€™π‘  π‘‘π‘Žπ‘₯ π‘Žπ‘’π‘‘β„Žπ‘œπ‘Ÿπ‘–π‘‘π‘¦ π‘ β„Žπ‘œπ‘’π‘™π‘‘ π‘‘β„Žπ‘–π‘›π‘˜ 𝑙𝑒𝑠𝑠 π‘™π‘–π‘˜π‘’ π‘Žπ‘› π‘’π‘›π‘“π‘œπ‘Ÿπ‘π‘’π‘Ÿ π‘Žπ‘›π‘‘ π‘šπ‘œπ‘Ÿπ‘’ π‘™π‘–π‘˜π‘’ π‘Ž π‘π‘Žπ‘Ÿπ‘‘π‘›π‘’π‘Ÿ 𝑖𝑛 π‘‘β„Žπ‘’ 𝑏𝑒𝑠𝑖𝑛𝑒𝑠𝑠𝑒𝑠 π‘“π‘Ÿπ‘œπ‘š π‘€β„Žπ‘–π‘β„Ž π‘”π‘œπ‘£π‘’π‘Ÿπ‘›π‘šπ‘’π‘›π‘‘ π‘‘π‘’π‘Ÿπ‘–π‘£π‘’π‘  π‘‘π‘Žπ‘₯ π‘Ÿπ‘’π‘£π‘’π‘›π‘’π‘’. π‘Šπ‘’ β„Žπ‘Žπ‘£π‘’ π‘Ÿπ‘’π‘£π‘–π‘ π‘–π‘‘π‘’π‘‘ π‘‘β„Žπ‘Žπ‘‘ π‘π‘Ÿπ‘œπ‘£π‘œπ‘π‘Žπ‘‘π‘–π‘£π‘’ π‘–π‘‘π‘’π‘Ž 𝑖𝑛 π‘‘β„Žπ‘’ π‘π‘œπ‘›π‘‘π‘’π‘₯𝑑 π‘œπ‘“ π‘‘π‘œπ‘‘π‘Žπ‘¦β€™π‘  π‘‘π‘’π‘π‘Žπ‘‘π‘’ π‘œπ‘£π‘’π‘Ÿ π‘π‘œπ‘Ÿπ‘π‘œπ‘Ÿπ‘Žπ‘‘π‘’ π‘‘π‘Žπ‘₯π‘Žπ‘‘π‘–π‘œπ‘›, π‘π‘œπ‘šπ‘π‘™π‘–π‘Žπ‘›π‘π‘’ π‘Žπ‘›π‘‘ π‘‘β„Žπ‘’ π‘Ÿπ‘’π‘™π‘Žπ‘‘π‘–π‘œπ‘›π‘ β„Žπ‘–π‘ 𝑏𝑒𝑑𝑀𝑒𝑒𝑛 π‘‘β„Žπ‘’ π‘ π‘‘π‘Žπ‘‘π‘’ π‘Žπ‘›π‘‘ π‘π‘Ÿπ‘–π‘£π‘Žπ‘‘π‘’ π‘’π‘›π‘‘π‘’π‘Ÿπ‘π‘Ÿπ‘–π‘ π‘’.

Read it on linkedin: https://www.linkedin.com/pulse/kra-stop-abdicating-your-shareholder-responsibility-robert-yawe/?trackingId=VbE1IEo0h9B6TSVVI7d9Pw%3D%3D

Robert Yawe β€” 𝐺𝑒𝑒𝑠𝑑 πΆπ‘œπ‘™π‘’π‘šπ‘›π‘–π‘ π‘‘.

Robert Yawe β€” 𝐺𝑒𝑒𝑠𝑑 πΆπ‘œπ‘™π‘’π‘šπ‘›π‘–π‘ π‘‘.

Robert Yawe is a Kenyan technology entrepreneur, ICT practitioner, financial-literacy coach and mentor with more than three decades of industry experience. Direct, witty and sceptical of hype, he writes about technology, money, enterprise and the systems beneath Africa’s digital economy.

Precursor is published by the FinTech Association of Kenya and exercises independent editorial judgement under the Editorial Independence Charter. This article is labelled First Reading: no commercial party reviewed it before publication.

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