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How Changes In Tax Laws Affect Business Owners In Kenya – By George Adega

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Understanding How Tax Changes Affect Businesses in Kenya

Tax laws are rules made by the government about how much money people and businesses must pay as tax. These rules often change, and when they do, it can affect how businesses operate. For business owners, these changes can be good or bad. Sometimes they create new opportunities, and other times they bring surprises that are hard to deal with.

Whether it’s a new rule on Value Added Tax (VAT), more paperwork to follow, or a change in how much tax companies have to pay, being aware of these updates is very important. Knowing how these changes work can help businesses plan better, save money, and grow over time.

Let’s look at some key areas where changes in tax laws affect businesses:

1. How Much Things Cost and How Much Profit Businesses Make

  • When tax laws change, things like the amount of tax a company pays or what expenses it can deduct from its taxes might change too.
  • In 2023, for example, VAT was increased on some basic materials used by small and medium-sized businesses (SMEs) in Kenya. This made it more expensive for them to run their businesses.
  • To deal with this, many businesses either raised the prices of their goods or tried to cut costs in other areas.

2. Decisions About Investing Money and Growing the Business

  • Some industries get special tax benefits to encourage growth. For example:
  • Companies listed on the Nairobi Securities Exchange (NSE) now pay less corporate tax — from 30% to 25%.
    • The government also gives breaks to businesses in manufacturing and affordable housing.
  • Big investors who bring more than 10 billion Kenyan shillings into certain sectors can even negotiate their own tax rates.
  • Multinational companies that send money back to their home countries will now pay 15% tax on that money starting in 2024.
  • However, every time tax rules change, companies may need to spend more money to update their systems, train employees, or hire legal experts to understand the changes.
  • Too many changes can make it hard for businesses to plan ahead, which can scare away foreign investors.

3. More Work and Higher Costs Just to Follow the Rules

●      Small businesses, especially in places like Embu County, often end up spending a lot of money just trying to follow tax rules.

  • As tax laws become more complicated, companies may need to hire experts or train staff, which adds to their costs.
  • Filing taxes, dealing with audits, and keeping up with new rules takes a lot of time. That means less time spent running the actual business.
  • New digital tax systems like iTax and Electronic Tax Registers (ETRs) are helpful but require investment in technology and training.
  • Constant changes in tax laws also make it harder and more expensive for businesses to stay compliant.

4. Managing Risks When Taxes Keep Changing

  • There are different kinds of risks related to taxes:
  • Compliance risk: Not following the rules correctly.
    • Operational risk: Mistakes in how taxes are handled internally.
    • Transactional risk: Issues when doing business deals.
  • To reduce these risks, companies can:
  • Do regular tax checks.
    • Train employees.
    • Use digital tools.
    • Ask the Kenya Revenue Authority (KRA) for help when unsure.

5. Problems When Dealing with Other Countries

  • If a business works with companies outside Kenya, there’s a chance they could be taxed twice — once in Kenya and once in the other country. This is called double taxation.
  • To avoid that, Kenya has agreements with some countries called Double Tax Agreements (DTAs).
  • When companies sell goods or services between branches in different countries, they must follow fair pricing rules (called arm’s-length pricing). If not, they could face penalties.
  • Kenya also charges withholding tax on payments made to people or companies outside the country. For example, a 15% tax is applied to dividends paid to foreigners.
  • In 2024, Kenya introduced a new tax called the Digital Services Tax, which is 6% on income from online services provided by foreign companies.
  • There’s also a 15% tax on profits that foreign companies send back to their home countries.

6. How Tax Changes Affect Financial Reports and Investor Trust

  • When tax laws change, it affects how companies report their financial health.
  • For example, tax changes can affect balance sheets and income statements.
    • They can also change how quickly assets lose value (depreciation), which affects profit calculations.
  • If businesses aren’t allowed to carry forward past losses for long, it becomes harder to plan for the future.
  • Frequent changes in tax policies can make investors nervous, leading them to invest elsewhere.
  • Credit rating agencies may lower a company’s rating if the tax system seems unstable.
  • Public reactions, like protests against the Finance Act 2023, can also hurt how stable Kenya looks to investors.

7. Gaining an Edge Over Competitors Through Tax Benefits

  • Some areas in Kenya offer special tax benefits to attract businesses:
  • Export Processing Zones (EPZs) and Special Economic Zones (SEZs) give tax-free periods and exemptions from VAT.
    • Examples include Tatu City and Konza Technopolis.
  • Certain industries benefit more from tax changes:
  • Tech companies enjoy VAT exemptions on digital tools.
    • Farmers benefit from tax-free farm supplies.
    • For instance, Twiga Foods grew faster thanks to favorable tax policies.
  • However, frequent changes in tax laws (from 2021 to 2024) have made some investors hesitate.
  • Compared to Rwanda, Kenya still faces challenges like difficult tax filing processes, slow VAT refunds, and inconsistent policies.