Minimum Tax

Do you know that for most companies, the first minimum tax payment is due next month in April? Minimum Tax was introduced by the Finance Act 2020 with effect from 1^st January 2021. The aim is to ensure that every person makes a fair and just contribution to the provision of government services regardless of the person’s profit position.The minimum tax is payable where:

• Instalment tax payable is lower than the minimum tax; or
• No instalment tax is payable.

Minimum tax is payable at 1% of the gross turnover of the person and shall be paid in instalments as set out below;

Payment	Applicable turnover	Date Payable
1st Payment	1st, 2nd & 3rd month	By 20th of the 4th month
2nd Payment	4th & 5th month	By 20th of the 6th month
3rd Payment	6th, 7th & 8th month	By 20th of the 9th month
4th Payment	9th, 10th & 11th month	By 20th of the 12th month
Balance of Tax	12th month	By the last day of the 4th month after the accounting period

For companies where more than two thirds of the income is derived from agricultural, pastoral, horticultural or similar activities, the minimum tax payable is as shown below;

Payment	Applicable turnover	Date Payable
1st Payment	1st to 8th  month	By 20th of the 9th month
2nd Payment	9th, 10th & 11th month	By 20th  of the 12th month
Balance of Tax	12th  month	By the last day of the 4th month after the accounting period

It is important to note that where a taxpayer does not have a December year end, minimum tax shall become due and payable on the date when the first instalment is due after 1st January 2021.

Income that is excluded from minimum tax

• Income that is exempt from tax under the Income Tax Act
• Employment income
• Income subject to Residential Rental Income Tax
• Income that is subject to Turnover Tax
• Income subject to Capital Gains Tax
• Income of Extractive Sector
• Income of a person engaged in business whose retail price is controlled by Government
• Income of a person engaged in insurance business
• Income that is subject to withholding tax, including Digital Service Tax provided that at the end of the accounting period, the tax payable on taxable income exceeds Minimum Tax payable.

Interpretational challenges

The provisions on minimum tax pose a number of interpretational and implementation challenges which might expose taxpayers fitting within the minimum tax regime to non-compliance risks due to lack of guidance on some underlying issues including the following:

1. Whether minimum tax can be set off against corporate income tax credits

There are no stipulations as to whether corporate tax overpayments/credits can be set off against minimum tax. Relatedly, companies whose gross turnover will be subject to withholding tax and who will fit within the minimum tax regime will more likely find themselves in a perpetual tax overpayment position.

2. Whether minimum tax is applicable to a taxpayer’s “other income”

The minimum tax provisions offer no guidance as to whether gross turnover would be inclusive of ‘other incomes’ as declared in a company’s financial statements. This issue will arise in the case of a taxpayer having other taxable income streams either taxed as business income or separately assessed as specified sources of income. Some of these incomes include interest, rental income and realized exchange gains. Thus, will be instances where taxpayers will pay income taxes on income from one source while it is in an income tax loss position thus defeating the primary purpose of the concept of separate sourcing as envisaged under Section 15(7) of the Kenyan Income Tax Act.

3. The impact of minimum tax on capital allowances and tax losses

Taxpayers stand to lose the ability to benefit from capital allowance deductions and tax losses for years where they fall under the minimum tax regime. Further, the current tax loss carry-forward period is fixed at ten years meaning that taxpayers who are unable to utilize their tax losses for years when they were paying minimum tax stand to lose such losses after the expiry of the ten-year period.

Conclusion

To navigate through the interpretational issues set out above and in the quest to ensure compliance with the minimum tax provisions, it is advisable for taxpayers to seek private rulings from the Kenya Revenue Authority on the way forward regarding the grey areas.For more information, please contact our tax advisory team through email at taxteam@cmadvocates.com