Tax AdvisoryOctober 4, 2023by fiecon

Charting A Course For Sustainable Growth: Kenya Medium-Term Revenue Roadmap – Prt 1

Nairobi 2

A medium-term revenue strategy (MTRS) is a high-level roadmap for tax system reform, covering a period of four to six years. Tax reform includes changes to tax policy, tax administration and legal frameworks.

According to PCT 2017, the core elements of the MTRS Includes;

  • A social contract on the level of revenue mobilization effort for the medium-term (5-10 years) with due consideration to the poverty and distributional implications of the associated measures.
  • A comprehensive reform plan for the tax system, reflecting country circumstances and the state of institutional capacity:
    • A redesign of the policy setting to meet the revenue goal.
    • A reform of the revenue agencies to properly administer the policy setting and to achieve a high level of taxpayers’ compliance to meet the level goal
    • A strengthening of the legal framework to enable the policy redesign and administration reform, including by balancing revenue agencies’ powers and taxpayers’ rights
    • A country’s commitment to a steady and sustained implementation, notably by securing political support and resourcing.
    • Secured financing for the CD effort (technical assistance and training) to support the country in overcoming domestic constraints to formulate and implement an MTRS effectively.

The MTRS concept gained prominence in around 2016, after the Platform for Collaboration on Tax (PCT) made a recommendation to the G20 Ministers of Finance for developing countries to have a coherent plan to improve domestic revenue collection. The PCT comprises: the Organization for Economic Cooperation and Development (OECD), the International Monetary Fund (IMF), the World Bank and the United Nations.

Considering the considerable funding required to meet the SDGs by 2030, developing countries need to mobilize their domestic resources. In addition, there is a pre-existing need to build tax capacity to support adequate domestic resource mobilization, which requires the development of country-owned tax reform strategies, supported by donors and capacity developers such as the IMF and World Bank.

Against that backdrop, the Kenyan government, under the auspices of the Treasury, has issued a preliminary medium-term revenue strategy document for solicitation of input from the broader public. This initiative is particularly pertinent given that Kenya’s current revenue generation falls short of the established target within the East African Community, which stands at 25 percent of the Gross Domestic Product (GDP).

The principal objective of this Strategy is to delineate a series of tax system reforms, with the overarching aim of altering the trajectory of the tax-to-GDP ratio. The ultimate goal is to attain the stipulated 25 percent ratio by the year 2030. The reform measures proposed for implementation during this strategic timeframe are chiefly geared toward fostering investment in diverse sectors by mitigating market distortions.

The Strategy sets forth a specific target of incrementally augmenting the ordinary revenue-to-GDP collection ratio by an additional 5 percent throughout the duration of the strategy implementation that covers the period 2024 to 2027. This enhancement will be realized through a multifaceted approach, encompassing the formulation of tax policies and administrative measures conducive to economic growth, enhancements in the efficiency of tax administration, broadening of the tax base, and the promotion of equity and fairness within the taxation framework.

Tax Policy Changes

The strategies aimed at enhancing revenue collection encompass all major tax categories, including income tax, value-added tax (VAT), excise duty, and customs duty. The Strategy further delineates a set of administrative measures designed to enhance the overall effectiveness of the tax system. The strategic interventions for each of these tax categories are as follows:

Income Tax

In pursuit of comprehensive tax reform, the proposed measures encompass the following key elements within the domain of;

  • Corporate Income Tax
    • Firstly, a reduction in the prevailing corporate income tax rate from 30 percent to 25 percent is being considered. This reduction aims to stimulate economic growth and competitiveness by lightening the tax burden on corporations
    • Secondly, a meticulous review of residential rental income tax is in the works, with the primary objective of establishing a taxation framework that ensures fairness and equity for all stakeholders involved in the rental market. This review acknowledges the need for a balanced approach to taxing rental income.
    • Furthermore, the reintroduction of a minimum tax is being contemplated. This minimum tax requirement is envisioned to provide a baseline tax liability, preventing certain entities from avoiding their tax obligations entirely.
    • Lastly, the proposal includes a comprehensive examination and rationalization of exemptions granted to various entities. The aim here is to expand the tax base and minimize instances where certain entities enjoy preferential tax treatment, thereby fostering a more equitable and sustainable tax system.
  • Personal Income Tax
    • An examination of the personal income tax band structure is underway, with the primary aim of enhancing progressivity. This review seeks to ensure that the tax system is fair and equitable, taking into consideration the varying income levels of individuals.
    • The taxation of pension income is also under scrutiny, with a view to refining the existing framework. This review acknowledges the importance of aligning pension taxation policies with evolving economic circumstances and demographic trends.
    • A thorough evaluation and streamlining of exemptions on individuals’ income are part of the proposed reforms, with the overarching goal of expanding the tax base. This step aims to minimize instances where certain sources of income receive preferential tax treatment, ensuring a more equitable tax system
    • Finally, a review of tax reliefs is on the agenda, seeking to evaluate and potentially revise existing provisions. This assessment is intended to optimize the effectiveness of tax reliefs in achieving specific policy objectives while maintaining fiscal responsibility

Author: Eddie Opiyo