1. Use of debt in the capital structure
- In Kenya as in many other countries, interest on cooperative debt is tax deductible companies can take maximum advantage of this tax deducting by determining the optimum amount of debt they can take and work with. It should be noted that the revenue authorities attempt to limit abuse of tax deductibility
- Section 16 (2i) of the income tax Act provides that interest on debt that is in excess of the thrice the shareholders equity of a company controlled by a non-resident in not tax deductible.
- The practice of over leveraging company with debt from associated sources so as to minimize taxable income. (known as thin capitalization) is well known and tax
- Authorities look out for it. Hence company’s working to take advantage of tax deducting should do so with the letter and spirit of income tax Act.
- Another technique for taking advantage of debts is the use of lease financing arrangement for the acquisition of assets rather than purchase with company’s fund as the lease payment made both capital and opportunity leases are tax deductible on the leases.
2. Capital investment allowances
The income tax act enables companies to change against their income certain allowance on capital expenditure. These allowances include wear and tear allowances for fixed assets on capital expenditure. These are covered under section 15 (2) and the 2nd schedule of the income tax act. These allowances serve as investment incentives Notable there is an investment deduction of 10% on industrial buildings used for manufacture as well as hotels constructed from 1st January 2004
3. Write off of bad trade debts and inventory and changing other allowable deductions
Section 15 (2a) of the income tax act allows the tax deductible on write off of bad debts subject to the approval of the commissioner. The commissioner is in the process of developing guidelines for the write off of bad debts within a period of 2 years after the expiry of 3 years since the bad debts came into existence.
Further VAT payable is given by the difference between output tax and input tax and since it is payable by the 20th of the due dates. This is more advantageous in case of large tax payers
Inventory writes off as effective or absolute is similarly tax deductible
There are write off as effective deduction detailed in the income tax Act which will enable business to reduce their taxable income if they actually utilize them. VAT should ensure that they source from supplies that will change VAT. That way the business buying can deduct input VAT from their output VAT and lower tax payable. While this is a matter well established in much business many other especially small and medium sized enterprises do not do this.
Another way of mitigating the tax burden is by importing from tax advantaged countries. This entails importing from within the East African community or the COMESA. These areas will eventually become free trade enabling duty free imports within them.
4. Export processing zones
Business where principal markets are foreign can set up a licensed export processing zones and enjoy a rating of tax incentives.
This include a 10 year tax holiday and modest 25% for the next 10 years exemptions from withholding taxes on dividends and other payments to non-residents for the first 10 years exemptions from VAT and investment deduction of 100 %
It should however be noted that sales within the EAC do not constitute exports for this purpose.
5. Off share business structure
The sparse collection of double taxation treaties to which Kenya is a party subjects international business and investment to multiple taxes on the same income.
- In practice, few business take advantage of the tax credit scheme under sec 42 of the income tax act which many multinational simply taking foreign taxes paid as a tax deductible business expense.
- Business can mitigate their tax burden on off share investment by establishing off share investment specifically in countries with relatively lower taxes or that could even be tax free i.e. tax havens such jurisdiction include Mauritius, Hongkong, Dubai etc
- The benefit of establishment in such jurisdiction is that they have a broad network of durable taxation and or relatively lower tax rates on income whenever it is generated or accrues.
Wilfykil answered the question on February 25, 2019 at 12:24
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