Kenya's banking sector's tax contribution grows by 39.94%

Kenya's banking sector has experienced a significant 39.94% increase in its total tax contribution in 2022 compared to the previous year, according to a new report by PwC Kenya. The total tax contribution reached 181.27 billion, marking a substantial growth driven by key factors outlined by Alice Murithi, Partner, Tax And Transfer Pricing at PwC Kenya. The key drivers for this notable increase include a 70% rise in corporate tax payments and a 60% increase in excise duty. Murithi explained that the surge in corporate tax payments was a result of a significant 85% increase in sector profitability in 2021, which led to a subsequent top-up tax payment in 2022. Additionally, the clarity on fees and commissions subject to excise duty contributed to the spike in excise duty payments. The report also highlighted a nearly 10% increase in the total tax rate, reaching 43.09% in 2022. This escalation was primarily due to the sharp rise in profitability which outpaced the increase in taxes paid. The impact of this rise in tax rates has resulted in reduced retained earnings for banks, affecting shareholder distributions. Despite these challenges, the banking sector's tax contribution has significantly contributed to Kenya's overall tax collections. In 2022, the 39 participating banks accounted for 8.93% of total tax collections, up from 6.83% in the previous year. While this demonstrates a substantial contribution from a limited number of taxpayers, there is a continuous effort to expand the tax base and ensure broader participation in tax payment. Initiatives such as the electronic tax invoice management system and geomapping for rental properties have been instrumental in enhancing tax compliance. Looking ahead, the implementation of the Finance Act of 2023 is expected to further impact the banking sector's tax contributions. The act, which recently came into effect, includes provisions such as an increase in the marginal pay-as-you-earn rate for high-income earners. These changes are likely to lead to a higher tax burden for the sector, potentially driving an increase in total tax contributions for the upcoming year. As the banking sector navigates these tax changes, stakeholders are closely monitoring the implications on profitability and shareholder returns.