If implemented as planned, Kenya is poised to become one of the most attractive destinations for foreign investors as it seeks to lower its Corporate Income Tax (CIC) rate, potentially making it the lowest in East Africa. The proposed changes, outlined in the Medium Revenue Strategy, could see Kenya’s CIC rate drop from the current 30 per cent to 25 per cent for resident firms, starting from the financial year commencing in July 2024.

“The intention is to reduce the rate of corporate tax from the current 30 per cent to 25 per cent,” said the Treasury.

If this proposal is passed, Kenya will not only have one of the lowest CIC rates in East Africa but also second only to Egypt, which boasts a 22 per cent rate, making it significantly more competitive than South Africa’s 27 per cent. The move is part of a broader effort to boost compliance and attract foreign investors in a fiercely competitive global landscape.

Potential revenue

Njuguna Ndung’u, Treasury Cabinet Secretary said the high CIC rate has led to low compliance among eligible companies, with Kenya Revenue Authority (KRA) collecting only about two-thirds of the potential revenue from corporate income tax.

He made the remarks in a statement released as part of the draft Medium-Term Revenue Strategy spanning from July 2024 to June 2027. Prof Ndung’u highlighted the negative impact of high corporate income tax rates on foreign direct investments and investor behaviour, citing studies that have shown a direct correlation between high tax rates and reduced foreign investments.

“Studies have shown that high rates of corporate income tax discourage foreign direct investments and encourage investors to lobby for lower rates or tax exemptions,” he added. A recent report ranked Kenya the most difficult country for businesses after South Sudan, pointing to a worsening environment that has seen Nairobi continue to lose major investment opportunities to its neighbours.

A report dubbed Ease of Doing Business in the East Africa Community (EAC) by the East African Business Council indicates that Kenya performed moderately with an index score of 3.43, putting it at position six out of the seven partner States surveyed.

South Sudan, which had a 3.5 index score, was the seventh. The respondents were asked to rank their perception of the ease of doing business in their countries on a scale of 1 (very easy) to 5 (very hard). The report, which surveyed a total of 252 select companies in EAC  between June 13 and July 21, places Rwanda as the best in terms of ease of doing business in the region, with a score of 2.08. It was followed by the Democratic Republic of Congo with a score of 2.75.

It means Kenya, the region’s biggest economy, slipped from the top two positions it held back in 2019 to the bloc’s new member, DRC, which joined in March 2022 and has since become an attractive destination for most companies, including Kenyan banks.

Taxpayer compliance

Furthermore, high CIC rates tend to encourage tax planning and reduce taxpayer compliance, contributing to a decline in income tax as a share of Kenya’s GDP. The most recent KRA statistics revealed a disconcerting compliance rate of only 11.12 per cent among firms registered for corporation tax for the year ending in June 2022.

This dismal compliance rate has implications not only for the government’s revenue collection but also for the overall business environment in Kenya.