The banking industry contributed 27 percent of all corporate taxes paid in Kenya in 2020 and 2019 even as the adverse impact of the COVID-19 pandemic caused a 12 percent overall decline in their total tax contribution in 2020 compared to 2019.  A new report compiled by audit firm PricewaterhouseCoopers (PwC) on behalf of the Kenya Bankers Association attributes the decline to reductions in corporate taxes and Pay As You Earn (PAYE) collections.

“This decline is partly attributable to reduced tax rates, specifically reduction of corporate tax rate from 30 percent to 25 percent, reduction of the top PAYE rate from 30 percent to 25 percent and the reduction of Value Added Tax rate from 16 percent to 14 percent. The aim of these measures was to provide relief to taxpayers against adverse economic effects of the COVID-19 pandemic,’’ the report notes. Corporate tax and PAYE are the largest contributors of the total tax contribution of the sector standing at 42.5 percent and 16.5 percent respectively.

Speaking during the report’s release on Thursday, the Kenya Bankers Association Chief Executive Officer Dr. Habil Olaka noted that the contribution indicates the industry has remained resilient,  navigated the challenges occasioned by the COVID-19 pandemic, and continued supporting the economy. “As an industry we recognise the important role the financial services sector plays in supporting  economic growth. In this regard, we remain committed  to sustain efforts towards anchoring business recovery in the face of the COVID-19 disruption,’’ he said, adding that the banking sector will continue to build capacity among vulnerable enterprises through de-risking initiatives such as the Inuka Enterprise Program.

Due to the COVID-19 pandemic, the  economy experienced a depressed economic performance and quality of assets, with provisioning for loan losses increasing by 47.5 percent to Sh.198.1 Billion from Sh.134.3 Billion in 2019. Loan loss accommodations absorbed 45.7 percent of non-performing loans compared to 40.2 percent in 2019, according to the State of the Banking Industry Report 2020.  The industry also restructured customer loans worth Sh. 1.63 Trillion or 54.2 percent of the total Sh. 3 Trillion loan portfolios, with the percentage of gross non-performing loans to gross loans significantly increasing  to 14.1 percent by December 2020 compared to 12 percent in December 2019.

Despite the challenges, access to credit for MSMEs increased. According to the Central Bank of Kenya (CBK) 2020 MSME Survey report, lending to micro, small and medium-sized enterprises increased by 42 percent between 2017 and 2020 to stand at Sh.638.3 billion by December 2020, up from Sh.413.9 Billion in December 2017.

The report also notes that the Banks that participated in the study contributed 7.5 percent of the total government tax receipts in 2019 and 2020. “Considering a total population of 6 million registered taxpayers countrywide, this is indeed a very significant contribution,” commented Alice Muriithi, Associate Director at PwC Kenya and the lead technical advisor on the study, adding that the report raises a number of questions about how tax policy impacts the banking sector and the impact of tax policy on the sector’s contribution to the tax base and the economy.

The Total Tax Contribution of the Kenya Banking Sector report also reveals that the cumulative ratio of taxes borne to profit of 32 banks surveyed during the period was 48.5 percent, representing the Total Tax Rate (TTR) of the participating banks. ‘’A cumulative TTR of participating banks of 48.5 percent means that for every Sh. 100 of profits, banks bear taxes of  Sh. 48.5,’’ the report indicates.

“The taxman applies strict criteria in terms of which provisions can be tax deductible in determining taxable profits. In practice, there is misalignment between provisioning for accounting purposes and the deductibility of the same provisions for tax purposes, and this misalignment continues to drive up the effective tax rates for banks and particularly, the Total Tax Rate (TTR),” said Ms. Muriithi.

The report shows that banks invested approximately Sh. 1.6b Billion in technology in the years 2019 and 2020 combined. This is compared to approximately Sh. 1.3 Billion in the 2017 and 2018 periods, demonstrating the sector’s prior commitment to the digitization journey well before the beginning of the pandemic.

The report further shows a 42.2 percent decline in excise duty collected by the banking sector in 2020 relative to 2019, attributable to regulatory guidelines issued by the Central Bank of Kenya requiring banks to waive fees on transfer of money between bank accounts and mobile phone wallets and also waive balance enquiry charges as a measure to mitigate the COVID -19 pandemic. This is also aligned to the 8 percent decline in fees and commissions income earned by the banking industry in 2020 relative to 2019.

On a year-on-year basis, the 32 banks that participated in the total tax contribution study represent 95.2 percent of the industry in 2019 and 96.2 percent of the industry in 2020.

PwC Tax Partner Titus Mukora observed that the study offers an opportunity for the tax contribution of the banking sector to be quantified and analysed so that policymakers can assess whether the operating environment is supportive of the sector.