Kenya’s banking sector corporate taxes soar to $563.7M

Kenya’s banking sector corporate taxes have been on the rise in the past few years.
A new analysis shows that the contribution of the banking sector towards Pay-As-You-Earn was 7.79 per cent of all PAYE collected in the country.
The study included 43 institutions—37 banks and six microfinance institutions.

The total tax contribution (TTC) from Kenya’s banking sector reached $1.5 billion (KSh190.26 billion) in 2023, a 4.96 per cent increase from the previous year, the Kenya Bankers Association has said. This marks the highest TTC since the study began in 2017, representing 8.78 per cent of the total government tax receipts for the financial year ending in June 2023.

According to the Banking Sector Total Tax contribution report, the TTC comprised $793 million (KSh102.52 billion) in taxes borne by the participating banks and microfinance institutions and $678.8 million (Ksh87.74) billion in taxes collected.

While the overall tax contribution grew, taxes borne by banks slightly decreased, the Total Tax Rate, which measures taxes borne against profit before tax (PBT), rose to 47 per cent in 2023, up from 43.09 per cent in 2022.

“TTR increased by 3.10 percentage points to 47 per cent compared to 43.09 per cent in 2022. This means that for every Sh100 profit made by the participating banks, Sh46.77 was paid to the government as taxes,” reads the report. The banking sector umbrella association says that the increase was primarily driven by a rise in irrecoverable VAT and a nine per cent decline in profit before tax.

Kenya’s banking sector corporate taxes

The study, which included 43 institutions—37 banks and six microfinance institutions—accounting for over 99 per cent of the sector’s market share. It shows that despite the increase, its relative share declined slightly by 0.15 per cent compared to 2022.

The taxes contributed by the participating banks grew by 4.96 while the taxes collected by the government from the entire economy increased by 6.7 per cent.

Furthermore, the relative contribution by the participating banks to total taxes collected in Kenya decreased by a marginal 0.15 per cent in 2023 compared to 2022.

“Given the current high levels of compliance within the banking sector, this perhaps indicates that the tax contribution of the banking sector is reaching a level where it cannot be optimised further,” says the report.

However, the banking sector faced rising non-performing loans (NPLs), which grew to 14.2 per cent of total loans in 2023, up from 13.8 per cent in 2022. This increase, coupled with inflationary pressures, resulted in a reduction in the profitability of the banking sector with the Profit Before Tax (PBT) reducing by 9.24 per cent and Corporate Tax paid by the banking sector reducing by 23 per cent.

The report also introduced an analysis of “people taxes” for the first time, covering the Affordable Housing Levy (AHL), National Social Security Fund (NSSF), National Hospital Insurance Fund (NHIF), and Fringe Benefit Tax (FBT). This year in the study. The analysis shows that the contribution of the banking sector towards PAYE was 7.79 percent of all PAYE collected in the country.

The report further shows that the sector’s contribution to the national exchequer was $565 million (Sh73.05 billion) paid in corporate taxes, $223.8 million (Sh28.93 billion) in pay-as-you-earn, and $184 million (Sh23.81 billion) in excise duty, representing 59.45 per cent of all excise duty collected from the financial services sector.

The report also revealed that for every $0.77 (Sh100) generated by the sector, $0.44 (KSh57.2) goes to the government in taxes, KSh27.8 goes to employees, and a further KSh15 goes to shareholders.

The tax has been a pain point for many companies in Kenya. KRA data shows that nearly half of the active companies that filed annual returns in the year to June did not pay taxes on corporate earnings, pointing to deepening losses and elevated prevalence of tax avoidance schemes.