Paying Taxes Fourteen years of data and analysis of tax systems in 190 economies: how is technology affecting tax administration and policy?

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1 Paying Taxes 2019 Fourteen years of data and analysis of tax systems in 190 : how is technology affecting tax administration and policy? Capital Club East Africa, Kenya. 5 December Paying Taxes 2019 China pwc.com/payingtaxes

2 Foreword Kenya has made good progress in implementing reforms geared towards making complying with taxes easier and as a result it has improved its Paying Taxes score by 46% since Paying Taxes This improvement has largely been driven by digitalization of the tax filing and payment process. This is a positive step for Kenya as it seeks to position itself as an investment hub and a globally competitive and prosperous country by the year 2030, as outlined in Kenya Vision The Kenya Vision 2030 is a long term economic blue print which aims at transforming the country into a middle income economy by the year Among the factors identified to catalyze the achievement of Vision 2030 is increasing competitiveness of Kenya s doing business environment, to promote efficiency growth, and attract more investment locally and internationally. The tax environment is a major part of the business environment and any improvement in the tax environment would benefit the business environment. The tax environment, as measured by World Bank Group and PwC s Paying Taxes study has been improving steadily since 2004, but there is still more that can be done to make it easier to pay taxes in Kenya. Since the inception of the online tax filing and tax payment platform (itax) in the year 2014, a number of Kenyan taxpayers have continued to embrace its use which has gradually reduced the time taken to file tax returns and pay the taxes due. Although in the initial stages, itax experienced a number of bugs which led to delays in the filing process, this has been gradually addressed over time. The recent improvement in Kenya s Paying Taxes score from in Paying Taxes 2016 to in Paying Taxes 2019 has been largely driven by the implementation of itax. Over this period, the number of tax payments a taxpayer makes has reduced from 30 to 25 (17% improvement) while the time taken to comply with taxes reduced from hours to hours (16% improvement). The Total Tax and Contribution Rate (which measures the amount of all taxes borne by the case study company, as a proportion of the profit before all taxes borne), has remained largely stable over the same period (37.1% in 2014 and 37.2% in 2017). In general, a number of changes in the tax environment contributed to Kenya s improvement in Paying Taxes including: Implementation of the online tax filing and payment platform, itax; Consolidation of all tax administrative procedures into the single Tax Procedures Act; Continued taxpayer education on tax administrative procedures/measures by the Kenyan Revenue authority (KRA); Improved customer relations by allocating dedicated relationship managers to taxpayers by the KRA; and Adoption of various tax regulations to provide clarity on some previously ambiguous tax provisions. While there has been notable improvement in the tax system over several years, it remains to be seen how the country will sustain this in future given that the key driver for the improvement achieved so far (digitalization of tax filings and payments) seems to have been largely exploited. The government therefore might need to consider a number of options to further improve Kenya s Paying Taxes score. The government could consider making filing and payment of National Social Security Fund (NSSF) electronic. This could help reduce the number of payments as well as the time taken to comply with paying taxes. The government could also consider whether there are technological improvements/ advancements that can be exploited such as linking taxpayers accounting systems to the KRA s systems. Subject to an appropriate assessment of the potential fiscal impact, the government could also consider reducing tax rates and/or eliminating some smaller taxes altogether, taking into account the costs of collecting the taxes relative to the amounts raised. 1 Paying Taxes 2019 Kenya

3 Key findings from the Paying Taxes 2019 data 3 Technology is already making tax compliance easier in many, but more can be done to unlock its full potential. The global average results for our case study company are almost unchanged from last year, and yet 113 recorded tax reforms. 237 hours Time to comply DOWN 2 HOURS FROM hours Since 2004, the global average time to comply has fallen by 84 hours. Highperforming use Real-time reporting systems Pre-populated tax returns 23.8 Number of payments Time Machine-learning tax accounting systems DOWN 0.2 FROM % Total Tax & Contribution Rate Payments THE SAME AS /100 Post filing index INCREASED BY 0.2 FROM 2016 TTCR PFI 10.3 payments The global average number of payments has fallen by 10.3 since For detailed results by economy and region and to prepare your own comparisons, please see 3 The most recent data in Paying Taxes 2019 relates to the calendar year ended 31 December 2017 The post filing index is a score out of 100 The higher the score, the more efficiently taxpayers receive VAT refunds and correct corporate income tax returns. 2 Paying Taxes 2019 Kenya

4 Labour and profit taxes have each accounted for around 40% of the Total Tax and Contribution Rate since 2008 will this continue? Audits and disputes can be some of the most difficult interactions between taxpayers and tax officers. The labour tax component of the Total Tax and Contribution Rate rose in 39, but fell in The following four components are each given a score out of 100 and averaged to give the post-filing index score hours to comply with a VAT refund In 2017, the profit tax component of the Total Tax and Contribution Rate fell in 58, and rose in weeks to obtain the refund hours to comply with the correction of a corporate income tax return. The average Total Tax and Contribution Rate is around 13 percentage points higher for low-income than high- and middle-income ones. 13 points to complete a corporate income tax correction weeks Improving tax officers skills is vital for a well-functioning tax system. 97% 35% High-income are most likely to perform well in both pre-filing and post-filing processes but there are exceptions. Pre-filing performance 97% of provide training to tax officers. 35% of offer regular, periodic training to tax officers. Post-filing performance High income Middle income Low income

5 Changes to Kenya s tax system in Paying Taxes 2019 In Paying Taxes 2019, Kenya s time to comply improved from hours to hours (3% improvement) and the number of tax payments reduced from 26 to 25 (4% improvement). The improvement in Kenya s paying taxes ranking over the past year is attributable to two issues. First is the continuous improvement in reducing the time the itax system took to upload tax returns when submitting filings, hence the reduction in the compliance time. Second is the implementation of Unified Business Permit by the Nairobi City County where businesses are only required to apply for one business permit via an online platform. Previously a business involved in manufacturing and trading would be required to apply manually for both manufacturing permits and trading permits. A further important change is the adoption by the KRA of a risk-based audit approach where taxpayers are categorized based on the risk of non-compliance. Those associated with a high risk of non-compliance would be flagged for audits while those with low/no risk are not selected for audit. This came as a reprieve to taxpayers who previously complained of numerous KRA audits taking much of their productive time and resources. While this change has benefitted many taxpayers in practice, it has not affected the Paying Taxes score. There would still be a greater than 25% probability of the case study company being subject to further review following a correction to its corporate income tax return. Figure 1: Trends in the Paying Taxes sub-indicators for Kenya since 2004 Figure 2: Trends in the Paying Taxes post filing sub-indicators for Kenya since 2014 % / Number of payments Hours Postfiling index (0-100) % Total Tax & Contribution Rate 25 Number of payments 180 hrs Time to comply VAT refund components: Time to comply with a corporate income tax correction (hours) The time to complete a CIT correction (weeks) Source: Paying Taxes 2019 data VAT is not applicable on the machine purchased by the case study company to be used for manufacturing Source: Paying Taxes 2019 data 4 Paying Taxes 2019 Kenya

6 Get in touch Steve Okello Tax Leader, Kenya and East Market Area Titus Mukora Tax, Partner pwc.com/payingtaxes At PwC, our purpose is to build trust in society and solve important problems. We re a network of firms in 158 countries with more than 236,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. 1 Please Paying see Taxes 2019 Chinafor further details.