The banking sector in Kenya is grappling with a growing complexity of tax compliance demands from the government, making it increasingly difficult for financial institutions to meet tax filing deadlines.

The Kenya Bankers Association (KBA) has called for revisions to the tax compliance timelines in response to the operational challenges faced by the sector.

According to the Kenya Bankers Association Total Tax Contribution Report 2023, banks are now handling more tax payments than ever before, with the average number of monthly payments rising to 42 in 2023 from 25 in 2019.

This increase is attributed to new tax requirements imposed by the Kenya Revenue Authority (KRA), including the introduction of a shorter five-day window to remit both withholding tax (WHT) and withholding VAT.

These new tax laws have placed an administrative burden on banks, requiring institutions to allocate more resources to tax compliance. For instance, the report states that banks are now forced to dedicate at least three permanent employees to full-time tax compliance tasks, which equates to approximately 450 work hours per month.

This workload far surpasses the average of 14.95 hours per month (179.5 hours annually) that was reported for Kenyan companies in PwC’s Paying Taxes Report in 2019.

It is this increase in operational demands that has prompted the KBA to recommend extending the filing deadlines for withholding tax and VAT from the current five days to either seven days or the 20th of the following month.

Such an adjustment, bankers said, would provide them with the necessary time to navigate the increasingly complex tax administration landscape.

Another pressing concern for Kenyan banks is the rising cost of tax compliance and the increasing likelihood of incurring penalties. As tax regulations become more intricate, the risk of errors and missed deadlines also grows.

The KBA report found that nearly 40 percent of banks have faced penalties due to compliance issues, further straining their financial and operational resources.

Such penalties are often a result of the tight timelines for filing returns, which many banks find difficult to meet given the complexity of the tax laws. The administrative burden, combined with the looming threat of fines, is forcing banks to reassess their internal tax processes and seek additional resources to manage compliance effectively.

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Impact on profitability

The burden of tax compliance is not only operational but also financial. The KBA report reveals that the Total Tax Rate (TTR) for Kenyan banks has risen significantly to 47 percent in 2023 from 43.09 percent in 2022. This means that for every Kes100 of profit made by participating banks, Kes47 is paid to the government in taxes.

This 3.1 percent increase in the TTR has been driven by an 8.99 percent decline in profit before tax (PBT), with participating banks reporting a drop in gross earnings from Kes239.70 billion in 2022 to Kes218.14 billion last year.

Despite the decline in profitability, the taxes borne by the banking sector only fell by 0.74 percent, further illustrating the growing financial strain imposed by taxes. As the TTR continues to rise, banks may find it increasingly difficult to maintain profitability while adhering to the stringent tax requirements set by the government.

The need for more time

Given these challenges, bankers are calling on the government to reconsider the current tax compliance timelines. Extending the deadline for filing WHT and VAT returns would provide the players with the flexibility needed to manage their tax obligations more effectively, without compromising the accuracy of their filings or risking penalties.

The report also points to the increased reliance on the electronic tax invoice management system (eTIMS) as a contributing factor to the sector’s tax compliance difficulties. Under the current regulations, any business expense must be supported by a valid tax invoice generated from eTIMS in order to be deductible for income tax purposes.

This additional requirement has further complicated the tax compliance process for banks, which are now urging the government to offer more time to meet these new demands.

Looking ahead, the banking sector anticipates that tax compliance challenges will continue to grow unless the government intervenes with more lenient policies. The KBA expects the TTR to rise further in 2024, driven by the continued reliance on eTIMS.

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