NEW REPORT URGES CAUTION AND REFORM AS KENYA MOVES TO REINTRODUCE MINIMUM TAX.
BY NJOKI KARANJA
NAIROBI, July 3, 2025 — As the Kenyan government signals plans to reintroduce a minimum tax under its Medium-Term Revenue Strategy (MTRS) 2024–2027, a new report by the Institute for Public Finance (IPF) in partnership with Oxfam Kenya is calling for a more equitable and legally sound approach to the policy.
Titled “Is Minimum Tax Still a Viable Option for Kenya? Lessons from Other Countries,” the report draws on international experiences—particularly from Nigeria and Tanzania—to propose a framework that avoids the pitfalls of Kenya’s earlier attempt to introduce a minimum tax in 2020. That effort was nullified by both the High Court and the Court of Appeal for violating constitutional principles of equity, fair treatment, and due process.
Initially introduced through the Finance Act, 2020, Kenya’s minimum tax was to be levied at 1% of gross turnover, aimed at preventing corporate tax avoidance and ensuring all businesses contribute to the national revenue. However, critics noted that taxing gross turnover—regardless of profitability—unfairly penalized loss-making companies and discouraged investment.
The new report emphasizes three core components in developing an effective minimum tax regime: the tax base, the rate, and allowable exemptions or tax holidays. While turnover remains the most common basis due to administrative ease and low evasion risk, the report warns that it can result in an unequal tax burden. Asset-based taxes, though potentially more equitable, are discouraged due to their negative impact on investment, while profit-based taxes are vulnerable to accounting manipulation.
Among the report’s key recommendations is the adoption of Nigeria’s more refined definition of gross turnover, which excludes non-operational income such as interest, rent, and royalties. This would address the High Court’s earlier concern that Kenya’s policy taxed companies even when they were drawing from capital rather than profits.
The report also advocates for a three-year grace period for startups before minimum tax obligations begin, aligning with Tanzania’s model. It further recommends special provisions to suspend the minimum tax during times of economic shock, such as pandemics.
"Introducing a minimum tax must be done thoughtfully to avoid repeating past mistakes," said IPF Executive Director James Muraguri. “It should protect the tax base without stifling business growth or violating constitutional rights.”
The report cautions, however, that minimum tax alone cannot resolve deeper structural issues in Kenya’s tax system. Broader reforms are needed to expand the corporate income tax (CIT) base by eliminating inefficient tax incentives and closing loopholes that enable avoidance.
Stakeholder engagement is also deemed essential to ensure the constitutionality and long-term sustainability of the policy. The report calls on the government to incorporate input from businesses, civil society, and legal experts during the design phase of the new tax proposal.
As Kenya prepares to table the Finance Act, 2025, which includes a provision to limit tax loss carry-forward to five years, the report offers a timely and evidence-based roadmap for fairer tax reform.
