What is Minimum Top-up Tax?
The OECD’s pillar two framework was designed to prevent large corporations from avoiding taxes by shifting profits to low-tax jurisdictions. At its core Minimum Top-up Tax seeks to ensure that MNE’s operating in Kenya pay a minimum effective tax rate of 15%. MNEs that are taxed at a lower rate than 15% will be required to top up to bring the effective rate to 15%.
How to calculate the effective tax rate?
- The combined effective tax rate for a covered person shall be the sum of all the adjusted covered taxes, divided by the sum of net income or loss for the year of income, multiplied by a hundred.
- The amount of tax payable shall be the difference between fifteen percent of the net income or loss for the year of income of a covered person and the combined effective tax rate for the year of income, multiplied by the excess profit for covered persons.
Definitions:
- Adjusted Covered taxes – means taxes recorded in the financial accounts of a covered person for the income, profits, or share of the income or profits of a covered person where the covered person owns an interest, and includes taxes on distributed profits, deemed profit distributions under this Act subject to such adjustments as may be prescribed.
- Covered person – means a resident person or a person with a permanent establishment who is a member of a multinational group and the group has a consolidated annual turnover of seven hundred and fifty million Euros or more in the consolidated financial statements of the ultimate parent entity in at least two of the four years of income immediately preceding the tested year of income.
- Net income or loss – means the sum net income or loss for the year of income after deducting the sum of the losses of a covered person as determined under a recognized accounting standard in Kenya.
- Excess profit – means the net income or loss of a covered person for the year of income less:
- 10% for the employee costs and
- 8% for the net book value of tangible assets
- Provided that the employee cost and book value of tangible assets may be adjusted as prescribed in regulations.
Conclusion
The potential implications on MNEs are varied the tax represents a new layer of financial complexity. Large corporations in Kenya would need to carefully evaluate their existing tax strategies and examine their tax structures to ensure compliance with the new rules.
This could lead to more transparent reporting and a more comprehensive understanding of their economic contributions. However, one potential challenge that Minimum top-up tax will face is that MNEs may argue that this additional taxation will impact their operational costs and influence investment decisions.
This might affect Foreign Direct Investment (FDI) and the overall attractiveness of Kenya as an investment destination. The Minimum Top-up Tax represents a delicate balance between attracting international business and ensuring fair economic contributions. The success of Minimum Top-up depends on the ability to create an efficient revenue-collecting mechanism without burdening MNEs and discouraging investment.
This material is intended solely for informational purposes and should not be relied upon without seeking specific professional advice on the matter. Should you have any questions regarding this topic, please feel free to contact our team at info@ke.andersen.com or +254 20 5100263.
Contributors & Contact Persons
Phil Njoka
Graduate Trainee
phil.njoka@ke.andersen.com
Marco Manyenze
Associate Director
marco.manyenze@ke.andersen.com