Bank’s attempt to cut taxation rejected

Denis Gitau | Jun 30, 2020

Banks’ proposal to have taxable incomes reduced has been rejected by a parliamentary committee after the more stringent regulations of the Central Bank of Kenya (CBK) were put in place.

The Kenya Banker’s Association (KBA) were looking to have the income tax law, through a submission to the National Assembly’s Committee on Finance and National Planning, changed to enable members to access CBK’s prudential guidelines to facilitate accounting for dud loans which allow for higher deductions and hence attract lower taxes.

According to the MPs, reclassifying the loans would lead to revenue loss for the Exchequer, adding that the aggressive provisioning laid out by the CBK was meant to act as protection to depositors while the taxman seeks to collect revenue.

The bankers recommended that financial institutions licensed under the Banking Act, Cap 488, shall have the deductible bad debts determined based on CBK's prudential guidelines.

This amendment, according to the institutions, would aid in aligning the computation of the provisions for bad debts for tax purposes to those of the CBK.

This would significantly reduce the challenge of keeping track of every transaction.

The committee’s report said, “The CBK guidelines have higher provisions for bad debts to protect depositors. If the CBK guidelines are adopted, they will reduce taxable profits of the financial institution, leading to loss of tax revenue.”

While this is not the first time banks have brought out this argument, the KRA has been quick to counter by arguing that this accounting method cannot be likened to the one used by the regulator of financial institutions as the latter serves a different purpose.

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