Kenya Urged to Take Cautious, Inclusive Approach on Minimum Tax Reintroduction.

Veronica ndegwa, Lead Researcher, IPF during Dissemination of a Report on Debt Transparency and Minimum Tax.

Nairobi Kenya, July, 03, 2025

A new report jointly released by the Institute for Public Finance (IPF) and Oxfam-Kenya is reigniting debate on the reintroduction of Kenya’s minimum tax. The report, titled “Is Minimum Tax Still a Viable Option for Kenya? Lessons from Other Countries,” arrives at a critical juncture as the Government, through its Medium-Term Revenue Strategy (MTRS) 2024–2027, signals fresh efforts to reintroduce a minimum tax as part of measures to curb corporate tax avoidance and protect the country’s revenue base.

Kenya’s first attempt to roll out a minimum tax in 2020, introduced through the Finance Act, faced strong legal opposition. Both the High Court and the Court of Appeal declared the tax unconstitutional, citing violations of equity, the right to fair treatment and dignity, and non-compliance with procedural requirements under the Statutory Instruments Act. The tax, which sought to levy 1% of a business’s gross turnover regardless of profitability, aimed to ensure that all enterprises contributed to public revenue and to prevent base erosion. However, critics argued that it unfairly penalized loss-making businesses and undermined fundamental tax principles.

The new research by IPF and Oxfam-Kenya offers critical insights into how Kenya can learn from international experiences to design a fair, effective, and legally sustainable minimum tax regime. According to the report, three essential elements must be considered in developing such a regime: the tax base, the tax rate, and exemptions or tax holidays. Notably, while a turnover-based minimum tax is widely used due to its simplicity and ease of administration, it risks disproportionately burdening companies with varying profitability levels.

Alternative approaches include asset-based or profit-based minimum taxes. However, the report cautions against an asset-based approach, noting its potential to discourage investment. A profit-based minimum tax, while more closely tied to a company's financial performance, remains vulnerable to accounting manipulations and tax avoidance schemes similar to those seen under the standard corporate income tax.

Drawing on examples from Nigeria and Tanzania, the report proposes practical recommendations for Kenya. It suggests adopting Nigeria’s definition of gross turnover, which excludes assets and equity from tax calculations. This adjustment would address concerns raised by Kenyan courts that taxing gross turnover could force loss-making businesses to pay taxes on their capital. The report also recommends clearly defining operational activities for tax purposes, excluding income streams such as interest, rent, and royalties that are unrelated to core business operations.

In addition, the report urges the government to consider a grace period for new businesses, allowing them at least three years to report losses before becoming subject to minimum tax. This approach, modeled on Tanzania's system, recognizes the challenges startups face in their early years. Furthermore, in times of extraordinary global shocks, like the COVID-19 pandemic, the government should introduce special provisions enabling genuinely loss-making businesses to temporarily avoid minimum tax obligations.

The report also acknowledges recent government efforts to address base erosion through the Finance Act, 2025, which limits the carrying forward of tax losses to five years. Previously, businesses could indefinitely carry forward losses, with the possibility of additional extensions granted on a case-by-case basis.

Perhaps most critically, the research emphasizes the importance of robust stakeholder engagement in designing the minimum tax framework. The lack of such engagement during the 2020 attempt contributed significantly to the courts’ decision to strike down the policy.

While acknowledging that a well-crafted minimum tax can enhance revenue generation and tax fairness, the report cautions that it is not a silver bullet. Broader reforms, particularly eliminating inefficient and preferential tax incentives for corporates, remain essential to strengthen Kenya's corporate income tax system and close loopholes that facilitate tax avoidance.

As the government considers reintroducing the minimum tax, the lessons highlighted in this research provide a clear pathway toward a more equitable and sustainable approach that balances the need for revenue with fairness for businesses.