A top-up tax is a mechanism designed to ensure that large multinational companies (MNEs) pay a minimum level of tax on their profits in each country they operate in.
Here’s how it works:
- There’s a minimum tax rate set, currently at 15%.
- MNEs calculate their effective tax rate (ETR) in each country, which is basically the total tax they pay divided by their total profit in that country.
- If an MNE’s ETR in a particular country falls below the minimum rate (15%), a top-up tax is applied.
- This top-up tax essentially increases the MNE’s tax bill in that country to bring their ETR up to the minimum level.
The goal of the top-up tax is to prevent MNEs from shifting profits to low-tax countries to avoid paying taxes. This practice is known as base erosion and profit shifting (BEPS).
By setting a minimum tax rate, countries hope to create a more level playing field for businesses and ensure they get a fair share of tax revenue.
Here are some additional points to consider:
- The top-up tax is part of a broader set of international tax rules called the GloBE Rules, which were developed by the Organisation for Economic Co-operation and Development (OECD).
- There are different mechanisms for collecting the top-up tax, depending on the country.
Introduction of top-up tax in Kenya
Kenya is actually implementing a minimum top-up tax as proposed in their Finance Bill, 2024. This aims to target multinational companies (MNCs) that are part of a larger group.
This proposal was upheld in the finance bill 2024 amendments announcement.
Here’s how it applies in Kenya:
- The minimum tax rate set is 15% of the net income or loss for the year.
- This applies to resident companies or those with a permanent presence in Kenya, belonging to a multinational group with a consolidated annual turnover of €750 million (approx. KES 91.8 billion) in at least two of the previous four years.
- The company calculates their effective tax rate (ETR) for the year in Kenya.
- If the ETR falls below 15%, a top-up tax is applied.
This top-up tax ensures the Kenyan government receives a minimum level of tax revenue from these large MNCs, even if they manage to lower their taxable income through various strategies.
It essentially prevents them from taking advantage of lower tax rates in Kenya.
Here are some additional points to remember:
- This is a new proposal, and the Finance Bill is still under review (as of June 19, 2024).
- The exact regulations for calculating employee costs and net book value of tangible assets (used to determine excess profit) might be further defined.