It is best for local businesses and multinational entities in Kenya to be compliant with the country’s tax regulations. Proper tax planning enables organizations to arrange their affairs in a way that minimizes their tax exposure and liability. Organizations such as Ronalds LLP work with companies to capitalize on incentives offered to taxpayers, especially in industries where the government wants to encourage strategic growth. In this article, we discuss the essential elements of tax planning strategies and how your company can capitalize on them to improve profitability and stay ahead of your competition.
What is Tax Planning for Companies
Tax planning for companies refers to the organization of a company’s affairs in an effort to minimize its tax liability. Corporate tax planning involves all activities undertaken by a company to reduce its tax burden by taking advantage of all exemptions, exclusions, deductions, permissible allowances, and rebates available. In simple terms, it is an undertaking by a business to enjoy all tax benefits legitimately available. Professional tax planning ensures the minimization of one’s tax burden in addition to conformity to set legal requirements.
Basic Tax Reduction Strategies in Kenya
Now that you understand the importance of tax planning here are three basic tax planning strategies you can employ to reduce your tax burden and improve profitability:
Choose an Accounting Method
Based on their business model, all companies operating in Kenya have the option to choose how they report their income and expenses. As a company, it is important that you understand the difference between cash and accrual as the two main accounting methods. Even if you have a dedicated CFO or a partner like Ronalds taking care of your financial reporting, it is important to understand the basics of each method to make the best decisions for your company. The option you go for will determine your company’s ability to handle its tax obligations, which is why it is important that you make your decision from a point of knowledge.
For purposes of continuity, the method of reporting you choose to use as a company should not be changed at the end of every financial year. Changing your method of reporting can be costly to a company as it puts a lot of pressure on the finance team each time they implement the changes.
Accelerate Expenses at the End of Each Year
This is effective for approved expenses you plan to utilize at the beginning of the subsequent year. Instead of paying for a product or service when you need it in January or march, you can choose to settle the payment in December or before. Implementing this strategy will allow you a tax credit for the expense postponing its tax liability by a year.
Find and Utilize Tax Credits
The Kenya government awards tax credits to encourage positive behavior among taxpayers. However, for businesses, tax credits are simply opportunities for companies to receive cash back from the government.
Tax Planning process for Companies in Kenya and How We Handle It
We break tax planning into three categories while taking our clients through the process:
1. Business Structuring
When we first take in a new business as a client, the first thing we seek to uncover is the company’s business structure. This will guide us on the strategy to use depending on how the company is structured. Business structuring should be evaluated during the growth stage to ensure maximum utilization of tax savings that can be garnered.
2. Tax Payment
Planning for regular tax payments is another critical step in the process. It is common for businesses to default on their tax payments simply because they did not know the payments were due. Another common reason for defaulting is business owners failing to allocate enough money for tax payments.
Pre-planning for regular tax payments enables company executives and business owners to understand how their income relates to tax obligations and structure their payments. So, we build a list of all upcoming payments keeping our clients in the know about when taxes should be paid to avoid any unnecessary penalties from the taxman.
3. Cash Management
Finding ways to work with your company’s income and incorporate it into your tax payment is a vital aspect of the tax planning process. Creating a custom-tailored strategy for handling income as a company can have a big impact on your efforts to reduce your tax burden. We help our clients develop a plan to manage their cash and pay their taxes gradually throughout the year.
5Ds of Tax Planning
The five pillars commonly referred to as 5Ds of tax planning include deducting, deferring, dividing, disguising, and dodging to save tax.
Deducting: This involves claiming tax credits you might not have claimed in full in the past. By making key changes, we create the opportunity for our clients to claim and enjoy some of these credits.
Deferring: Under certain circumstances, it is possible for you to take a tax bill owed in the current year and push it to a future year. While this might not eliminate tax obligation, paying the tax in the future is better than paying it immediately as money gains value with time.
Dividing: You can save money if you move income from a family member with a higher tax rate to one with a lower rate. By dividing the income, you can have more money at your disposal as a family.
Disguising: Here you can convert one type of income to a different type of income that is taxed at a lower rate. This is possible since not all income is taxed equally.
Dodging: This involves structuring our income in a way that some of the taxable amounts on your tax returns might not have to be reported on your tax returns in the future. Moving to non-taxable cash flow leaves you with more of your hard-earned cash.