Large multinational companies operating in Kenya are caught in a compliance dilemma after the State failed to provide subsidiary regulations needed to implement the new global minimum tax law despite a looming April 30 payment deadline.
The minimum top-up tax rule requires multinational enterprises, with consolidated annual global revenues of at least pound 750 million (about Sh114 billion) in at least two of the previous four accounting periods, to pay at least 15 percent tax on profits made in Kenya.
Kenya domesticated the Organisation for Economic Co-operation and Development (OECD)-led global minimum tax framework through the Tax Laws (Amendment) Act, 2024.
Under the global minimum tax framework, if the effective tax rate paid by a multinational’s operations in a particular country falls below 15 percent, a ‘top-up tax’ can be imposed to bridge the gap.
Kenya, however, has not published the final subsidiary regulations to guide how the tax should be calculated, reported, and paid, leaving firms struggling with a dilemma of compliance with Kenya’s Qualifying Domestic Minimum Top-Up Tax (QDMTT) framework.
The uncertainty amongst affected firms is compounded by the fact that the minimum top-up tax is payable by the end of the fourth month after the year of income. This means a company with a December 31, 2025, financial year would be required to pay by April 30, 2026.
‘The Minimum Top Tax Regulations (Draft Regulations) are still in draft form and have not been regulated. In this regard, though in law there is a requirement to comply with the minimum top-up tax, it is unlikely that entities would practically be able to comply since the guiding regulations are not in force,’ tax and legal advisory firm Bowmans pointed out in a note.
The QDMTT framework aligned Kenya with OECD-led global tax reforms aimed at curbing profit shifting and ensuring large corporations pay a minimum level of tax wherever they operate.
The absence of final regulations, however, has created a compliance uncertainty on how to calculate the effective tax rate and determine the final liability.
Analysts at Bowmans say the complexity revolves around the formula used to compute the effective tax rate, which relies on financial accounting figures rather than traditional tax computations.
They reckon that the rules require companies to aggregate ‘adjusted taxes’ in their financial statements, including deferred tax and taxes on distributions, and then divide this by net income before tax.
They are then required to apply further adjustments to determine what is known as ‘excess profit,’ deducting expenses linked to employee costs and tangible assets before arriving at the base on which any top-up tax is charged.
The draft minimum top-up tax regulations, which are yet to be formally adopted, have proposed that affected entities should notify the Kenya Revenue Authority (KRA) within 60 days of the rules coming into force, and file returns within six months after the end of their financial year.
Officials at KRA have described the implementation of the global minimum tax as ‘technically complex worldwide,’ citing the intricate rules governing effective tax rates, deferred taxes, and cross-border reporting.
The tax authority said in March it was engaging affected taxpayers through sensitisation forums and industry consultations, while also working with professional bodies and advisory firms like the Institute of Certified Public Accountants of Kenya (ICPAK) and the Law Society of Kenya to align interpretations of the rules.
Kenya’s domestic top-up tax rule gives the KRA the first right to collect that difference.
This is intended to prevent scenarios where another country-typically the jurisdiction where the multinational’s global headquarters are based-would instead claim the additional tax under the OECD rules.
‘The guiding principle is simple: If tax is not collected in Kenya, another jurisdiction may collect it,’ KRA Commissioner for Large and Medium Taxpayers Weldon Ng’eno said via email in March. ‘Our framework ensures Kenya protects its tax base in line with global reforms.’