Dear Kenya Revenue Authority Commissioner General; You assume office at a critical moment for our country, when revenue mobilisation, economic growth, job creation and private-sector competitiveness must work together.
I write on behalf of stakeholders across Kenya’s advertising, marketing and creative industries to draw your attention to an issue that is having an increasingly significant impact on the sector: the five percent withholding tax applied to the sector.
We recognise the rationale for withholding tax. It is an important mechanism for improving compliance and ensuring that government revenues are collected efficiently.
The concern is not with taxation itself, but with the unintended economic consequences of the current application of the rate in an industry where margins are relatively thin, and where cash flow is critical to keeping businesses operating and people employed.
For many firms in the advertising and creative sector, net margins can be modest.
A five percent deduction from gross revenue can, therefore, represent a substantial proportion of the profit ultimately available to a business. The result is that significant amounts of working capital are effectively transferred into the tax system before a company’s final tax liability is determined.
This is increasingly becoming a business sustainability issue.
Across the industry, businesses are experiencing pressure on cash flow, with consequences including delayed payments to suppliers, constrained hiring, limited investment in technology and innovation, wage pressures and, in some cases, reductions in workforce.
These pressures do not stop at advertising agencies. They extend across production companies, media agencies, content creators, digital specialists, freelancers, media owners and the wider network of businesses that depend on advertising expenditure. The issue becomes more acute where excess withholding tax credits cannot be recovered quickly and predictably.
In my view, a withholding tax system works best when there is a corresponding mechanism through which taxpayers can efficiently reconcile and recover amounts withheld in excess of their ultimate tax liability. Where refunds or offsets take too long, the system effectively turns working capital into an interest-free source of financing for the tax system.
That is particularly challenging for smaller and growing businesses, which have fewer financial reserves and less capacity to absorb prolonged cash-flow constraints.
This matters beyond the fortunes of the advertising industry.
It helps manufacturers launch products, enables retailers to reach customers, allows financial institutions to acquire new users and gives SMEs a route to market. It also supports a growing creative economy encompassing filmmakers, designers, photographers, writers, digital creators, strategists, technologists and thousands of young professionals.
Constructive dialogue
At a time when Kenya is seeking to expand youth employment, digital entrepreneurship and the creative economy, we should be careful that the design of tax administration does not inadvertently constrain sectors with significant potential for growth and job creation.
The industry believes this is an opportunity for constructive dialogue between KRA, the National Treasury and the Creative sector.
The taxman could undertake a review of the applicability and appropriateness of withholding tax on advertising, marketing and creative services, including an assessment of whether the current rate remains proportionate to the economics, margins and operating realities of the sector.
The second would be to adopt a reduced withholding tax rate of two percent for the sector as this provides a more appropriate balance between protecting government revenue collection and reducing the significant working-capital burden.
The third, if the withholding mechanism is retained, would be to establish a transparent, predictable and time-bound process for the reconciliation, offset or refund.
The objective should not be to weaken tax compliance. It should be to design a system that enables government to collect revenue efficiently while allowing compliant businesses to remain liquid, invest, employ people and grow.
Kenya needs revenue. Businesses need liquidity. Our shared objective should be to design a tax system that protects both.
