The financially ailing Kenya Airways (KQ) has received a shot in the arm as a parliamentary committee has recommended its exemption from requirements of the minimum tax enacted last year until it returns to profitability.
However, this will only come to fruition if the National Assembly approves the report of its committee on Delegated Legislation.
The committee chaired by Tiaty MP Kamket Kasait has recommended that the loss-making KQ, where the Kenyan government owns a 45 per cent shareholding, and its subsidiaries, be spared from minimum tax on account of the Covid-19 pandemic.
In the legal notice No.27 of 2021 submitted to Parliament, National Treasury Cabinet Secretary Ukur Yatani notes that the pandemic affected the operations of airlines worldwide and worsened the financial position of the already ailing KQ.
“It was therefore considered prudent to grant the exemption from minimum tax to support the company to continue its operations until it returns to profitability,” the committee recommends.
However, KQ will continue to pay corporate tax and other taxes.
“The committee was satisfied that the legal notice was submitted to the National Assembly without unreasonable delay,” the committee’s report, adds.
KQ’s partners
On how the exemption will affect KQ partners like KLM and Air France, the committee was informed that KLM is a shareholder of Kenya Airways APLC with a shareholding of 7.76 percent.
This means that since KQ has made losses, no benefit will be derived by KLM.
The KQ subsidiaries include Kenya Airfreight Handling limited that deals in cargo handling for perishable products, Jambojet limited, which is a local passenger air transport and African Cargo Handling limited that handles cargo.
The other two subsidiaries are dormant. They are Kencargo Airlines International limited and Fahari Aviation limited or Pride Oil limited, which deals with drones and emerging technologies.
In all these subsidiaries, KQ has 100 per cent shareholding except Kenya Airfreight Handling limited where it has 51 percent stake.
Last year’s enactment of the Finance Act 2020 introduced minimum tax payable at one percent of gross turnover of a business entity whether in profit position or not.
Crippling losses
In its financial reports for the financial year ended December 2020, KQ recorded a loss of Sh36.2 billion, the worst ever in its history.
The loss was blamed on Covid-19 disruptions that led to a decline in passenger volumes.
In 2019, the national carrier recorded Sh12.98 billion in losses.
The losses are a clear indication that it will take longer for the national carrier to repay about Sh75 billion in guaranteed loans from the national government.
“To ensure that this tax does not significantly compromise the operations of airlines, it was deemed necessary to cushion these airlines from the impact of paying minimum tax as it is clearly known that the company’s financial position has been on a downward trend,” Mr Yatani noted.
The CS noted that this is in line with practices by other governments.
But even as the committee approved the exemption, it raised concerns that the move will likely raise issues of discrimination against other airlines operating domestically as well as other companies especially those affected by Covid-19.
National interests
The committee also noted that the airline has experienced financial challenges for several years,. even before Covid-19 pandemic struck Kenya in March 202, and that it has been bailed out before.
However, CS Yatani while appearing before the committee to defend the exemption, said that KQ is a national carrier with strategic trade and tourism interests, including hosting the headquarters of the United Nations Environmental Programme (Unep), hence its need for government support.
This support, the CS told the committee, is necessary so that Kenya can ably compete with other countries that have injected funds to protect their national carriers amid the pandemic.
“KQ, as the national carrier, plays a pivotal role in the economy through marketing Kenya as a tourist destination, trade facilitation, job creation among others,” Mr Yatani told the committee.
“Considering its financial operations, the minimum tax will render the company’s operations unsustainable.”
The CS also told the MPs that the national carrier continued to pay lease expenses even during the suspension of all international operations occasioned by the pandemic.
This in addition to other costs such as those for regular inspection of aircraft in compliance with international regulations, thus increasing its likelihood of making losses.
“It is because of its important role in the economy that the government, as a majority shareholder, has continued to provide tax incentives and bail it out to finance its operations despite making losses over time,” the CS said.
Criticism over tax
Although the tax was meant to boost government revenue, it has received criticism from various quarters due to the likely negative impact on some sectors.
Already, the National Treasury has been inundated with various presentations from stakeholders on its impact on several classes of businesses, specifically public entities that are facing challenges.
But on the flipside, the minimum tax, payable in four instalments on the 20th day of the fourth, sixth, ninth and twelfth months of the year of income, was meant to discourage tax planning.
Some companies perpetually declare losses to avoid paying tax while others may not be paying the correct amount.
This is, notwithstanding, that the amendment did not take into consideration specific sectors of the economy that are strategic to any government for purposes of its operations.
These sectors include aviation, which is strategic to any government, security and trade.
The legal notice was published on March 17 and submitted to the National Assembly two weeks later.
It was communicated to parliamentarians on April 28, in accordance with the Statutory Instruments Act of 2013, and committed to the Delegated and Legislation committee for consideration. BY DAILY NATION