The Kenya Revenue Authority Withdraws Public Ruling on Treatment of Tax Loss in Computing Profits

In a notice to taxpayers on 21st September 2021, the KRA announced that with effect from 1st October 2021, all taxpayers will be required to prepare separate accounts in respect to each declared source of income.

Following the withdrawal of the letter to the Institute of Certified Public Accountants (ICPAK) dated 7th February 1979, which waived the requirements of Section 15(7)b of the Income Tax Act, companies will henceforth only be allowed to deduct any losses incurred from profits or gains derived from the same specified source of income in the following or subsequent years of income, for as long as the losses had not already been deducted.

In the 1979 letter, the then Commissioner of Income Tax decided to waive the ‘separate sub-accounts’ requirement of Section 15(7)b in the case of the ‘larger’ companies, which he included as finance institutions, insurance companies, oil companies, banks, large manufacturing concerns and companies quoted on the (then) Nairobi Stock Exchange.

Owing to the time that has lapsed since the issuance of this ruling to date, the separation of accounts according to income stream may prove to be a cumbersome exercise. This is because, in many situations, there could already be previous years’ losses from different income sources being deducted against current year gains.

One could argue that since the same entity is incurring the loss, it should not matter under which income stream the losses are reported, hence the issuance of the Ruling in the first place. The separation could best be applied in the cases of incorporation of new entities to take care of different income streams, where it is easier to keep track of related party transactions.

On the other hand, it is expected that this withdrawal will greatly assist the Revenue Authority in streamlining the reporting of different streams of income belonging to the same entity, and may mark an increase in revenue collected.

Should you or your company need assistance in preparation of separate accounts for each declared income stream, please do not hesitate to seek the services of a competent Tax Consultant.