One of the greatest purposes of an education is to encourage critical thinking, to create problem solvers. Studying law is an even greater equipment, seeing that most matters in the world are controlled by the law. Understanding the law, and how it affects the course of the nation is therefore a powerful tool for anyone who understands it. The law is dynamic; it grows with the society, the economy, and with the changing times.
One of the most recent and notable arising matters in Kenya is on Taxation. The government in a bid to raise more revenue to meet the high expenditure saw it best to increase tax rates on some items. This includes Value added tax on petroleum and petroleum products, a raise in tax on internet purchase, including a proposed raise of corporate tax rate from 30% to 35 %. In appreciating that education ought to create problem solvers, as a student I wondered, is increasing taxes the only way the government can raise more revenue? Are there more unexplored sources of revenue?
This question led to exploration of where the state invests its resources. It turned out that the state heavily invests in public service through state corporations.Having undergone clinical externship at a state Corporation, at the National Youth Council, provided an upper hand in understanding state corporations. One of the goals of undergoing clinical externship was to criticize and compare content learnt in theory versus real life. It turned out that State corporations in quite a number of ways resembled companies.
Due to the proposed increase in Taxes under the Finance Bill 2018, questions of taxation in companies arose. This also led to my curiosity as to whether State Corporations are taxed. If not, are their similarities to companies enough, as to justify a demand that they too, should be taxed?
The word company in itself is strictly no legal definition. This is the position held by Professor Gower. The Companies Act attempts to define a company, where a company is defined as “a company formed and registered under this Act or an Existing Company”. This definition is equally not so clear. Ashiq mentions that in theory a company is an association of persons with a common objective. Where this objective is sharing profits, then this forms a company.
However, this definition falls short as it could imply a partnership. The Case of Salomon Vs Salomon &Co Ltd distinguishes a company from any other association, where a company is seen as a body corporate with a legal personality separate from its shareholders or employees.
Below are the distinguishing Characteristics of a company as explained by Keith, Norman and Kevin as well as the Companies Act:
A company’s liability can be limited by either Guarantee or shares. It can be a private or public company. More of these distinguishing characteristics shall be discussed later when comparing companies to state Corporations.
According to the State Corporations Act, A state Corporation is any state corporation established under article 3 of the Act, a body corporate established under an Act of Parliament or any written law, or a subsidiary of a state corporation. The Act is careful to mention that while a state corporation is a body corporate, it is not a company, a cooperative society, a building society, a local Authority or the Central Bank of Kenya. State corporations are owned by the state and strictly public in nature.State corporations have been referred to with different names throughout history, such as Parastatals, government-Linked Companies (GLCs), state Owned Enterprises.
Other authors have referred to state corporations as Statutory Company. This is where a company was incorporated under a special act of Parliament. According to Keith and Norman[footnoteRef:15], states incorporated such companies to provide public services such as oil, gas, water, minerals, airlines etc. Most such Companies in the western World have long been privatized, mainly due to the massive losses incurred by state corporations. Kenya however still has a host of State corporations, approximately one hundred and thirty.
This high number of state corporations will be forming part of the argument on whether state corporations should pay corporate tax.Similarities between State Corporations and Companies’
Both entities are body corporates with a separate legal personality from the members. Section 2 of the State Corporations Act states that a state corporation is a body corporate. Being a body corporate mean that it has a legal personality of its own, separate from its employees, board of management or any other members. In the Companies Act in section 18 Companies Act, it is provided that once the Registrar is satisfied with an application, he/she issues the company with a certificate of Incorporation which has the effect of making that company a body corporate with a legal personality of its own.
Both can sue or be sued in their corporate capacitySection 3(2) (b) State corporations Act and Section 19 (b) of the Companies Act state as much. Since both entities do not have a corpus, they are represented by advocates during suits.
Both entities have perpetual succession. Section 3(2) (a) of the state Corporations and Section 19(2) (b) Companies Act provide. According to Black’s Law Dictionary, perpetual succession means the continuous succession of a corporation despite changes in shareholders and officers, for as long as the corporation legally exists. This mean that’s unless legally dissolved, these entities would last forever. Death of members, officers or shareholders does not cease the existence of either entities.
Both Companies and state corporations are managed by boards. State corporations have boards of management, while companies have boards of Directors as managers.
Both companies and state corporations and companies can take debts in their corporate names. The state corporation Act in section 5(2) gives state corporations power “to borrow money in Kenya or elsewhere…”
Both entities can hold and alienate property, movable or immovable in their names. Section 3(2) (c) state corporations Act affirms this. Section 19(2) of the Companies Act corroborates this as well.
Both companies and state corporations have memorandum and articles of association. In both entities, the memorandum and articles are prerequisite to establishment. Sections 12 and 20 of the companies act provide for memorandum and articles of association in companies respectively. Section 7(2) of the state corporations act provides that “Directions Under this section mat require that the memorandum and articles or other documents establishing a state corporation be amended…”
Both state corporations and companies are required to keep updated books of account.
Both are also required to be audited, and proper records of auditing should be kept.
Companies are Incorporated under the Companies Act while state Corporations are incorporated under the State Corporations Act. State Corporations are established by an order of the President while companies are established by the Proactive applications of members seeking to start a company. Also, state corporations are created by a special Act of Parliament, whereas Companies are created by application to the registrar of companies. For instance, the Kenya Medical Training College is created by the Act Establishing it. Capital State corporations are initially funded by the state. According to Ashiq State corporation’s capital is raised by borrowing, guaranteed by the National Treasury.
Under section 14 of the Companies Act, the total amount if capital in shares or any other assets must be declared in the application.
A company’s purpose of establishment is found in its Memorandum of Association. The primary purpose of the establishment of any company, public or private is to make profits. In fact, where a company is unable to pay its debts, or where its liabilities are higher than its assets, existing or prospective, ii is subject to liquidation. State Corporation on the other hand are for providing Public service. For instance, the National Youth Council of Kenya is a state corporation dedicated to ensuring fairness in representation of young people in decision making. The corporation could be said to be a liability, considering that it makes no profits. However it is kept afloat by the state in the state’s duty to its youth.
Winding Up State corporations can only be wound up by repeal or revocation of the special Act that created it. Where a committee advises that a state corporation be dissolved, then such advice is not deemed as derogating from the committee’s duty. Unlike a company, a state corporation cannot be wound up sue to making losses. While its property can be executed by creditors, it cannot be sued or wound up by any creditor. Since state corporations loans are guaranteed by the national treasury, the Treasury is liable for all debts of state corporations.
Before proceeding in this discussion, the meaning of tax and rationale behind taxing shall be discussed Definition of Tax Tax has been defined by any contribution to the state charged by the state on individuals, for the services provided by the state such as transport, water, health, housing etc. Adam Smith sets parameters on how a good tax system functions. He states that each citizen, natural or corporate should contribute to the government in proportion to the revenue they enjoy under the protection of the state. He also proposes that a good tax system should also be certain, that is, it should not be based on guess work. In the spirit of this principle, tax in Kenya is strictly statutory. All taxes levied in Kenya and their respective rates are expressly provided for in statute, including tax levied on corporations.
Taking from Adam Smith’s perspective, “subjects of every state ought to contribute to and support the government as near as possible in proportion to revenue enjoyed under the protection of the state. This is to mean that every person, legal or natural should contribute to the state for the benefits enjoyed under services the state provides.
This inference is important to this work as it will be used in determining whether state corporations, as legal persons, should paying tax. However, before proceeding to that argument, what does the law say about corporate tax?
Companies pay corporation tax of 30%. This rate is expressed as six shillings on every twenty shillings income, which amounts to 30%. Note however that the 30% rate applies to resident companies. Nonresident companies are charged at 37.5%. Resident company means: it is incorporated under Kenyan Law, its business is managed and controlled in Kenya, where the Cabinet Secretary to the National treasury declares a given company tax resident for a certain year of income. For the purposes of this work, statutory corporations are being compared to Resident companies.
As it stands, state corporations are exempted from paying corporate tax. Employees of these corporations however pay tax under individual income tax rates, like all other income earners in Kenya.Companies are charged tax on their Net income. This means that any attempt to charge corporate tax on state corporations should prove that these corporations make their own income. The state Corporations Act gives state corporations power to invest in property, where it gives them power to” Hold and alienate property”. These entities have power to invest. The fact that they do not should not exempt them from being held accountable for that power. It is highly appreciated that state corporations are funded from public funds, and that their services are primarily for public service. Hence, why they are not taxed.However, it is commonplace that state corporations increasingly make losses. The fact that these cannot be dissolved on basis of insolvency, in my opinion, has made the management of state corporations notoriously irresponsible. Suppose state corporations were given ultimatums that they must have at least one profit making source of income? Suppose the model of control and management of state corporations was converted to one similar to private companies?
All these possibilities can be enacted by amendment of the state corporations Act. Such changes would ensure that state corporations are:
Consider that state corporations have perpetual succession; and that they are constantly funded by the state. Does this mean that if no special Act establishing a corporation is revoked, that Kenya would perpetually have one hundred and thirty body corporates financially consuming revenue without contributing to it? In the spirit of the Kenya Vision 2030 sustainable development, is this kind of consumption contributing to sustainable development? Or is the public service provided by state corporations enough consideration for their one way consumption?
I am from the school of thought that if state corporations were held to a higher level of accountability, such as a corporate tax rate, even if lower than that of companies, their services would be better, and their expenditure more responsible; and they would also contribute to state revenue.To answer the question, whether state corporations should be taxed, my answer is positive: Yes, state corporations should be taxed.
Why should they be taxed? State corporations are body corporates with power to be in business, while also serving the public, just like companies. Their being taxed would raise accountability, making sure that state corporations do not make losses confident that the national Treasury will be liable for their losses .
An amendment of the state corporations Act to include: Ultimatums on performance, requiring each state corporation to have at least one profit making source of income; Provisions on “private company” model of control.
An amendment of the Income Tax Act to include corporate tax for state corporations. The only peculiar recommendation is that state corporations should be subject to a lower corporate tax rate, say 10%. Instead of raising corporate tax rate to 35%, the state should consider taxing state corporations.A good tax system is certain. This certainty is referring to express statutory provision of the rate of tax and when the tax is paid; hence my recommendation.
This is a call to Legal scholars to explore state corporations law, same way company law has been addressed. The aim of academic writing such as this is to build upon existing literature, or address a gap in the existing literature, while also helping solve real problems. Finding secondary material on state corporations in Kenya is difficult as they are very few and almost non-existent. This explains my recommendation.
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