The current financial bill in operation increased the withholding income tax from 2 percent for 5 percent on Management fees, professional fees, training fees and contractual fees on all companies in the Republic of Kenya.
The Advertising sector has been badly affected by this increase mainly due to the fact that on average Advertising companies make a 10 percent profit margin on revenues, thus making the 5 percent and advance 50 percent corporate tax rate.
The result of this has been a major contraction in Advertising companies cash flows with the attendant delays in payments in the entire marketing sector, wage freezes, layoffs, and reduced investment into innovation and expansion. The ripple effect of this can be seen in the flagging performance of our local media houses.
Looking back at the original intent of withholding tax in the USA where it was first introduced in 1862, then reintroduced in 1943, its’ purpose was to lighten the tax burden on individuals and companies by breaking up the tax liability into smaller chunks rather than one big amount at the end of the accounting year, plus give the government a steady stream of income.
In Kenya’s case it is stifling growth in the sector and keeping the companies’ capital out of their hands and forcing them to borrow to meet cash flow requirements, driving up operating costs and reducing profitability.
The USA also has a very efficient and time bound tax refund process and system that ensures any withholding tax credits are refunded to the companies or individuals.
Unfortunately, here in Kenya the process is painfully long, and even when tax credits are approved, the treasury provides the KRA a meagre amount to disburse every month, with tax offsets being the only recourse to the companies in the industry.
Advertising can be a powerful force for economic growth, referencing the USA in 2020, Advertising contributed 18.5 percent of the GDP and directly stimulated $2.8 Trillion in sales. In the UK it is estimated that for every Pound spent on advertising, 6 pounds of value are generated in the economy.
The advertising industry supports significant job creation with every job in advertising in the developed world supporting another 34 jobs in other sectors.
Kenya lacks such statistics but anecdotal evidence on the growth of the creative economy amongst young Kenyans strongly suggests that growing the advertising sector will create a lot more opportunities and jobs for those 900 thousand plus young Kenyans joining the job market every year.
We as the Association of Practitioners are advocating for a reduction in the withholding tax to 1.5 percent which is at the right level for both the government and the companies in the sector.
To the policy makers at the treasury reading this, please put this into consideration in the next finance bill and put the advertising industry back on a growth track and reap the benefits of reviving an industry sector that will help improve the economy with the attendant benefits of job creation and increased sustainable, tax revenue collection.
Lenny Nganga is currently a Council Member and former Chairman of the Association of Practitioners in Advertising, the Umbrella body for companies in the Advertising sector.
He has been in the advertising Industry for 30 years and is also the CEO of the Saracen Marketing Group, a member of the Association.
