When you think of a company’s value, you may not think about intangible assets. You probably picture its office building, factory machines, and fleet of vehicles. These are tangible assets. You can see and touch them. But what about the company’s brand name, its customer list, or the unique software it developed?
These are intangible assets, and in today’s digital economy, they are often a company’s most valuable possessions.
For Kenya, understanding and properly valuing these intangible assets is not just an accounting exercise. It is a powerful, untapped opportunity to boost our national tax revenue. Let us delve into the world of wealth that remains invisible.
What Exactly is an Intangible Asset?
An intangible asset is a non-physical resource that provides a long-term economic benefit to a company. It lacks physical substance, but it holds significant value.
Common examples in Kenya include
a. Software – A proprietary system developed by a Kenyan FinTech like Cellulant.
b. Brands and Trademarks – The iconic “KCB” logo or the “Safaricom” name.
c. Customer Relationships – The loyal M-Pesa user base.
d. Patents and Copyrights – A unique agricultural formula from a company like Kakuzi.
e. Licenses and Franchises – The right to operate a KFC outlet in Nairobi.
The Multi-Billion Shilling Question: How Do They Boost Tax Revenue?
This is where it gets crucial for the Kenya Revenue Authority (KRA) and our national budget. Here is the simple connection:
a. Fair Profits = Fair Taxes
When a multinational company operates in Kenya, it is required to pay corporate tax on the profits it earns in the country. A common tactic, known as profit shifting, involves the parent company charging its Kenyan subsidiary high fees for using “intellectual property” (such as a brand name or software).
This artificially reduces the Kenyan subsidiary’s reported profit and, therefore, its tax bill. By accurately valuing these intangible assets used locally, the KRA can ensure that a fair portion of the global profit is declared and taxed in Kenya.
b. Taxing Asset Transfers
When intangible assets are sold or transferred between companies, it is a taxable event. Without a proper valuation, a company could sell a valuable patent for a suspiciously low price to avoid capital gains tax. A correct valuation ensures the government gets its fair share from the transaction.
c. Encouraging Local Innovation
When Kenyan companies develop their own intangible assets, they become more profitable and valuable. A thriving tech startup that owns its software code will grow, hire more people (who pay PAYE), and ultimately pay more corporate income tax. A strong IP framework protects these assets, encouraging more investment in innovation.
How the KRA is Leveraging Intangible Assets
The KRA is increasingly focused on this area through Transfer Pricing regulations. They require companies to prove that transactions between related parties (like a Kenyan subsidiary and its foreign parent) are conducted at “arm’s length”, as if they were with an unrelated company. This involves the valuation of intangible assets, such as royalties and service fees, to a great extent.
Example Scenario
A global soda brand’s Kenyan bottler pays a “royalty” for using the brand. If this royalty is set too high, profits are shifted out of Kenya. The KRA can challenge this by commissioning an independent valuation to determine a fair market rate for the brand’s use in Kenya, ensuring that more profit and tax stay in the country.
The Way Forward
The way forward is to value the invisible. To fully harness the power of intangible assets, Kenya needs to:
a. Build Local Expertise – Train more valuers and tax auditors specializing in intangible assets.
b. Adopt International Standards – Consistently apply globally accepted valuation methods (Income, Market, and Cost Approaches) to ensure fairness and credibility.
c. Promote IP Registration – Encourage Kenyan businesses to formally register their patents, trademarks, and copyrights, which makes their value concrete and easier to assess for tax and investment purposes.
In conclusion, intangible assets are no longer just abstract accounting concepts. They are the bedrock of the modern digital economy. By bringing this hidden wealth into the light and valuing it correctly, Kenya can secure a more robust and equitable stream of tax revenue, which will, in turn, fund the public services that will foster the next generation of innovative Kenyan companies.
Feel free to send us tax and investments in Kenya questions or topics via email taxkenya@gmail.com that you would wish to be covered in this Website.
Disclaimer
This post provides a general overview and guidance and does not constitute professional advice in any way. Hence, www.taxkenya.com, its owner, or associates do not take any responsibility for the results of any action taken based on the information in this post or for any errors or omissions. Kenyan taxpayers must always rely on the most current information from the KRA. The tax industry in Kenya is very dynamic.
