Effect of tax planning strategies on tax savings by manufacturing companies in Nairobi County, Kenya

Abstract

There has been growing disquiet and discontent among the manufacturing firms in Kenya owing to the high level of taxation within the existing tax regime and dwindling revenues to the business occasioned by hard economic times, the taxes have been high to servicing the ballooning public debt, corruption, high cost of fuel used by manufacturers, inflation and high interest rates partly caused by COVID-19 pandemic that have led to massive job losses and reduced purchasing power. This study therefore, sought to examine the effect of tax planning strategies on tax saving by manufacturing firms in Nairobi County, Kenya. The specific objectives were to determine the effect debt in capital structure, capital allowances, tax education and intelligent sourcing on tax saving by manufacturing firms. The study is anchored on the credit theory of money, stakeholders’ theory and capital structure theory. This study used an explanatory research design. The target population constituted finance managers from a total population of 118 registered manufacturing firms. Stratified sampling was employed to arrive at the 118 manufacturing firms. Data was collected using questionnaires. Quantitative data analysis was executed through descriptive statistics such as means, standard deviations, and percentages and frequencies. Correlation and regression analysis was conducted to determine the relationship between the study variables. The findings of the study show that intelligent sourcing, tax education, debt in capital structure and capital allowances explain 56.9% of the total variations in the tax saving by the manufacturing companies. Debt in capital structure (β=0.257, p=0.008<.05), capital allowances (β=.198, p=.042<0.05), tax education (β=.232, p=.004<0.05), and intelligent sourcing (β=.243, p=.010<0.05) had a positive and significant effect on tax saving by manufacturing firms in Nairobi County, Kenya. Basing on the predictive model, intelligent sourcing had the highest positive influence on tax saving by the manufacturing firms, followed by debt in capital structure tax education and capital allowances. The study recommends the need for government to carry out tax education campaigns. There is need for government to provide tax incentives to the manufacturing companies as a way of attracting more investments in the manufacturing sector. The Government should review the various sections of the ITA to address the manufacturers tax concerns, the government should make available its existing treaties with other countries that may help the manufacturing companies know on where to access raw materials at a cheaper price. The manufacturing companies should be given easy credit access through use of business products as collaterals. The manufacturers through workshops and seminars should lobby the government to reduce taxes. Finally, the manufacturers and suppliers should integrate to make supply of raw materials easier and cheaper. The study makes significant contribution to policy, theory and practice in the field of tax administration. The study was limited to manufacturing sector; further research could focus on tax planning strategies and tax savings in other sectors such as agriculture, telecommunication among others.