In many financial models, taxes are treated almost like an afterthought. You’ll often come across a single line calculating corporate tax as 30% of earnings before tax, and that’s it: no deeper analysis, no breakdown, no effort to model how taxes work in practice. This might be convenient, but it’s also a mistake.
Tax can be far more complex and influential than a flat percentage applied to profits. Depending on the jurisdiction, multiple layers and types of tax can materially affect project returns and cash flow. These include:
- Corporate income tax, with potential deductions, exemptions, and carry forwards
- Withholding taxes on interest, dividends, royalties, and service fees
- Value Added Tax (VAT), and whether it’s recoverable or a sunk cost.
- Minimum taxes or alternative tax regimes
- Deferred taxes from timing differences or accumulated losses
- Capital gains tax, which may apply at exit
- Sector-specific levies or royalties
- Tax incentives or holidays based on location, sector, or size of investment
Failing to factor in these tax items can lead to inaccurate modelling, mispriced risks, and suboptimal investment decisions. It’s not just about compliance, it’s about accuracy, and ultimately, value.
A Kenyan Example: Tax Losses Carried Forward
Let’s take a specific example from Kenya to illustrate the impact of good (or poor) tax modelling.
Currently, Kenyan tax law allows companies to carry forward tax losses indefinitely, effectively up to 99 years. This flexibility benefits businesses in capital-intensive sectors like infrastructure, energy, and manufacturing, which tend to generate losses in their early years before breaking even.
However, the Finance Bill 2025 proposes a significant change: reintroducing a cap of five years on carrying forward tax losses. This change might look technical, but the financial implications are real and potentially significant.
Consider a USD 68 million wind energy project with a 30-year PPA. Equity Investors are targeting a blended equity IRR of 15%, based on a PPA tariff of USD 59/MWh, assuming tax losses are carried forward indefinitely. If the proposed 5-year limit is enacted, the IRR falls to 13.8%. The tariff would need to increase to USD 61/MWh to restore the original return.
While this adjustment helps maintain project viability, it raises broader implications for consumers. The utility company, i.e. Kenya Power, will likely pass on the additional costs to households, potentially increasing electricity prices.
What seems like a modest policy shift could ripple through project returns, impact debt service, and alter dividend expectations. Sometimes, it could determine whether a project moves forward or gets shelved.
Based on the above, you will note that tax modelling is about more than ticking a compliance box. It’s about building a realistic, risk-adjusted picture of a project’s financial viability. Done well, it helps:
- Accurately reflect after-tax cash flows.
- Identify and optimise incentives or exemptions.
- Avoid overestimating returns or underestimating obligations.
- Stress test downside cases and structure around tax leakages
- Prepare proactively for potential policy changes.
In African markets, where governments are under pressure to raise revenues while attracting investment, these tax dynamics are only growing more important. If you’re advising, investing in, or modelling capital projects, it’s time to give tax the attention it deserves. The assumptions you make or ignore today could determine long-term success or failure.