Taxation Practices and Financial Performance of Commercial Banks in Western Region of Kenya

The commercial banking sector in Western Region of Kenya has experienced significant transformation due to increased competition, regulatory changes, and evolving customer expectations, necessitating enhanced effectiveness and competitiveness through improved financial performance. However, the specific relationship between taxation practices and financial performance among commercial banks in this region remained largely unexplored, despite the critical role these institutions play in driving economic growth and providing financial services. This study was guided by four specific objectives: to determine the impact of corporate tax rates on financial performance, to evaluate the influence of tax incentives on financial performance, to assess the impact of tax exemptions on financial performance, and to examine the effect of tax compliance costs on financial performance of commercial banks in Western Region of Kenya. The study was anchored on Pecking Order Theory, Stakeholder Theory, and Agency Theory, employing a descriptive research design with a target population of 180 managers (branch, credit, and operations managers) from commercial banks operating in Western Region of Kenya. Using census sampling, 180 questionnaires were distributed with 161 returned, achieving an excellent response rate of 89.4%. Data was analyzed using descriptive and inferential statistics including correlation and multiple regression analysis. Key findings revealed that all four taxation factors significantly influenced financial performance, with the combined model explaining 67.7% of variance in performance (R² = .677, F = 81.912, p < .001). Corporate tax rates emerged as the strongest predictor (β = .361), followed by tax compliance costs (β = .238), tax incentives (β = .235), and tax exemptions (β = .162). The study concluded that taxation practices represent major determinants of banking performance, with effective tax management serving as a source of competitive advantage rather than merely a compliance burden. The study recommended that policymakers prioritize stable corporate tax policies, expand tax incentive programs, enhance exemption accessibility, and simplify compliance procedures, while banks should invest in sophisticated tax management capabilities to optimize their taxation strategies and improve financial performance.