Advertisement

Kenya in bid to retire tax breaks to foreign investors

Saturday April 04 2015
tax

Kenya’s National Treasury is considering a proposal to abolish tax incentives and exemptions to foreign investors as the country seeks ways of funding its expanding budget, estimated at $20 billion in the 2015/2016 fiscal year. TEA GRAPHIC | NATION MEDIA GROUP

Kenya’s National Treasury is considering a proposal to abolish tax incentives and exemptions to foreign investors as the country seeks ways of funding its expanding budget, estimated at $20 billion in the 2015/2016 fiscal year.

Kenya joins Uganda and Tanzania in reworking its tax systems. Tax exemptions are costing the region up to $3 billion in lost revenue that could be devoted to reducing poverty and dependence on foreign aid.

Tanzania, which loses about $1.4 billion annually, leads in the region, followed by Kenya, whose lost revenue stands at about $1.1 billion; Uganda’s is $272 million and Rwanda about $232 million.

READ: How Tanzania loses $1.87 billion annually
Kenya’s Treasury Cabinet Secretary Henry Rotich said that the budget committee is reviewing the proposal by the Kenya Revenue Authority to abolish among other benefits, 10-year-tax holidays enjoyed by foreign investors at the Export Processing Zones.

Mr Rotich, however, cautioned that the proposal would only be considered if it has a major impact on the overall investment climate, and contributes to the attainment of the government’s long-term development objectives under Vision 2030.

“KRA is just submitting a proposal, which will be evaluated by the budget committee. If found suitable, the tax proposals will be included in the Finance Bill of the next budget, but we will still hold public consultations with stakeholders such as the Kenya Private Sector Alliance (Kepsa) and members of the EPZ before it is enforced,” Mr Rotich told The EastAfrican.

Advertisement

The Treasury is also working on robust and simplified excise and income tax laws through the Tax Procedures Bill, which will see the removal of exemptions and address distortions in the tax system.

As at December last year, the Treasury had tabled three proposed laws in parliament, — the Excise Management Bill, the Extractive Industry Tax (Income Tax Amendments) Bill and the Tax Procedure Bill — with the latter expected to address the exemptions issue.

KRA Commissioner General John Njiraini said that the effect of such concessions and incentives on investor confidence remains minimal.

“The country needs an accelerated effort to retire existing incentives by revitalising and re-engineering the public sector through improved provision of service,” said Mr Njiraini. “We have also seen that across the East African region, there is a very low ranking for tax incentives as a foreign investment attraction.”

Kenya’s charm

According to Mr Njiraini, the main reasons foreign firms invest in Kenya are access to the local and regional market, political stability, security, infrastructure, market size, quality of labour, regulatory certainty and favourable bilateral trade agreements, with tax concessions being among the least of the attractions.

According to the government, the tax incentives granted to investors in the EPZs have not been beneficial to the country, with some investors accused of closing shop once the 10-year grace period ends.

Kenya Investment Authority chief executive Moses Ikiara said the plan to remove the many tax incentives Kenya has been offering investors is overdue, as the country is now focusing on cutting red tape and promoting ease of doing business as an alternative way to attract investors.

“We are seeing scenarios where these firms are making more than the country is gaining. These policies are not helping us any more, and we are removing them,” said Mr Ikiara.

According to the Kenya Association of Manufacturers, tax incentives are meant to encourage and compensate investors for the costs incurred while operating in Kenya. But this privilege has been subject to abuse by some investors.

“They enjoy the tax holidays, and then close down and repackage themselves into other companies after the grace period to continue enjoying the tax reprieve,” said Betty Maina, chief executive of KAM.

Hurting economy

Alvin Mosioma, the executive director of Tax Justice Network Africa, welcomed the proposals by Kenya to phase out these incentives, saying that they are hurting the economy.

“The costs of tax incentives in African economies are numerous and include budget revenue losses, administrative and compliance costs, rent seeking behaviours, corruption and economic distortions that favour some sectors against others,” said Mr Mosioma.

Last year, Kenya mooted plans to lure textiles manufacturers to set up shop in special zones, with tax breaks being the central part of the incentive package.

Last year, Uganda Revenue Authority Commissioner General Allen Kagina said that tax holidays have had a negative impact on revenue collections and that was why the government was reversing these policies.

“Although the exemptions were meant to enhance trade and investment, revenue collection became the victim in the process,” said Ms Kagina.

Uganda abolished most of these tax breaks in the 2014/15 financial year. The move was expected to net the country $74.3 million.

Previously, the country provided tax incentives in the construction, agriculture, health and education sectors, which were largely meant to attract investments and support productive sectors to take off, with the major exemptions being in the VAT and income tax regimes.

Tanzania is also banking on the new 2014 VAT Act, which will see it lift exemptions in a number of areas, and enable it to collect $500 million in additional revenue in the 2015/16 financial year.

By Allan Olingo and James Anyanzwa

Advertisement