Kenya is set to stop new investments in its Export Processing Zones before the end of this year after years of official frustration that their operations have failed to add value to the economy despite numerous tax incentives.

Faced with revenue collection target of Ksh1.3 trillion ($12.13 billion) to finance the government’s ballooning expenditure requirements in the 2015/2016 financial year, the Kenya Revenue Authority is looking for means to seal loopholes for revenue leakages while at the same time enforcing tax compliance.

The EastAfrican has established that the EPZ will be replaced by Special Economic Zones (SEZs), which have been created to attract foreign direct investments in the country’s key urban centres.

The latest follows the signing into law of the Special Economic Zones (SEZs) Bill.

“We came up with SEZs as an instrument to attract foreign direct investment,” said James Ojee, Deputy Commissioner of the Domestic Taxes Department at KRA.

READ: Kenya now introduces special economic zones

SEZs are currently undergoing a pilot programme in Mombasa, Lamu and Kisumu.

At the expiry of their contractual period, existing investors in the EPZs will be required to start paying taxes in line with Kenya’s taxation laws. They will also have a choice to either relocate or reapply afresh to be considered for investments in the SEZs under stringent conditions.

“We will allow tax exemptions at SEZs but under controlled conditions being very careful not to lose out like EPZ,” Mr Ojee said.
The Export Processing Zones Authority will be abolished and replaced with Special Economic Zones Authority under the proposed arrangements.

Enterprises  at the SEZs will enjoy several tax incentives under a controlled environment to ensure that the Kenya government does not lose out on revenues. These include value added tax exemption on all supplies of goods and services to enterprises, reduction in corporate tax to 10 per cent from 30 per cent for a period of 10 years of operation and 15 per cent for the next 10 years.

EPZ investors are currently enjoying 10-year corporate tax holiday and 25 per cent tax thereafter, 10-year withholding tax holidays and stamp duty exemption. They also get 100 per cent investment deduction on initial investment applied over 20 years and VAT exemption on industrial inputs.

The impact of special economic zones on government revenues will be evaluated each financial year and if found below expectations, a decision will be made on whether to continue, according to KRA.

Fanuel Kidenda, the chief executive of EPZA, however noted that  tax incentives are integral in ensuring competitiveness of SEZ and EPZ investors on a global scale, adding that more important is the need to address systemic issues in the investment environment that have hindered the attraction, facilitation and retention of investments in Kenya.