Kenya is considering tax relief measures to attract reluctant investors from the West. This week, Nairobi rolled out the red carpet for American investors even as the US government complained that corruption and lack of a transparent tax policy were discouraging interest in Kenya.
These issues emerged at the summit of the American Chamber of Commerce (AmCham) in Nairobi, where President William Ruto was among key speakers.
“My government is finalising new tax policy guidelines that have gone through various stakeholder consultations, including inputs from AmCham. This policy that will enhance transparency in our tax regime will take effect by June and will be in place for a minimum of three years,” President Ruto said.
Digital services levy
He also revealed a plan by the government to scrap a 1.5 percent levy on digital services for the contentious global framework proposed by the Organisation for Economic Cooperation and Development (OECD) on taxing multinationals that includes a minimum rate of 15 percent.
While Kenya had been opposed to the framework proposing a 15 percent minimum tax rate on global firms, President Ruto has expressed a change in tone, which will see Kenya sign up to OECD pact ahead of its implementation on January 1, 2024.
“The growth of digital commerce has forced many countries to impose Digital Services Tax measures on income derived in their jurisdictions. Kenya has also done the same. Following discussions with players in this sector, we have committed to review this tax regime and align it with the two-pillar solution currently being developed by the OECD inclusive framework,” he said.
Reform taxation rules
The new two-pillar plan aims to reform international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate.
Under the former administration of President Uhuru Kenyatta, Kenya withheld its backing for the global minimum tax rate, which would have seen the government pause collection of the digital services tax, currently charged at 1.5 percent of sales made, from tech giants such as Google, Facebook and Amazon.
“Members who join the statement are obliged to withdraw their unilateral measures imposed on non-resident companies which do not have a physical presence in the market jurisdiction,” said the then Kenya Revenue Authority commissioner for Intelligence and Strategic Operations, Terra Saidimu.
Nairobi’s rejection of the OECD minimum tax framework had been a hurdle to negotiations on the free trade between Kenya and the US.
Disjointed tax regime
Speaking at the summit, US ambassador Meg Whitman raised concerns over a disjointed tax regime that was not conducive to American investment. She identified different tax regimes under various agencies as an impediment to doing business.
“Kenya must have a consistent, transparent and fairly administered national tax policy to attract and retain foreign direct investment and accelerate economic development,” she said.
She also took issue with corruption, which has been a persistent threat to a transparent business environment.
“Without a doubt corruption is also a critical issue and one that must be addressed for Kenya to reach its full potential in all areas of development,” said Whitman.
In response, President Ruto steered clear of the corruption bit, choosing instead to focus on the uncoordinated and disjointed tax regime that has seen the cost of doing business rise.
“Kenya is interested in and committed to promoting the best operating environment for business enterprises, and that our policy and institutional framework is designed to make Kenya the most competitive investment destination,” he said.
Cargo clearance cost
The Joe Biden administration also cited the high debt and high cost of cargo clearance at the Port of Mombasa.
“Kenya, like many developing countries, is burdened with high debt, limiting its ability to fund public services and infrastructure in line with its ambitions,” said Whitman.
“Another issue I often hear about is cargo clearance. Despite improving logistics infrastructure, the delivered cost of a container shipment to Kenya does remain significantly higher than for container shipments landing in Europe or Asia.”
Kenya says it has improved clearance time for imports at the Port of Mombasa from over 11 days in 2010 to 3.5 days in 2022 despite cargo consistently increasing over the past five years, from 27 million metric tonnes in 2016 to nearly 35 million metric tonnes in 2021.
Another key tax area that the Biden administration wants addressed is the VAT on exported services, which President Ruto promised to fix.
“This tax not only renders us uncompetitive, but it also inhibits investors seeking to make Kenya their regional or global services hub. Many companies are already operating out of Kenya and serving regional markets. Following consultations with stakeholders, VAT on exported services will now be removed in the Finance Bill, in the coming budget, in June this year,” said Ruto.
Delayed tax refunds
The National Treasury has also been on the spot for delaying VAT tax refunds thereby crimpling business. But the President outlined new measures to unlock these.
“The issue of tax refunds has remained a thorn in the flesh of many companies. The government of Kenya is making a policy shift on this matter and as a result, effective June this year, all verified tax refund claims will be payable within six months,” said Ruto.
“If for whatever reason a refund is not made by the Kenya Revenue Authority within this period, the taxpayer can offset their claim against future tax liability, without further application to KRA.”
The president announced that beginning July 1, start-ups based in Kenya will be exempted from paying taxes on unrealised gains.
“We are also reviewing our Special Economic Zones and Export Processing Zones laws to remove impediments to attracting new local and foreign investments. The rafts of amendments are under stakeholder consultations and will be in place by July 1.”
President Ruto also addressed the National ICT Policy, which requires Foreign ICT entities that set up in Kenya to have a 30 per cent domestic equity, a position he said was untenable and has made it impossible for large corporations to invest in Kenya.
“We will review this position and remove this requirement to facilitate greater investment in our ICT sector.”
Additional reporting by Kepha Muiruri