Cracks Appear Over Kenya’s Tax Incentives To Investors

Cracks Appear Over Kenya’s Tax Incentives To Investors

Opinion is divided on the impact of Kenya’s tax exemptions, which have been criticized in a recent report by non-governmental organizations but supported by economists.

The Kenyan government offers a huge range of incentives and tax exemptions to multinational companies and individual investors. This is done principally through Export Processing Zones, tax remission for exports, income tax benefits, capital investment allowances and double taxation treaties.

Kenya is losing more than $1.1 billion a year from tax incentives and exemptions, according to a report by two organizations – the Tax Justice Network-Africa and Action Aid International.

From 2003 to 2009, it is estimated that Kenya lost $2.5 billion in revenue to incentives, according to a study by the Kenya Revenue Authority. Of these, investment-related incentives and export-related incentives accounted for 72.4 percent and 27.6 percent, respectively. This translated into an average $423 million of revenue annually, or 1.7 percent of GDP.

According to Kennedy Osoro of the University of Nairobi School of Economics, foreign direct investment has continued to grow over the years despite the 2007-2008 post-election violence and other challenges. He attributes this to cash injections from foreign partners and the privatization of parastatals. In 2008, for instance, Kenya managed $95.6 million in foreign direct investment, rising to $116.3 million the following year.

Total investment for the period 2003-2009 was $413 million, averaging $68.8 million per year over the six-year period.

But even this is not good enough to spur the economy sufficiently.

“The foreign investment we have been getting is welcome, but hardly sufficient to overcome the severe unemployment and other problems we face,” said Anne Njeri, a high school business teacher.

Foreign direct investments are the only avenue through which Kenya can fight the challenge of unemployment and technology transfer, says Jeremiah Obilo, a lecturer of mathematics at Moi University in the northern Rift Valley town of Eldoret.

Through foreign investment, he said, new industries are initiated that absorb the growing workforce. It also becomes possible for the country to acquire expensive technologies through partnerships, since local entrepreneurs would find it difficult to afford and maintain such innovations alone.

The incentives were not a waste, and neither are they too costly, Obilo told AfkInsider. They are reasonable, he said, because Kenya suffers from a high cost of doing business.

Electricity costs Kenyans “four times that of our neighbors,” and corporate tax rates charged to businesses are high, he said.

“Investors are very useful in helping the government eradicate poverty and reduce rural-urban migration,” Obilo added.

Access to the local and regional market, political and economic stability and favorable bilateral trade agreements are other reasons why multinationals were investing in Kenya, according to the ActionAid report.

Capital investment allowances offered to investors cover industrial building and mining, deductions on investments such as shipping, and on-farm works. These are offered on a reducing-balance basis to those investing in capital projects.