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.
Allowances on mining are granted to any investor who searches for minerals on Kenyan land and incurs capital expenditure in discovery, testing and mining. This is granted at the rate of 40 percent in the first year and 10 percent from the second to the seventh year.
Stakeholders in Kenya’s mining industry, however, feel that the taxes on mining are having a negative impact on the industry. Stakeholders want the government to revoke withholding tax and to eliminate VAT tax on exploration services.
Kenya is working to review the mining licensing process and mining legislation to make it easier and more effective for all stakeholders, said Najib Balala, Kenya’s cabinet secretary for mining.
“We are also looking at creating value addition and incentives to lure big investments in the industry,” Balala said.
Kenya also grants investors allowances on industrial building, usually on capital expenditure incurred in the construction of an industrial building. Rates of 4 percent and 2.5 percent per year are applied on the cost of hotel and industrial buildings, respectively. The rates can be changed, however. Applicants must clearly point out the inadequacies of the rates provided.
Farm works deductions are granted at the rate of 33.33 percent per year for three years to the owner or tenant of any agricultural land who incurs capital expenditure in the construction of farm works. To claim these funds, therefore, an investor will have to show that he or she has made improvements on a farm by way of putting up buildings and other necessary structures.
Incentives on investment deductions are offered to investors in manufacturing industries. They are granted once at a rate of 100 percent in the first year of use to any investor who incurs expenditure on construction of a new building and installation of new and old manufacturing machinery. It also applies to the construction of a hotel.
Shipping investment deductions are granted at the rate of 40 percent on capital expenditure. For a purchase to qualify, it must be a new power-driven ship of more than 495 tonnes.
The government levies corporate tax on the taxable income of a resident company at 30 percent, and for non-resident companies at 37.5 percent. If the investor chooses to list shares at the Nairobi Securities Exchange, however, the investment benefits from incentive tax rates. These include corporate tax at 27 percent for the first three years for a company with 20 percent of its share issue listed at the NSE. A company with 30 percent of its issued shares listed will have the corporate tax levied at 25 percent for the first five years. The deal gets sweeter for a company with 40 percent of its issued shares listed, which would be required to pay corporate tax at the rate of 20 percent for the first five years.
Tax on exports is meant to encourage investors operating outside the Export Processing Zones. These zones fall under the category of export promotion incentives and allow exporters to buy imported inputs for use in the production process at world prices. This is in recognition of the fact that some of the materials used in the manufacturing process cannot be obtained locally and have to be imported.
The other Kenyan incentive that targets exporters is Manufacture under Bond – extended to support manufacturers who import plants, equipment, machinery and raw materials for use exclusively in the manufacture of goods and services.
The third incentive under export promotion is the Tax Remissions Export Office, providing further reprieve for manufacturers who produce for export. It is done by remitting duty and VAT on raw materials used in the manufacture of goods for export.
Prior to such a remission, however, a security bond must be executed in order to obtain the remission certificate. Remission of VAT paid is also allowed in respect of capital goods – excluding motor vehicles – imported or purchased for investment in industries such as oil exploration and prospecting for minerals.
The Export Processing Zones Act spells out tax incentives given to investors who locate their investments in EPZs. The Act also allows for amendments, especially on an initial 10-year corporate income tax holiday and a 25 percent corporate tax rate for a further 10 years thereafter. This is an exemption for EPZ commercial enterprises.
To prevent double taxation, the Kenyan government has entered into treaties that mitigate the tax chargeable on the income of persons derived from a country other than the country in which they are a resident.
Among the countries Kenya has signed treaties with are Canada, Denmark, Norway, Sweden, India, Zambia, the U.K. and Germany.
Multinationals investing in EPZs are also given incentives on procedures such as the offer of facilitation services by the EPZ Authority, together with exemption from having to take out a number of licenses.