Tax exemptions cost Kenya Sh100b yearly

June 6, 2012
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Times Tower in Nairobi/FILE
NAIROBI, Kenya, Jun 6 – Kenya loses an estimated Sh100 billion in tax incentives and exemptions every year accounting for about 3.1 percent of the country’s gross domestic product (GDP).

A new study released by the Tax Justice Network-Africa (TJN-A) and Action Aid International revealed that despite being the most generous with tax incentives in the region, Kenya was the biggest loser in Foreign Direct Investment (FDIs) flows compared to Uganda and Tanzania.

FDI flows to Uganda in 2010 stood at $848 million, followed by Tanzania with $700 million.

A member of the parliamentary Budget Committee Martin Ogindo, who was present during the report launch, said there is a serious need to revisit Kenya’s tax regime to address tax incentives that do not bear the country any fruit in terms of investment.

“We have very unhealthy competition in the region of trying to outdo each country on trying to provide better tax incentives for foreign direct investment, which has turned out to be a fallacy. We need to deal with the structural inhibitions that are making our country unattractive for FDI’s,” he said.

Ogindo added that the country’s debt service rose by 75 percent to Sh303 billion for this year’s Sh1.4 trillion budget, which he said is a result of low tax revenue impacted largely by the tax incentives.

The study said tax incentives are draining Kenya of needed revenue for essential public services highlighting the fact that the Sh100 billion lost to tax incentives was twice what government spent on the entire health budget for 2010/2011.

It added that Export Processing Zones (EPZ) represented the largest sector where the government is losing in tax incentives, with many companies closing shop after their 10-year tax holiday and re-registering under new names or relocating to other countries to avoid taxation.

Kenya’s EPZs employ around 30,000 people down from 38,000 in 2005, which the study highlighted as an indication of businesses relocating.

Some tax benefits available to investors include zero year corporation tax holiday and 25 percent tax thereafter, 10 year withholding tax holiday, stamp duty exemption and 100 percent investment deduction on initial investment applied over 20 years.

The chair of the TJN-A Dereje Alemayehu said EPZ companies notably in textiles, for instance, accounted for 70 percent of the exports under the US African Growth and Opportunity Act (AGOA).

“The ones operating in the tax free zone subsidized by the government are competing against taxpaying Kenyan manufacturers. If they are already taking 70 percent of the share that were subsidized through tax incentives look at what it means for producers paying taxes and struggling to extend to the external market,” he explained.

At least 61 percent of companies operating in Kenya’s EPZ are from China, UK, US, Taiwan, Qatar and the Netherlands among other countries.

The country’s exports to the US remain very narrow, only having exported less than a 100 of the 6,500 eligible products in the AGOA framework; however, the government is in the process of implementing Special Economic Zones (SEZ) to expand the range.

The SEZs however are not the answer, TJN-A Coordinator Alvin Mosioma argues as they are just geographically defined regions where any company can operate tax free.

“De La Rue is registered in Ruaraka as an EPZ and there is no logical explanation why they should be operating as an EPZ. It is a question of what the rationale of distinguishing specific companies to operate in a geographical area where they are not paying tax,” he said.

Kenya lost around Sh156 billion between 2000 and 2008 due to transfer pricing – the pricing of products between a resident company and its non-resident related companies- which allows companies to under-declare or over-declare prices to reduce their tax burden.

To curb such scenarios, the study recommended the removal of tax incentives granted to attract FDI, particularly those provided to EPZs and SEZs; a public review of all tax incentives on an annual basis as well as tax coordination among East African Community member states by improving the existing draft Code of Conduct on tax competition in the region.

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