Kenya plans to end tax holiday for foreign firms

Politics and policy

EA Affairs, Commerce and Tourism secretary Phyllis Kandie, PS Ibrahim Mohamed (left) and KNCCI national chairman Kiprono Kittony on October 27, 2014. PHOTO | DIANA NGILA 

By GEORGE OMONDI, omondi@ke.nationmedia.com

In Summary

• Kenya Investment Authority (KenInvest) chief executive Moses Ikiara says the plan is to retire the many tax incentives East Africa’s largest economy has been offering investors even as it moves to cut bureaucratic red tape to lower costs.
• Kenya offers a number of tax incentives to foreign firms that manufacture goods locally for export, including a 10-year corporate income tax holiday and a 10-year withholding tax holiday on repatriated dividends and other remittances.
• The tax incentive schemes are estimated to cost the Kenyan economy Sh100 billion annually, leading policy makers to conclude that they are unsustainable and end up hurting the domestic economy.

Kenya plans to retire most of the tax incentives that foreign firms have been enjoying for setting up operations locally, senior investment officials said on Monday.

Ending the tax exemptions is part of the measures the government is taking to align the investment promotion tactics used by the counties and the national government.

Kenya Investment Authority (KenInvest) chief executive Moses Ikiara said the plan is to retire the many tax incentives East Africa’s largest economy has been offering investors even as it moves to cut bureaucratic red tape to lower costs.

“This sort of policy [on attracting investments] means that foreign firms have in most cases been taking away more than the economies that compete to host them gain,” Mr Ikiara said.

The tax incentive schemes are estimated to cost the Kenyan economy Sh100 billion annually, leading policy makers to conclude that they are unsustainable and end up hurting the domestic economy.

Kenya offers a number of tax incentives to foreign firms that manufacture goods locally for export, including a 10-year corporate income tax holiday and a 10-year withholding tax holiday on repatriated dividends and other remittances.

READ: Tax incentives to industries cost Kenya Sh200bn

Foreign investors are also exempted from paying value added tax (VAT), import duty on inputs, and payment of stamp duty on legal instruments. They qualify for 100 per cent tax deduction on new capital investments.

“In the coming years, you will see the government put more resources in creating a conducive environment for doing business as opposed to offering tax incentive to foreign firms,” said Mr Ikiara.

The National Investment Policy, which seeks to level the playing ground for foreign and domestic investors, is set to be made public by President Uhuru Kenyatta when he officially opens Kenya’s first International Investment Conference in Nairobi on November 19.

The two-day event is expected to attract 1,000 participants from the private sector, counties, national government and international business community.

Key highlights of the new National Investment Policy include provisions that seek to ensure all the 47 counties apply the same rules as the national government in their quest to attract foreign and domestic investors.

“This is our golden opportunity to address our competitiveness and face our rivals in the market,” said Export Processing Council CEO Ruth Mwaniki.

The planned change of investment regulations comes in the wake of massive investment in renewable energy sources that the state says should pull down the cost of power to an average of Sh6 per kilowatt hour from Sh18 per kilowatt hour at the beginning of the year.

Kenya has also embarked on execution of multi-billion shilling capital investments such as construction of Konza technopolis and the standard gauge railway.

READ: Uhuru banks on construction to create jobs

A number of manufacturing firms, citing high cost of doing business, have lately left Kenya to set up new bases in Egypt, which offers domestic producers huge subsidies as opposed to doling out tax incentives to investors.

Elimination of tax incentives would come as a relief for Kenya Revenue Authority (KRA), which is struggling to meet high collection targets and has long opposed the schemes extended to foreign firms.

The schemes – which have been used extensively by agencies such as KenInvest and Export Processing Zones Authority to attract foreign investment – have lately stirred up fierce debate.

Critics have accused the state of paying undue attention to foreign firms at the expense of promoting local enterprise.

The criticism is centered on the fact that most of the firms fold up operations and leave soon after the grace period is over – exiting the local economy without transferring the envisaged skills or technology to locals.

On Monday, officials said the new investment policy, together with opportunities spawned by the emerging oil and gas industry, are among the things Kenya hopes to put on the table next month when it holds its first international investment forum in Nairobi.

“Kenya has numerous investment opportunities in areas ranging from infrastructure to tourism that international investors are hardly aware of,” said Trade secretary Phyllis Kandie.

Despite trying tax incentives since independence, the United Nations Conference on Trade and Development World Investment Reports indicates that it is only after Kenya discovered oil and gas that foreign direct investments (FDI) have grown significantly.

Last year, capital inflows to gas, oil and manufacturing sectors pushed Kenya’s FDI up 98 per cent to $514 million (Sh45.7 billion), up from $259 million (Sh23.1 billion) in 2012.

The investment forum is also set to test Kenya’s international profile following recent upward revision of the economy’s size by 25 per cent.

It will be held as a culmination of a series of international marketing onslaughts that Kenya has been undertaking jointly with the private sector in countries like Nigeria, US, China, Qatar and Sri-Lanka.

“Our presentations in these markets have attracted a lot of interest, not only due to our liberalised foreign exchange policy but also because of an enforceable public-private partnership law that most of our neighbours are yet to finalise,” said Kenya National Chamber of Commerce and Industry chairman Kiprono Kittony.