Tax incentives denying Kenya money it needs to improve livelihoods

 Opinion and Analysis

  

 Entrance to the East Africa Portland Cement factory in Athi River. PHOTO | F

By ALVIN MOSIOMA

In Summary

• Civil society groups say cost of financial outflows from Africa outweighs investment benefit.

Kenya is bleeding. Between 2002 and 2011 East Africa’s economic powerhouse is estimated to have lost at least Sh151 billion ($1.51 billion) to trade misinvoicing — deliberate cheating by companies on how much goods and services they have sold abroad.

That is three times Kenya’s national health budget or equivalent to about 8.3 per cent of the government’s total revenue. Companies often misinvoice to evade taxes, avoid customs duties, transfer a kickback or launder money.

Kenya is not alone in this, according to a newly released report of the African Union and the Economic Commission for Africa High Level Panel on Illicit Financial Flows from Africa.

The continent loses at least Sh500 billion ($50 billion) annually to tax evaders and money launders. This could build 151,000 modern schools in just one year.

Illicit financial flows (IFFs) — broadly defined as money that is illegally earned, transferred or utilised — are bigger than misinvoicing.

These funds originate from commercial activities (tax evasion, trade misinvoicing and abusive transfer pricing) and criminal activities (including the drugs trade, human trafficking, illegal arms dealing, and smuggling of contraband as well as corruption by government officials).

Of these, aggressive tax practices by commercial entities — particularly multinational companies operating in Africa’s mining, oil and gas sector — constitute the worst offenders.

Kenya is one of six countries where the High Level Panel conducted indepth case studies for its groundbreaking report. The others were Algeria, DR Congo, Liberia, Mozambique and Nigeria.

The panel also visited Mauritius, as a representative of small island economies, and South Africa to gain understanding of how institutions and processes in Africa’s second largest economy are geared to addressing illicit financial flows.

In addition to IFFs, Kenya loses over Sh100 billion ($1.1 billion) each year from legitimate tax incentives and exemptions granted to multinational companies.

Of these, trade-related tax incentives were at least Sh12 billion ($133 billion) in 2007 and 2008. In 2010/11, the government spent more than twice the country’s health budget in tax incentives.

Can we really afford this when 46 per cent of Kenya’s 40 million people live in poverty (less than $1.25 a day)?

Many studies, including those by the African Department of the International Monetary Fund (IMF), focusing on East Africa, have found that “investment incentives — particularly tax incentives — are not an important factor in attracting foreign investment”.

A separate study recently found that foreign companies mainly invest in Kenya for access to local and regional markets, political and economic stability and favourable bilateral trade agreements.

Only one per cent of the firms surveyed mentioned fiscal concessions offered to those operating in the EPZs as reason for setting shop in Kenya. They are an expense the country can do without.