Move to drop tax waivers for foreign contractors welcome

Government plans to remove all tax waivers given to foreign contractors undertaking government projects are welcome. However, the tax reliefs should have been introduced years back, when the country began undertaking major mega infrastructure projects. But as the adage goes, “better late than never.’’

Local contractors are set to be the biggest beneficiaries of the plan to slap a 25 per cent import duty in addition to the recently implemented 16 per cent Value Added Tax (VAT) as it will end the largely unfair advantage enjoyed by their foreign competitors. But maybe a word of caution is in order.

Despite the expected levelling of the playing field, the foreign contractors, particularly from China, are likely to continue enjoying an edge over the local ones unless the latter shape up and learn to give Kenyans value for money. Because surely, it does not take a road engineer to tell the difference between roads and highways built by local contractors and those built by foreign ones.

A common characteristic of the local contractors’ work is that no sooner is the surface finished than it begins peeling off, to say nothing about the myriad potholes that soon start dotting the roads. Yet, despite this poor workmanship and use of sub-standard materials, the contractors still take their sweet time to complete the project in well-orchestrated moves meant to inflate the cost by, at times, one or two hundred per cent.

The removal of the tax waivers and the imposition of VAT are also expected to give local manufacturers a shot in the arm because some of the foreign contractors have been accused not only of importing materials that could be bought locally, but also dumping their surplus imports on the local market.

Perhaps the National Treasury could be persuaded to go even further and review all tax incentives given to foreign investors to ensure they are well targeted and benefit ordinary citizens.

The urgency to do this should be borne out of the realisation that despite being more generous than its partners in the East African Community, Kenya attracts less Foreign Direct Investment (FDI) than its partners.

Viewed rationally, this should not come as a surprise because tax incentives only play a small — some would even argue insignificant — role in attracting investors. A 2006 report by the Africa department of the International Monetary Fund (IMF) focusing on East Africa notes that investment incentives — particularly tax incentives — are not an important factor in attracting foreign investment.

A 2010 study found that the main reasons for firms investing in Kenya are access to local and regional markets, political and economic stability and favourable bilateral agreements; fiscal concessions offered by Export Processing Zones were mentioned only by one per cent of the businesses sampled.

Since there is reason to believe that these conclusions are well known to the Government, particularly to the team at the Treasury, it is hoped that the new team will move expeditiously to save the country from the close to Sh100 billion it loses in tax incentives.

The Treasury team should also be required to conduct a national audit to uncover and cost all tax incentives already in place. Ideally, this report should be published with a proper justification to allow the public to interrogate it more fully than has been the case in the past.