How effective are tax exemptions in attracting Foreign Direct Investments (FDI)?
In a recent televised interview, Trade and Industry Cabinet Secretary Peter Munya said part of Kenya’s industrialisation strategy would involve offering tax incentives and holidays to attract foreign direct investment (FDI).
“We need to attract large foreign manufacturers to come into the country and we are doing this by ensuring the investment climate is favourable for FDI,” said Munya.
“The other thing we have been doing is giving them incentives like tax holidays and we negotiate with them and find out what they want and we have various incentives in our investment code such as setting land banks in the counties,” he said.
Research by several think tanks and advocacy groups, including the International Monetary Fund, Action Aid and Tax Justice Network, has, however, revealed that tax incentives rarely lead to increased FDI as anticipated by policymakers. At the same time, companies take advantage of the tax exemptions, for example, through reporting losses indefinitely to avoid corporate taxes and alter registration details periodically to ensure they remain liable for tax rebates.
A 2013 study by Action Aid revealed Kenya loses over Sh100 billion annually in foregone revenue through tax incentives offered to multinationals. The report stated that incentives such as tax holidays, free zones, stability agreements and discretionary incentives offered to companies to set up shop in the country’s Export Processing Zones are in fact derailing economic growth.
Another report by the Tax Justice Network found that some of the incentives granted by the Government do not translate to more foreign direct investment and if repealed, would undoubtedly provide an increased revenue stream.
Investors in the manufacturing and hotel sectors outside Nairobi and Mombasa, for example, are eligible for an investment allowance of 85 per cent on the plant, machinery, buildings and equipment. In addition to this, investments located in Nairobi and Mombasa are eligible for an investment allowance at 35 per cent.
For manufacturers under bond, the applicable rate is 100 per cent for all locations. The report found that multinational firms collude with shady banking officials and accountants and auditors to manipulate their accounts so that they can continue to enjoy the tax holidays provided by these laws.