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Treasury to evaluate cost of tax incentives on Kenya's revenue

BUSINESS
By Moses Michira | June 22nd 2016

Kenya is evaluating the cost of tax incentives to the economy in a study that could inform a major policy decision on exemptions granted to investors.

Senior government officials have been flip-flopping on plans to retire some of the numerous taxation breaks as a means to shoring up revenue collections.

A recent letter authored by National Treasury Cabinet Secretary Henry Rotich and Central Bank of Kenya boss Patrick Njoroge to the International Monetary Fund shows intent of appraising the value of tax incentives.

Findings of that report are expected at the end of September, according to the projections by the two senior government officials, shedding light for the first time on the value of Kenya’s foregone revenues.

September date

“Will complete by end-September 2016 a study on tax expenditures, in order to identify their size, type (e.g tax exemptions, reduced tax rates), their evolution over time, and the category of taxation to which they apply (structural benchmark). Based on the results of this study, we will devise measures to reduce tax expenditures,” reads the letter of intent in part.

It will be the first time the country will assess the trade-off between revenues losses and the benefits accrued from offering tax incentives to promote investments and job creation.

Kenya’s commitment on checking its revenue collection and losses was part of the conditions that tied to the Sh150 billion emergency loan from the IMF in March.

In his letter to IMF’s boss Christine Lagard, Rotich made a commitment on reviewing tax incentives. It would however not be the first time the country was making such a commitment after informing the IMF in 2011 that it would rationalise existing tax incentives, expand the income base and remove tax exemptions as envisaged in the Constitution.

Recent policy measures have however raised doubts about the seriousness of the commitments, as shown by the current push to create Special Economic Zones (SEZs) which offer investors from any industry taxation reliefs.

Already, laws regulating the operations of SEZs were passed last year that envisages the creation of several low-tax manufacturing hubs in Kisumu, Mombasa and Naivasha, among others.

Civil society estimates that over Sh100 billion worth of tax breaks are given every year in incentives that delivered minimal benefits to the economy.

“Rhetorically, government officials often say they are committed to reducing tax incentives, and some limited steps have been taken. Mainly, however, policy has been to maintain and even increase tax incentives, notably through introducing new Special Economic Zones,” ActionAid says in a report unveiled yesterday.

The report titled ‘Still Racing Toward the Bottom? Corporate Tax Incentives in East Africa’ is seeking to estimate the total value of revenue losses from the four countries in the region.

Tanzania was found to be hit the most at Sh120 billion a year, out of the total Sh280 billion collectively lost by the four including Kenya, Uganda and Burundi.

Kenya revenue Authority Commissioner General John Njiraini has in the past criticised the tax exemptions, citing a study that found no correlation between the concessions and investor confidence.

“Studies have shown that the main reasons foreign firms invest in Kenya are access to the local and regional market, political stability, security, infrastructure, market size, quality of labour, power costs, regulatory certainty, and favourable bilateral trade agreements. Tax concessions offered by incentives are very minimal.” Mr Njiraini said.

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