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Kenya risks scaring away foreign cash with 'toxic' clause in new companies law

FINANCIAL STANDARD
By Standard Reporter | November 3rd 2015

Government is trying to “coerce” foreign companies to incorporate locally.

“The Government is basically looking at increasing its taxes. When these companies incorporate locally, then the Government benefits from 30 per cent corporate tax,” she said, adding that with branches, companies declare profits in their countries of origin.

However, when a country is incorporated, in addition to corporate taxes, a share of dividends will also be paid to Kenyans, with the Government getting levies on this. Under the current companies law, the Government only benefits from value added tax (VAT) and income tax from foreign firms.

Friendly taxes

However, incorporation of companies in the country will be dependent on a favourable environment for doing business, which includes the tax regime.

According to Odhiambo, a lot of American companies have been incorporated in countries such as Singapore and Hong Kong because of their more friendly corporate tax rates compared to the US.

British audit firm KPMG puts the US’ corporate tax at 40 per cent, which is the highest in the world. Singapore’s is 17 per cent while Hong Kong’s is 16.5 per cent.

But it is not all give and give for foreign investors; being incorporated in Kenya comes with some benefits, such as being able to bid for Government contracts.

Mr Ouma gives the example of China Road and Bridge Corporation, which won the tender to construct the Standard Gauge Railway. He says the company is incorporated in Kenya and bids for plenty of Government-run infrastructure projects.

Benefits of companies opting to incorporate locally can be felt in the long run, added Odhiambo. But in the short run, she said, especially within the first year, the country may suffer from reduced foreign branches because of this rule.

Ouma agrees, saying the law is a form of affirmative action, and while its intentions were noble, the Act does not go the whole hog. He feels the drafters of the legislation were “soft” on foreign companies, probably for fear of losing taxes, especially from multinationals.

“A Sh5 million fine is pocket change to a multinational,” he said.

Further, since the law is not clear on whether a company that ignores the provision on local shareholding will be dissolved or prevented from continuing with operations in the country, the clause is prone to abuse.

Kenya is not the only country to insist on locals owning a share of foreign companies. Jumba said countries like Rwanda and Tanzania have similar provisions for specific industries, such as telecommunications, mining, tourism and petroleum.

Ease of doing business

In French-speaking West Africa, branches can only be described as such for up to two years, after which they have to convert into subsidiaries, which allows for citizens to take up shareholding.

Only two countries have a provision in their Companies Act on local ownership like the one in Kenya: South Africa and Zimbabwe, said Mr Mwembi.

In South Africa’s case, it was to align the law to the Black Empowerment Programme, while for Zimbabwe, it was to align it to ZANU-PF’s nationalisation policy. While the clause is politically motivated in these countries, could politics behind the Kenyan provision? Is the country trying to nationalise foreign companies?

Mwemi warned the country risks undoing its efforts to create an investor-friendly environment, which recently saw it move up 21 places in World Bank’s Ease of Doing Business index to position 108 from 129 last year.

Moreover, it is still also not very clear in the Act who will monitor foreign firms to ensure the clause is complied with.

It is hoped that since the Act will be implemented in phases, the section relating to foreign firms will be delayed to allow for consultations and a review of its impact.

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