Fix infrastructure investment hurdles in Kenya

Investment in long-term infrastructure requires massive funding, which is not locally available.

An estimated Sh5.56 trillion investment into infrastructure development for Kenya is planned (as of 2015 estimates), the majority of which will focus on telecommunications and power generation infrastructure. Investor returns are already squeezed given the economic and political risks surrounding such projects and Kenya’s tax regulation does not help.

Even then, a number of positive steps have been taken, from a tax perspective, to attract more investments, which shows recognition by Government policy honchos that a strong infrastructure base is important for economic growth.

These include exempting the deduction of withholding taxes on payments made to non-resident service providers for services rendered under a Power Purchase Agreement.

Interest paid on loans from foreign sources has also been exempted from withholding taxes for investments in the energy and water sectors or in roads, ports, railways or aerodromes. Accelerated investment deduction allowances have been set at 150 per cent of qualifying capital expenditure for projects meeting certain criteria.

There was also the extension of the tax loss carry-forward period from five to 10 years.
But are these measures enough? What more needs to be done to ensure Kenya becomes the destination of first choice for international investors?

There are many barriers to the economic viability of such projects and many foreign investors believe they cannot take full advantage of the incentives designed to attract them in the first place. Key tax changes need to be thought about.

It would be prudent if a further extension of carry forward tax losses arising from investment deductions and capital allowances for these capital intensive projects to potentially 15 years.

Under current tax legislation, many of these projects attract the accelerated investment deduction at a rate of 150 per cent. However, capping tax losses arising from investment deductions and capital allowances to 10 years shoots the guise of attracting more investment in the foot as investors cannot utilise the accelerated allowances given to attract them in the first place.

There is also the issue of complex regulations around thin capitalisation and deemed interest. While I understand that thin capitalisation rules are important to stem tax revenue leakage, more specific and relevant thresholds should be considered for infrastructure-related projects. In any case, these projects bring in foreign exchange and create employment.

These call for a fiscal solution to the challenge of trapped cash. Complex regulations around compensating tax and the inability to repatriate dividends to investors even though cash is available for distribution remain a major challenge.

These regulations contradict the accelerated tax allowances and incentives provided to these projects to attract investment in the first place. Delays in dividend distribution over long periods reduce the overall, already low returns for investors. True, VAT and Customs Duty exemptions are provided for importation of certain equipment.

However, in practice, importers face significant challenges at the port of entry due to lack of clear understanding by customs officials. Significant clarity on the application of the rules around these exemptions needs to be provided for investors to be able to make efficient use of the tax breaks given.

Enhancement of the number of double taxation treaties, including treaties with our neighbouring countries, would also help. Currently, most of the double taxation treaties in place are with Kenya’s historic trade partners and efforts need to be made to lock in more treaties.

Further, in the past, the Finance Bill 2015 erroneously dropped the accelerated 150 per cent investment deductions. Although this was reinstated in the Finance Act 2015, it caused jitters for various investors who now, at the back of their minds, question the long-term intention of this allowance.