Kenya's tax incentives need an overhaul

Sunday June 18 2017

By LUIS FRANCESCHI
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Google Search trends is a good indicator of the concerns of the middle class.

In Kenya, the top Google rising searches for the past four weeks were SGR, iTax, and IEBC. This is not shocking; they are interconnected.

SGR searches point at the thrill in the middle class for this new exciting toy, which will make a holiday to the beach cheap, fast and pleasant.

It also bears the burden of proving itself useful, after many allegations of overpricing, corruption and doubts cast on the project’s sustainability.

iTax reminds me of the pains of tax collection. The submission deadline is around the corner. A huge amount of those taxes will go into paying for the forthcoming elections, the salaries of our new leaders, and the debts we incurred, one of them being the SGR.

Naturally, the fact that we pay such high taxes and that those taxes are supposed to be wisely used for the common good by sensible leaders, triggers a deep interest on who will be those people deciding our budget priorities and our expenditure.

The identity of those leaders is in the hands of IEBC. In just 53 days, the efficiency, transparency and accuracy of Chebukati’s team will make or break our destiny.

In a presentation given at the ICPAK, Sam Kimeu, director of Transparency International-Kenya, explained that the Kenyan government loses one-third of its national budget to corruption every year. This is the equivalent of approximately $6 billion (Sh608 billion) per year.

DISTRESSING DISCREPANCIES

Last year, President Uhuru Kenyatta said that corruption has progressed to levels that threaten national security.

Audit reports from the Auditor General’s office have also incessantly given qualified and adverse audit opinions to county and national government departments pointing out distressing discrepancies in financial statements. Corruption undermines our growth and perpetuates “financial exclusivity”.

There are five characteristics of an inclusive economy, according to Emily Garr. There must be participation, where people can partake fully in economic life; equity, which opens more opportunities to enable upward mobility for more people; growth, where there are more good jobs and work opportunities and increasing income, especially for the poor; sustainability and stability, so that individuals, communities, businesses and governments have a sufficient degree of confidence in their future and an increased ability to predict the outcome of their economic decision.

Recently, I had an engaging discussion with a young, brilliant lawyer, Margaret Muchoki, who argues that poorly designed tax incentives do not help economic growth.

HARMFUL TAX COMPETITION

Instead, economic growth is triggered by financial inclusion and a sober, predictable and fair taxation system.

Margaret argues well that Kenya gives a wide range of tax incentives to businesses especially to Export Processing Zones (EPZ) and Special Economic Zones (SEZ) with the aim of attracting greater levels of investments, foreign direct investment (FDI) and employment.

However, the Kenya Revenue Authority (KRA) estimated that the total amount of revenue loss as a result of tax incentives in Kenya over the period of 2003/4 to 2008/9 stood at Sh220.8 billion. A 2012 report by Tax Justice Network (TJNA) shows that Kenya loses close to Sh100 billion annually through tax incentives. This figure keeps increasing.

Our tax incentives regime is not transparent and the government does not provide figures on its tax expenditure, which is a major challenge.

The TJNA and Action Aid also argue that tax incentives are not only resulting in large revenue losses for the governments, but are also promoting harmful tax competition in the region, and yet they are not needed to attract investments.

COMMON RELUCTANCE

According to a World Bank working group, tax incentives generally rank low in investment climate surveys in most East African countries. More important factors are good-quality infrastructure, access to regional markets, low administrative costs of setting up and running businesses, political stability and predictable macroeconomic policy. “Financing public goods and services that enhance productivity and promote private investment, public spending is widely believed to be critical for long-run growth,” the bank says.

The fiscal cost for tax incentives can be high, reducing opportunities for much-needed public spending on infrastructure, public services or social support, or requiring higher taxes on other activities. We need to re-evaluate the current tax incentives policy in Kenya and in East Africa.

We should either remove tax incentives or improve their design, transparency and administration. Currently there is a common reluctance to scale back incentives and instead a tendency to let them proliferate.

Even the Finance Bill 2017, introduces additional tax incentives which will take effect as from January 2018.

This attitude reveals the lack of political will to remove or re-evaluate the current tax incentives, which begs the question, who do these incentives benefit? Are they aiming at benefitting the country or specific individuals?

DISCRETIONARY POWERS

We need to re-evaluate Kenyan tax incentive policy. Incentives should only be in place after being tested through a thorough cost-benefit analysis.

Other recommendations would include ensuring that tax incentives are subject to systematic monitoring and evaluation and are revocable if companies fails to reach agreed development objectives.

It is also crucial that the government removes tax incentives that involve exercise of discretionary powers by ministers in order to achieve transparency and accountability in the tax incentives regime

The government should publish an annual overview of the costs of tax incentives as part of the annual budget.

Finally, seeing the increased tax competition amongst African countries, Kenya should be at the forefront of advocating for coordination and regional tax harmonisation, otherwise we will have entered a race to the bottom.

Dr Franceschi is the dean of Strathmore Law [email protected]; Twitter:[email protected]