Tax incentives and
revenue losses in
Kenya
Tax Competition
The government of Kenya is
providing a wide range of tax
incentives to businesses to
attract greater levels of Foreign
Direct Investment (FDI) into the
country. Yet this study shows
that such tax incentives are
leading to very large revenue
losses and are anyway not
needed to attract FDI.
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Recent government estimates are
that Kenya is losing over KShs
100 billion (US$ 1.1 billion) a year
from all tax incentives and
exemptions. Of these, trade-
related tax incentives were at
least KShs 12 billion (US$ 133
million) in 2007/08 and may
have been as high as US$ 566.9
million. Thus the country is being
deprived of badly-needed
resources to reduce poverty and
improve the general welfare of
the population. In 2010/11, the
government spent more than
twice the amount on providing
tax incentives (using the figure
of KShs 100 billion) than on the
countrys health budget a
serious situation when 46% of
Kenyas 40 million people live in
poverty (less than US$ 1.25 a
day).
Kenyas provision of tax
incentives is part of the tax
competition among the members
of the East African Community
(EAC). Following the EACs
establishment in 1999, Kenya,
Tanzania and Uganda created a
customs union (a duty-free trade
area with a common external
tariff) in 2005, and were joined
by Rwanda and Burundi in 2009.
This has created a larger regional
market, and means that firms can
be located in any EAC country to
service this market. At the same
time, however, countries are
being tempted to increase tax
incentives in order to attract FDI
and, they believe, increase jobs
and exports. Our analysis
suggests that the provision of
tax incentives across the East
Africa region represents harmful
tax competition and may be
leading to a race to the bottom.
Kenya provides an array of tax
incentives. The more prominent
ones concern the Export
Processing Zones, which give
companies a 10-year corporate
income tax holiday and
exemptions from import duties
on machinery, raw materials, and
inputs, and from stamp duty and
VAT. Yet a 2006 report by the
African Department of the IMF,
focusing on East Africa, notes
that investment incentives
particularly tax incentives are
not an important factor in
attracting foreign investment. A
2010 study found that the main
reasons for firms investing in
Kenya are access to the local and
regional market, political and
economic stability and favourable
bilateral trade agreements; fiscal
concessions offered by EPZs
were mentioned by only 1% of
the businesses sampled. Despite
its generous tax incentives,
Kenya has in recent years
attracted very low levels of FDI,
largely due to recent political
violence and instability. FDI flows
to Uganda, which provides fewer
incentives than Kenya, are much
higher.
The Kenyan government
recognises that the current level
of tax incentives presents a
problem and has committed itself
to rationalising and reducing
them. However, there are major
questions as to how far, and
how quickly, the government is
really prepared to go.