Fix taxation to enhance Kenya competitiveness

Posted on : Saturday , 15th October 2016

Statistics indicate that within Africa, Kenya is the second largest destination for Foreign Direct Investments standing at 12.6 per cent compared to South Africa’s 17.1 per cent.

Nairobi as a City has fared even better, now sitting prettily in position one across Africa having overtaken Johannesburg.

Kenya has done well in the last two years on this account – in fact very well indeed bearing in mind the significant turbulence that we have seen coming from unfortunate terrorism events as well as other economic downturns and headwinds internationally.

Whilst we need to unreservedly congratulate ourselves on this achievement, we must not get complacent as this trend will not automatically continue into the future.

The level of international interest and more specifically investment in any country is potentially one of the most significant Key Performance Index that measures progression, development and overall growth prospects.

Increased Foreign Direct Investment normally comes with several positive impacts including increased employment, direct inflow of foreign exchange, improved balance of trade, increased corporate profitability and overall increased collection from direct and indirect taxes. It’s a win-win for all.

So, will we become and remain the first choice destination for international capital? Clearly our competitors within East Africa, Sub-Saharan Africa and indeed all of Africa are watching and learning.

To maintain our progress, we do need to carefully analyse what we do well, and do more of it, and more so understand what we could do better, and fix it.

Whereas we have made a lot of progress, there still are a number of tax hindrances that dwarf the effort to increase Foreign Direct Investment and we need to continually work to ease such blocks.

The first taxation related block is the double taxation treaties where progress has been very slow on signing a number of treaties.

The second hindrance is taxes that are discriminatory to foreign investment. Particularly complex rules around thin capitalisation and deemed interest need to be looked into.

It is no hidden fact that most international business will seek to place significant reliance on debt to finance investment into emerging markets not only because of better accessibility on global financial markets but also because it is a cheaper form of capital.

Our tax rules are almost by design meant to punish the establishment of new businesses using such debt. In this day and age of transfer pricing policies and methodologies that ensure equitable profit is recognised in country, we need to question the relevance of some of these rules. In addition our withholding tax regime which heavily penalises foreign payments, in the absence of double taxation treaties, is also a big block in encouraging investment into the country.

The third would be the need to generally update our tax regime. whilst we as a country have done extremely well in encouraging free movement of funds, updated corporate legislation (e.g. the new Companies Act 2015) etc., our tax legislation if far from modern and not easy to comprehend and comply with.

The last but not the least tax related block is the fact that Corporations pay too much tax in Kenya. Our corporate tax rate, for an emerging economy seeking to grow and attract foreign investment, is possibly too high. We need to seriously look into this and build a case for a lower corporate tax rate. We should use this to attract as a regional hub more multinational corporations to set-up shop in Kenya and use this as a ground to build their Africa business.