This archive report was first published on 23 September 2019.
On September 23, 2019, Kenya's tax incentive policy was under scrutiny due to the country's estimated loss of Kshs.478 billion per year in tax expenditures, equivalent to 5.9% of the country's Gross Domestic Product (GDP).
Tax incentives are provisions in law that grant favourable conditions to individuals or activities, deviating from the normal provisions of tax legislation. These incentives take various forms, including reduction in tax rates, tax exemptions, allowable deductions, and tax holidays.
Kenya, like many African countries, has a comprehensive range of tax incentives incorporated in various statutes. These incentives aim to induce domestic investment, attract Foreign Direct Investment (FDI), and promote exports. However, evidence suggests that tax incentives are not among the priority drivers of investment decisions.
A 2012 investor motivation survey by the International Financial Corporation (IFC) found that tax incentives ranked 11th in order of priority, while the first five factors were access to finance, access to land, labour costs, affordable skilled labour, and proximity to the port. Furthermore, 60% of investors indicated that they would have invested with or without the available tax incentives.
More recently, the 2018 Global Competitiveness Report by the World Economic Forum (WEF) ranked Kenya 93rd out of 135 investment destinations. The principal challenges undermining Kenya's ranking were crime, infrastructure, macro-economic management, health, and skills of the workforce.
Experts argue that tax incentives are a poor way to promote investment, and the country should focus on tackling the underlying issues. The way forward is to minimise tax incentives, conduct cost-benefit analysis, and focus on addressing the factors that undermine the investment climate.
The writer, a Deputy Commissioner at the Kenya Revenue Authority (KRA), suggests that existing incentives should be 'grandfathered' through legislation, allowing those already benefiting to continue while new entrants do not.
