Why Tax Bill May Inhibit Kenya from being Manufacturing Hub

Times Tower

June 4, 2018//-Manufacturing is a key economic driver due to its ability to generate jobs and create wealth.

Beyond this two key factors, a vibrant manufacturing sector can reduce reliance on imported goods and drastically tilt the balance of payments transforming a country from a net importer to an exporter. In time this can prop up the economy by impacting on other factors such as the balance of payment and demand for foreign currency.

It is, therefore, no wonder that manufacturing is a key pillar in the Big Four agenda with the intention to increase its contribution to the gross domestic product (GDP) from the current 0.2 percent to 15 per cent by 2022. The sector is, however, capital intensive and often relies on foreign investment.

Last year, Kenya recorded a 79.2 per cent increase in net foreign direct investment (FDI) inflows from a surplus of Sh23.9 billion in 2016 to a surplus of Sh42.9 billion, according to the Economic Survey 2018. This is despite the economic slowdown due to a prolonged electioneering period and adverse weather.

Traditionally most of Kenya’s FDI is directed to towards the finance and insurance sectors with manufacturing attracting about 20 per cent. Most foreign investors evaluate incentives awarded by various countries prior to making their investments to maximise returns. Kenya is no exception. The government should position the country as a manufacturing hub to achieve the Big Four agenda. Part of this will require extensive tax reform.

For instance, the Income Tax Bill 2018, which has been commended for its radical reforms will negatively impact on FDI inflows and may require redrafting to align it with the Big Four agenda. The Bill proposes to scrap 150 per cent investment deduction currently available to investors constructing buildings or installing machinery outside Nairobi, Mombasa or Kisumu.

The deduction had resulted in an influx of foreign companies seeking to set up on the outskirts of the three cities to enjoy this incentive. If enacted in its current form, the Bill may reverse this trend, not to mention the opportunity cost and forgone job opportunities.

The Bill also proposes to introduce 10 per cent tax on income repatriated by branches of foreign companies. The proposed method for computing this tax is rather unusual in the sense that it seeks to tax the net increase in the value of the branch as opposed to actual amounts repatriated.

The situation is further complicated by the fact that a branch would still have to part with corporation tax at the rate of 30 per cent on its business income. This is certainly a punitive approach to taxation as the effective tax rate will be higher than the current rate of 37.5 per cent.

The Bill further delves into alterations on thin capitalisation provisions by altering the debt to equity ratio from the current 3:1 to 2:1.

Whereas the aim is to safeguard the country from harmful international tax practices devised by multinationals through base erosion and profit shifting, it is regressive in the sense that it hinders the very desire of attracting foreign direct investments.

In totality, the provisions outlined above coupled with the high cost of manufacturing products will negatively impact on Kenya’s attractiveness as a manufacturing hub.

In effect, the Bill will claw back the gains that Kenya has made on the Ease of Doing as well as the Global Competitiveness indices. A number of companies have already relocated their manufacturing activities to countries with better tax incentives and low cost of production.

To safeguard the gains made in boosting Kenya’s attractiveness and competitiveness, the government should review the Bill while at the same time seeking to lower the cost of production.

Incentivising foreign investment would not only kick-start the Big Four agenda but also spur job and wealth creation thus expanding the pool of taxable income.

While I advocate each taxpayer to contribute fairly towards development by complying with the relevant tax laws, it is the government’s duty to provide an enabling environment for businesses to grow and spur sustainable economic development.

By John Magu, a tax expert

This article was originally published on businessdailyafrica.com.

 

 

 

 

 

 

 

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