Tax incentives can promote job creation, development

• Tax deductions are effective, additional general and targeted approaches that should also be explored under the tax code so as to better advance the goals of infrastructure investment and job creation within the context of Tatu City project.
• Infrastructural investments such as Tatu City’s proposed roads, sewerage systems, electricity generation and water supply stimulate the Kenyan economy.
• In order to foster multi-faceted development in line with Kenya’s Vision 2030 goals, the interaction between tax incentives and Tatu City’s development needs to go further than simply aiming for a maximum tax refund.
• Financing incentives such as the issuance of private activity bonds, loan guarantees, standby lines of credit and direct loans by the Kenyan government could also be explored.

In his article examining possible tax incentives for the Tatu City project (Business Daily June 20, 2012), David Herbling focused on tax refunds of up to Sh20 billion that Tatu city developers intend to claim as a tax deduction for amounts spent on infrastructure investments.

Yet while tax deductions are effective, additional general and targeted approaches should also be explored under the tax code so as to better advance the goals of infrastructure investment and job creation within the context of this mega project.

Infrastructural investments such as Tatu City’s proposed roads, sewerage systems, electricity generation and water supply stimulate the Kenyan economy.

These investments result in other benefits such as generation of tax revenue for the Kenyan government, attraction of foreign direct investment (FDI), reduction of unemployment and promotion of specific sectors in the economy.

Although the resulting economic growth and development are beneficial, the significant cash inflows required to fund such projects frequently render them prohibitively expensive to undertake.

In order to address this concern, the tax code is structured in a way as to be optimal to investment. In order to foster multi-faceted

development in line with Kenya’s Vision 2030 goals, the interaction between tax incentives and Tatu City’s development needs to go further than simply aiming for a maximum tax refund.

While the benefits from infrastructural investment make it evident that a case can be made for tax deductions, the costs and benefits of such practicable incentive schemes need to be evaluated.

Indeed, tax deductions provide for more favourable tax treatment of certain activities or sectors compared to what is commonly granted in the industry.

However, even such carefully planned schemes are susceptible to inefficacy. In particular, tax deductions can erode the tax base.

Consequently, for the tax incentives associated with Tatu City and other similar satellite cities being constructed elsewhere to be efficient, multiple mechanisms need to be used.

Another potential method is the acceleration of depreciation treatment. This is done by expensing all qualifying infrastructure expenditure amounts to full deduction in the year the investment is made rather than depreciate these investments over several years.

Finally, financing incentives such as the issuance of private activity bonds, loan guarantees, standby lines of credit and direct loans by the Kenyan government could also be explored.

Importantly, no single tax incentive should be singled out over others as broad-based reform works best.

Zawadi is completing her PhD specialising in taxation and debt at the Massachusetts Institute of Technology.