How special economic zones law alters enterprise horizon

The Special Economic Zones Act assented into law in September, comes into force on December 15. It has been widely publicised as a significant step in Kenya’s efforts to attract greater foreign investment. President Uhuru Kenyatta hails it as revolutionary.

It is, therefore, potentially one of the most important pieces of legislation for foreign investors seeking to do business in Kenya.

A special economic zone is a designated geographical area ‘where business enabling policies, integrated land uses and sector-appropriate on-site and offsite infrastructure and utilities shall be provided, or which has the potential to be developed, whether on a public, private or public-private partnership basis...’

While under Export Processing Zones Act (EPZ Act) the activities of EPZ enterprises are limited to manufacturing, commercial and service activities, the SEZ Act provides a long non-exhaustive list of activities.

They include business processing outsourcing, manufacturing and processing; livestock marshalling and inspection, refrigeration, deboning, value addition; and services and activities to facilitate tourism and recreation sector.

Apparently, anything (legal) under the sun may now be done in a SEZ.

There is, however, a provision to exclude certain activities — referred to as a ‘negative list’ of activities. While there are no activities that are prohibited , the SEZ Authority’s functions include recommending to the Industrialisation Cabinet Secretary such activities, as well as ‘restricted activities’.

Significantly, the SEZ Act does not repeal the EPZ Act. This effectively means that there will be parallel export promotion mechanisms through the EPZ Act and the SEZ Act, at least for now until the EPZ regime is phased out as per media reports.

The notable beneficiaries of agricultural and livestock activities inclusion are farmers and the horticulture industry players, who were left out of the EPZ regime.
All licensed special economic zone entities are exempt from all taxes and duties payable under the Excise Duty Act, the Income Tax Act, EAC Customs Management Act and the VAT Act. They are more specifically exempt from stamp duty.

Work permits

Further, licensed SEZ entities are entitled to work permits of up to 20 per cent of their full-time employees, with the possibility of additional work permits. Kenya’s film industry is another industry set to benefit from recent government measures to boost it, in view of the tax exemptions under the SEZ Act as well as under the Finance Act 2015, the latter which granted income tax and VAT exemptions to industry players.

In comparison, the tax exemptions that SEZ entities will enjoy will be, by far, the most extensive that the government has granted to date. It remains to be seen whether the returns the country will reap from this will be worth it.

Under the Income Tax Act as amended by the Finance Act 2015, SEZs will be corporate tax-free for the first 10 years following commencement of operation,

Both EPZs and SEZs are subject to the non-resident witholding tax rates on payments they receive but SEZs are specifically exempt from taxes on their dividend income.

As with EPZs, SEZs are considered to be outside Kenya for taxation, goods taken out of the country into the SEZ are deemed to have been exported from Kenya, and the same is true of services. Conversely, goods taken out of the SEZ into Kenya is deemed to be imported.

Goods and services produced within an SEZ are primarily destined for export market, hence the tax incentives they enjoy. However, unlike with the EPZs where a threshold of 20 per cent has been set by the EAC countries for consumption within the EAC countries, there are as yet no such stipulations for SEZs, and it is expected that this will be contained in EAC regulations on SEZ once finalised.

It is only sensible that there is a maximum ‘local consumption’ threshold for SEZs, in absence of which the tax holidays and exemptions would not provide the necessary quid pro quo.

Rights and benefits
The SEZ Act establishes an authority mandated to license SEZ developers, operators and enterprises. The authority is required to render a decision on an application for a licence to be an SEZ entity.

This time stipulation will help operationalise the SEZ Act, and prevent instances where the effectiveness of the parent legislation is inhibited by lack of regulations.

Entities licenced as SEZ must be companies incorporated in Kenya, and changes to their particulars must be communicated to the SEZ Authority within 14 days.

SEZs enterprises are guaranteed protection from nationalisation and expropriation of assets under the SEZ Act.

They also enjoy wide ranging rights and benefits to carry on their licensed activities freely, including a right to enjoy the benefits in the national context of an open, free, competitive investment environment.

Ms Chebet is an advocate.