advertisement

Opinion & Analysis

Let’s tax extractive industry prudently

The past weeks have seen reports about a decision relating to charges levied on transportation of some minerals and mineral ores within a county.

It is reported that the charges are Sh5,000 for each tonne of minerals. The first time I heard about this matter was over two months ago at an editor’s forum in the said county.

At first glance one may quickly point out to the two sides of the debate. For the county governments, this is the way of sharing in the benefits that derive from the resource.

For the company it may be a case of double taxation while for the national government, the counties have no legal basis to tax companies engaged in extractive.

The argument to support the illegality of the action of the county government is normally anchored in the Constitution. It holds that mineral and oil are public resources and their ownership is vested in the national government in trust for the people of Kenya.

Further that the provisions on public financial management clearly stipulate the circumstances under which a county can levy any charges.

Article 209 of the Constitution gives counties powers to levy property rates, entertainment tax and any other tax authorized by an act of Parliament.

The debate only revolves whether by including their taxes within the ambit of their Finance Act, counties can argue that they have the requisite legal backing to levy such funds. In my view this argument is far-fetched.

Despite the above, in dismissing the action of the county governments without even a second consideration, we may miss the larger point that their actions raise and which require our collective attention as a country.

The first is an understanding of the driving imperatives for the action of the County Governments.

The second is the purpose of taxation and its impact on the sector’s sustainable growth. By seeking to impose taxes on the mining sector, the counties may be looking for money for their operations, either driven by genuine needs or just out of greed.

There have been interesting experiences across the country, where county governments have sought to impose charges on each and everything imaginable.

The drive behind most of these actions have been the need to raise some additional revenue, either because the resources they are receiving from the national government are inadequate or just because they think this another way of accessing additional resources.

In my view, though, I think the larger message that the counties are sending is that they need to be involved in decisions regarding the extractive industry. This is not too much to ask.

My only advice is that in doing so we should operate within the ambits of the Constitution and the law. This is not to say that county governments should be treated like strangers and ignored from decisions on the extractive industry.

The call by the Constitution that ours is a governance system that requires consultation should guide resolution of the current issue relating to taxation of the extractive sector.

The debate on fiscal measures around the sector is, however broader than the actions by a few counties to impose charges. The fiscal regime that a country puts in place is fundamental in determination of the share of benefits that it will derive from the extractive sector.

There is need to determine the fiscal objectives for the sector as this will help to determine the appropriate instruments to apply. Whether royalties or other measures, such decisions must consider the long-term interest of the country and the need to ensure that taxation is just one of the instruments to apply.

Other non-tax instruments must also be employed. Private sector promotion must also be considered. In return investors also have to realise that the government has an obligation to its citizens to ensure that the sector benefits the country’s economy and its people.

In any case, the resources are public resources. Fiscal measures are necessary as they are one of the most powerful tools for harnessing the benefits and subsequently deploying it to the country’s development goals.

The challenge is to strike the appropriate balance between adequate taxation and incentivizing investors so as to remain an attractive and competitive destination for business.

Dr Odote is a senior lecturer, Centre For Advanced Studies in Environmental Law and Policy, University of Nairobi.

advertisement