Favourable tax regime can raise Kenya’s regional hub status

Africa can be accessed from four cardinal points — South Africa, Lagos in Nigeria for West Africa, Cairo in the North and Kenya in East Africa.
Whichever way you look at it, Kenya is one of Africa’s most centrally and uniquely placed countries.

South Africa is geographically distant from Sub-Sahara Africa while Cairo is not as attractive an investment platform into Africa given the unstable political situation in Egypt.

West Africa, just like the South, is geographically distant and not well connected to the rest of the continent.

Mombasa port ensures that not only is Kenya able to export its agricultural produce but also provides a platform for hinterland exports such as metal ores and produce from Uganda, Rwanda and eastern DRC which are landlocked countries.

The expanded Jomo Kenyatta International Airport, which is set to open a new terminal, is an important transport hub. The presence of internet connectivity has changed the way business is done and provides a vital base for competitiveness and efficiency.

The fact that several fibre optic cables land at Mombasa underscores Kenya’s pole position as an investment hub. The government has fast-tracked energy production, which is expected to peak at 5,000MW by 2017.

Focus on oil

With focus on oil and gas development, Kenya’s attractiveness as a foreign direct investment destination is likely to rise. It is no wonder that even without a specific tax regime for Pan African investments, Kenya is a headquarter for several multinationals including Coca-Cola, Google, Airtel and GE.

Interestingly, some of the multinationals previously had their Africa headquarters in South Africa. Investments into Africa have traditionally been routed through South Africa and Mauritius.

South Africa, presumably due to its more sophisticated financial markets; and Mauritius because of the investment holding company regime and a wide tax treaty network.

Citizens of 48 African countries do not need visas to visit Mauritius — perhaps as a response to the rising migration of multinationals headquartered in South Africa and in order to consolidate its position as a gateway into Africa.

South Africa recently put in place a headquarters company regime which is attractive to multinationals.

For example, a headquarters company is exempt from foreign exchange controls and interest paid by such companies is exempt from withholding tax.

Headquarter companies are also exempt from the debt to equity threshold which triggers thin capitalisation and the consequent restrictions on deductibility of interest expenses.

Scramble for FDI

Given African countries’ scramble for foreign direct investment, is it time for Kenya to establish a similar regime to consolidate our position as the preferred hub for businesses with Africa operations?

To start with, Kenya has enhanced its tax treaty network by signing a pact with France. In May 2014 the Mauritius-Kenya tax treaty was gazetted.

The same month, the government negotiated a treaty with Qatar, largely driven by projected investments in the energy, oil and gas sectors.

Earlier, the government had negotiated a similar treaty with the United Arab Emirates. These developments provide a good basis for a headquarters regime in Kenya.

Some tax incentives that the government could think of for Kenya’s headquarter regime include reduced tax rates for income earned outside Kenya by headquarter companies, dividend exemption for the companies, lower withholding tax rates for payments outside Kenya, and VAT zero rating or exemption for supplies to such companies.

From an economics perspective, headquarter companies would create much needed jobs, increase government taxes from employment, enhance the multiplier effect especially from consumption of goods and services, and buffer foreign exchange reserves from earnings by the companies.

With a headquarters regime in Kenya, companies which are rearing to exploit business opportunities in Africa will get impetus that will propel them to excel beyond the continent.

Such a regime could also provide the launch pad for Kenya’s very successful models such as banking, IT, mobile apps and real estate development.

With the ever growing budgetary constraints, the big question remains; can tax drive Kenya’s regional hub profile? Yes it can and now’s a good time to start.