Kenya lost over Sh200 billion in the five years between June 2003 and June 2008 through numerous tax incentives to manufacturers.
According to a study carried out by non-governmental organisations ActionAid and Tax Justice Network Africa (TJN-A), the biggest loss of Sh73.1 billion was incurred through incentives to replace wear and tear of plant and machinery.
The second largest loss came from investment deductions through which companies first subtract their spending on new investments before calculating their tax obligations – which minimises the expenditure.
The study called for the scrapping of such incentives to improve revenue- generation and increase social spending.
“Incentives such as tax holidays have negative impact on government spending. The State needs to reduce these incentives,” said Tennyson Williams, the country director of ActionAid during the launch of the report in Nairobi on Wednesday.
Participants, however, said the revenue losses could be more because some of the beneficiaries further avoid paying taxes by incorporating their companies overseas.
On trade-related incentives, the biggest loss— amounting to Sh19.6 billion — occurred due to the Tax Remission for Exports Office (TREO), a scheme that encourages local manufacturers to export their products by reimbursing the duty and VAT paid on raw materials.
Recently, the Kenya Revenue Authority (KRA) said it had scaled up surveillance of the TREO scheme following abuse by some manufacturers who sold the goods they made locally.
Dereje Alemayehu, the chairman of the TJN-A, said Africa had lost over $160 billion annually in transfer pricing whereby multinational companies used their subsidiaries to evade tax through various methods, including invoices and costly loans.
Alemayehu said tax havens were also critical in the avoidance of payment, with subsidiaries of companies being used in the schemes. He added that this was clear from the fact that 60 per cent of the total global trade is done through subsidiaries.
Mr Alemayehu also questioned the impact of an agreement between Kenya and Virgin Islands, a tax haven where billions of shillings amassed through the National Hospital Insurance Fund are alleged to have been stashed.
“The return of money is unlikely. Talking to the prime minister of Virgin Islands is not enough to bring money back to Kenya. If it were that easy, then the island would not have bothered keeping the money,” said Mr Alemayehu.
The agreement was announced by Vice- President Kalonzo Musyoka after official visits to Asia.
The director at TJN-A Alvin Mosioma, said the tax incentives did not necessarily bring in foreign direct investment (FDI) as intended because between 2006 and 2010 Kenya received less FDI than Uganda and Tanzania which had fewer incentives.
Using data from United Nation Conference on Trade and Development (UNCTAD), the study showed that Kenya got $1.15 billion (Sh98 billion) in FDI in five years, less than a quarter of what Uganda and Tanzania each god despite having fewer incentives.
