Kenya is losing over Sh100 billion in tax revenue through wide-ranging exemptions mainly to multinationals.
Experts say the loss, which excludes revenue forfeited in capital gains, calls for urgent changes to the existing trade and investment incentives.
According to a new report by the non-governmental organisations ActionAid and Tax Justice Network, the numerous tax incentives given to the foreign investors do not translate to substantial returns in foreign direct investments (FDI).
Uganda and Tanzania, which give far fewer incentives than Kenya, have had a better flow in FDI, the report shows.
The report was released Monday at the Sarova Stanley hotel in Nairobi as part of activities planned by ActionAid to raise awareness on the negative implications of tax exemptions to multinational corporations (MNCs) on spending to alleviate poverty.
The amount lost is enough to pay for free primary and secondary education as well as free medical and maternal health services, said Sarah Muyonga, policy and advocacy consultant at ActionAid Kenya.
The exemptions range from investment deductions and allowances for industrialists to incentives for the fleet-footed Export Promotion Zones firms as well as valued added tax (VAT).
“Tax should be a tool for justice and equity. But there has been aggressive tax avoidance by multinationals which have denied countries revenue. And the government is giving them exemptions from tax which they don’t need. If we remove these exemptions, Kenya, for example, will collect over Sh100 billion annually,” said Ms Muyonga.
The new report titled, Give us a Break: How big Companies are Getting Tax-free Deals says there is an “incentive epidemic” that not only leads to constrained public spending on essential services but also causes governments to make up for the lost revenues through taxes on the ordinary people and even those living in poverty.
The survey found that small businesses, which have to pay fees to local authorities and are occasionally pursued by revenue authorities to pay turnover tax, oppose incentives to foreign investors. According to a separate report on Kenya, the incentives do not necessarily attract FDI.
Comparing the average FDI in the three largest economies in East Africa in the five years ending 2010, Uganda has the highest average at $766 million followed by Tanzania which had $654 million while Kenya had only $210 million.
“FDI flows to Uganda, which provides fewer incentives than Kenya, are much higher. (Data) shows that Uganda has received the largest FDI flows in the region, which have been increasing. FDI to Tanzania has been significant but largely static while in Kenya FDI is low and erratic,” says the report.
The June 2013 report shows that Kenya loses Sh12 billion annually in investment deductions allowed against profits and on capital expended on buildings and machinery used for purposes of manufacture and certain hotels.
The country loses Sh3 billion annually in industrial building allowance, which can be claimed by any person who incurs expenditure on the construction of a building or purchase and installation of machinery provided that these are used for manufacturing or hotel.
Over a five-year period, MNCs had accumulated Sh73 billion in terms of allowances for wear and tear that had been forgone as revenue by the government. This means that companies were being allowed to exclude spending on replacing old machinery and plant through aggressive depreciation policies.
It meant that a company calculates profit after deducting the cost of replacing the plant or machinery, thereby improving its cash flow and simultaneously reducing its tax burden.
“We agree with the findings of the ActionAid report that too much tax revenue is being lost in the incentives to multinational companies. We need to remove these incentives because they are not helping the country,” said Irene Otieno, the Nairobi Regional Co-ordinator for the National Tax Association, an NGO that monitors the national Budget and fiscal policies of the government.
Ms Otieno noted that the benefits of tax exemptions, even when the levies were on local goods, never reached those intended as they were appropriated by the firms.
“The incentives are just an avenue for corruption. When you give discretion to someone to decide what they want to be exempted from you have clearly opened the way for corruption,” said Ms Otieno in an interview.
The Treasury’s position has been that exemptions should be removed and the revenues that are then raised used for targeted interventions. It is currently planning to double the number of households targeted for cash transfers through the Budget to 310,000 with a Sh7.5 billion allocation in the 2013/14 Budget Estimates.
Joseph Kinyua, the former Treasury permanent secretary, said in 2011 that Kenya was losing Sh60 billion in VAT exemptions and zero-rating. A controversial bill on the tax is currently before Parliament and is intended to curb revenue loss.
In the ActionAid report, the EPZs were also identified as a loophole where at least Sh5.8 billion was being lost annually. About Sh20 billion had been lost in five years, mainly to foreign firms which are dominant at the EPZ.
According to the report, 61 per cent of the EPZ investors are foreign companies from China, Britain, the US, the Netherlands, Qatar, Taiwan and India while a quarter of the firms are joint ventures between Kenyans and foreign companies. Only 14 per cent of the enterprises are fully owned by Kenyans.
Among the tax incentives provided in the EPZs, the most significant are a 10-year corporate income tax holiday and a 25 per cent rate for the next 10 years (compared to the standard rate of 30 per cent). The firms enjoy a 10-year exemption from all withholding taxes, exemption from import duties on machinery, raw materials, and inputs, stamp duty and VAT on raw materials, machinery and other inputs.
Last year, the Kenya Revenue Authority said it would restructure the Tax Remission for Exports Office (TREO), a scheme that seeks to encourage domestic manufacturers to export by cutting or removing import duty and VAT on raw materials used in the manufacture of export goods.
This would include reducing the firms’ spending on excise duty on fuel oil and kerosene.
In the TREO scheme, the government lost nearly Sh24 billion in the five years to June 2008. If the numbers were to be done for the most recent financial year, the figure is likely to be higher since tax revenues — across the board — have risen by more than 50 per cent since 2008, the year used in calculating the losses.
KRA’s position has been that many a times, the firms would manufacture goods and divert them to the local market rather than export, thereby defeating the purpose for which the tax exemption was given.
Another incentive given to transnationals is the ‘Manufacturing Under Bond’ system, which was introduced in 1986 to encourage investors to manufacture for export by offering them exemption from duty and VAT on imported plant, machinery, equipment, raw materials and other inputs.