Two US firms with operations in Kenya have reported enjoying significant tax benefits arising from the move last year by President William Ruto’s administration to cut taxes for local branches of foreign companies.
Ormat Technologies Inc, a US company that has power generation operations in Kenya, disclosed a tax benefit of $9.4 million (Sh1.49 billion), suggesting that foreign companies will make billions of shillings in savings from the controversial Finance Act, 2023 that reduced the corporate tax rate for the branches from 37.5 percent to 30 percent.
The decision aligned the corporate tax for foreign companies with the rate paid by resident ones.
US-based tower firm American Tower Corporation (ATC) also reported tax savings against the backdrop of a public backlash locally over mounting taxes and levies.
“The company applied the applicable changes in the Finance Act in its third quarter [ended September 2023] condensed consolidated financial statements,” said Ormat in a trading update.
“The impact resulting from the reduction of the statutory corporate income tax rate for branches from 37.5 percent to 30 percent was recorded under income tax (provision) benefit in the amount of approximately $9.4 million.”
The company raised its income tax provision for the nine-month period to September, but revealed that this increase was partially offset by a fresh tax benefit in Kenya.
However, it did not disclose the actual value of the benefit.
“The increase in the income tax provision during the nine months ended September 30, 2023 was…partially offset by a benefit in the current year from the application of a tax law change in Kenya,” said ATC.
ATC through its local subsidiary ATC Kenya owns 3,645 telecoms towers in the country that it leases to local mobile network providers. It is unclear the exact number of foreign companies that are operating in Kenya, but data from the Business Registration Service shows 89 have been registered in the current financial year starting July.
This means that the Kenya Revenue Authority (KRA) will forgo billions of shillings annually from the tax cut.
But President Ruto is betting that in the long term at least, earnings from foreign investments in the country will grow to offset the revenue loss.
The government through the draft Medium Term Revenue Strategy (MTRS) 2023 has also proposed to lower the corporate income tax (CIT) for companies from 30 percent to 25 percent from July to ease the tax stress on businesses.
Treasury Cabinet Secretary Njuguna Ndung’u argued that reducing the CIT rate to below Africa’s average of 29 percent and closer to a global average of 23 percent will not only drive up compliance levels but also attract foreign investors to set up locally.
“Studies have shown that high rates of corporate income tax discourage foreign direct investments and encourage investors to lobby for lower rates or tax exemptions,” said Prof Ndung’u.
A raft of new taxes and levies in July last year and January this year on items such as fuel and housing followed the implementation of the Finance Act, further squeezing workers’ payslips and increasing the cost of doing business for companies and entrepreneurs.
Under the revenue measures, the fuel tax was doubled to 16 percent while workers pay a 1.5 percent housing levy on monthly pay that employers match. But foreign firms such as Ormat and ATC have emerged the unlikely beneficiaries of the tax review.
Ormat’s local subsidiary, OrPower 4, is the third largest power producer in Kenya only behind the State-owned KenGen and Lake Turkana Wind Power (LTWP).
The company owns four geothermal power plants at Olkaria in Naivasha with a total capacity of 150 megawatts (MW), making it the country’s second largest geothermal power producer.
The firm sold electricity valued at Sh14.39 billion to Kenya Power in the year to June 2023, marking a significant increase from Sh11.95 billion in the previous year.
“Our operations in Kenya contributed disproportionately to gross profit and net income,” said Ormat. Its lower tax burden underlines the huge boost that President Ruto’s tax cut has had on multinationals as part of efforts to attract more foreign investment into the country.
“The change aligns the corporation tax rate for branches to that of companies. The tax on repatriated profits is the equivalent of tax on dividend payments,” said KPMG in its analysis of the Act.
It added: “Further, to achieve full equity with companies there is [a] need for further amendments to make the various payments made to the head office or related entities of the branch tax deductible.”
The tax benefit comes even as the power producer prepares to upgrade its generation capacity in a bid to increase electricity revenue from its key source market.
OrPower’s electricity sales to Kenya Power have declined over the years to 940 gigawatt-hours (GWh) in the year to June 2023 from a high of 1,285GWh in the 2018/19 financial year. Its sales to the utility declined to 1,076GWh in 2020; 981GWh in 2021 and 976GWh in 2022.
“We are performing a drilling campaign and expect to increase plant capacity in 2023,” says OrPower in its annual report last year.
The new revenue measures came as the International Monetary Fund (IMF) recommended a staggered implementation of new tax measures by governments in sub-Saharan Africa, including Kenya, amid a public backlash.
The IMF suggests delaying difficult fiscal reforms until macroeconomic conditions are favourable and compensatory measures are in place.
In Kenya, workers have for the fourth year in a row seen their pay increases lag the soaring cost of living.
The government argues the higher taxes are necessary to stabilise government finances, which have been strained by the growing debt repayments.
