Cementing Kenya as tech hubTuesday January 03 2023
Kenya has been touted to be a major hub for tech companies which are seeking to develop products and solutions that are fit for the African market.
The country is also home to many tech start-ups that are seeking to solve African problems by incorporating technology in their solutions.
The current growth trajectory in this nascent industry presents the country with an opportunity to cement its position as a technology hub.
The availability of talent and access to affordable internet are some of factors that have contributed to the rise of the country’s prominence in technology matters.
The Government, on the other hand, set out a framework to develop what has been dubbed as the Silicon Savannah and established Konza Technopolis.
Konza Technopolis is a flagship project under Kenya’s Vision 2030 economic development blueprint. It is seeking to become a world-class city that is powered by information, communications, and technology (ICT) which is supported by a superior and reliable infrastructure.
It is meant to host major technology companies and other ancillary service providers.
The process of establishing intangible property involves various steps. This entails Development, Enhancement, Maintenance, Protection and Exploitation (DEMPE).
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DEMPE ensures that all parties who are involved in the process are properly allocated returns from the use of the intangible property based on the functions that they perform, the assets that they use and the risks that they assume in the process.
Intangible property is highly mobile. It is not uncommon to find start-ups and technology firms developing intangible property in Kenya and then transfer and register them in the form of intellectual property rights in a legal entity that is based in another jurisdiction.
The intellectual property is then rolled out for use in other jurisdictions within Africa and beyond.
This implies that the returns from the use of the intellectual property across the various jurisdictions are paid to the registered owner either in the form of royalties or other forms of compensation.
Consequently, the country loses what would otherwise have been long-term revenue that would be critical in the Government’s efforts to plug perennial budget deficits.
It also denies the country the much-needed foreign currency that would be paid by the user countries.
Public policy plays a critical role in promoting research and development (R&D). A mix of broad fiscal and targeted tax policies are critical in maintaining intangible assets that are developed in Kenya.
This will encourage investment in R&D and registration of the final products in the form of intangible assets in the country.
Currently, the prevailing tax law allows taxpayers to deduct expenditure which is incurred by a person for the purposes of a business carried on by him being expenditure of a capital or non-capital nature on scientific research, a sum that is paid to a scientific research association approved by KRA as being an association which has as its object the undertaking of scientific research related to the class of business to which the business belongs.
The law also allows the deduction of a sum paid to a university, college, research institute or other similar institution approved by the KRA for the scientific research.
Due to the nature of R&D, massive upfront investment is required in the initial stages of development of intellectual property.
This is in the form of salaries to developers among other related costs. It thus becomes critical that a start-up has sufficient cashflow to fund its R&D activities.
This is most cases done through fundraising from international private equity, venture capitalists as well as development partners.
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Common tax incentives for R&D
Globally, some of the most widely used tax incentives are tax credits, favourable tax deductions for R&D expenditure and preferential tax rates on income from certain R&D activities. The incentives focus on reducing the cost while encouraging increased expenditure on R&D.
The tax credits could be in the form of credits against income or payroll taxes for expenditures on wages and/or capital investments for R&D. Additionally, it could also be in the form of accelerated depreciation which enable the recovery of the investment faster than the underlying economic depreciation of the intangible asset.
Income-based tax incentives provide for lower tax rates on future income from investments in R&D and thus increase the after-tax rate of return on those investments.
This could be done through the set-up of an innovation box where qualifying intellectual property is taxed at a preferential rate.
By and large, the Government could adopt some or a mix of these incentives to promote investments in R&D and ultimately the retention of the intellectual property that is developed in the country within the borders.
The writer is an Associate Director at Ernest & Young LLP.