Here’s a headline (see picture) that should send ripples across the whole of Africa. Kenya’s Business Daily reports that the Kenyan government is considering plans to withdraw tax exemptions granted to foreign investors, including ten year tax holidays on corporate profits and ten year withholding tax holidays on repatriated dividends and other remittances.
Tax holidays are estimated to cost around Ksh100 billion (US$1.1 billion) annually, but are widely regarded as serving no useful purpose, costing Kenya more than the investments contribute. According to Mr Moses Ikiara of the Kenyan Investment Authority:
“This sort of policy [on attracting investments] means that foreign firms have in most cases been taking away more than the economies that compete to host them gain.”
Foreign investors are also exempted from paying value added tax (VAT), import duty on inputs, and payment of stamp duty on legal instruments. They further benefit from 100 per cent tax deductibility on new capital investments.
In practice, this form of tax “competition”, which typically involves large expenditures on corporate welfare (see here for recent estimate of what this costs the UK annually), is more accurately described as ‘tax wars’, with different nations being played off against one another by powerful investors. The evidence suggests, however, that tax breaks tend to attract the shifty, rent-seeking sort of investment, and creates a distorted market which harmfully favours “foreign” investors (who in reality are often Kenyan residents who have round-tripped their capital offshore to Mauritius or a similar tax haven and hide their identity behind offshore companies in order to enjoy the tax breaks). As the Business Daily reports:
“Critics have accused the state of paying undue attention to foreign firms at the expense of promoting local enterprise. The criticism is centered on the fact that most of the firms fold up operations and leave soon after the grace period is over – exiting the local economy without transferring the envisaged skills or technology to locals.”
Our colleagues at Tax Justice Network Africa have been leading the criticisms for many years, and they can fairly claim much credit for persuading the Kenyan government to rethink their use of tax expenditures. We hope to see other African governments follow suit and, you never know, maybe even some European governments like Ireland and the UK will eventually wise up to the fact that tax subsidies are for losers.
Read the Business Daily article here. Read more on tax wars here; on the 2012 TJN-Africa/ActionAid report Tax competition in East Africa: A race to the bottom? See also this IMF report entitled A Partial Race to the Bottom? Corporate Tax Developments in Emerging and Developing Economies which notes that:
“a race to the bottom is evident among special regimes, most notably in the case of Africa, creating effectively a parallel tax system where rates have fallen to almost zero.”
Update: TJN-Africa has responded to the news with a press release, which you can read here.