STRATEGY

Bad mining contracts robbing Kenya of revenue - tax lobby

The country is losing over Sh100 billion a year from all tax incentives and exemptions.

In Summary

•Experts say the sector can be a major revenue contributor to support education and health systems which are hit by Covid-19.

•Major Kenya Revenue Authority revenue sources remain vulnerable to pandemic hence the need to tap into natural resources. 

Tax Justice Network Africa executive director Alvin Mosioma speaks during this year’s Pan African conference on Illicit Financial Flows and Taxation, in Nairobi,Yesterday/COURTESY
Tax Justice Network Africa executive director Alvin Mosioma speaks during this year’s Pan African conference on Illicit Financial Flows and Taxation, in Nairobi,Yesterday/COURTESY

Foreign firms are exploiting flawed double taxation agreements, transfer pricing and incentives that make them get away without paying taxes to deny Kenya revenue, according to Tax Justice Network Africa.

This, according to the TJNA executive director Alvin Mosioma is common in the extractive industry where Kenya is not optimising earnings from its natural resources thus denying the government taxes.

KRA estimates the country loses over Sh100 billion ($1.1 billion) annually from all tax incentives and exemptions.

 

Out of these, trade-related tax incentives were at least Sh12 billion ($ 133 million) and may have been as high as $ 566.9 million.

Mosioma spoke at the ongoing Pan African conference on Illicit Financial Flows and Taxation (PAC), in Nairobi.

The extractive sector has been identified as among major areas that can be tapped by sealing loopholes for illicit financial flows , with United Nations Conference on Trade and Development (UNCTAD) estimating that Africa loses $89 billion (Sh9.69 trillion )annually through illicit financial flows (IFFs).

IFFs emerging from the extractive sector -where raw materials are obtained from the earth like oil and gold - constitute majority of the IFFs from Africa.

Kenya is not spared from this threat  as she has a range of minerals with oil being the latest discovery.

"Kenya's extractive industry especially on oil and gas is still nascent but the government should put in place the right measures to ensure it doesn't lose out," said Mosioma.

According to TJNA ,  the Covid-19 pandemic has brought out the urgent need for African countries to maximise on local resources as a source of development finance.

 

"It is time to rethink because donors and other financiers have diverted huge budgets to address their own issues at home as the pandemic remains a global concern," said Mosioma.

The Kenya Civil Society Platform for Oil and Gas, Transparency International, amongst others, have called for increased transparency in extractive governance and structures, mining auditing, and more African Mining Vision mainstreaming in Kenya’s local laws and institutions.

“Recent discoveries have positioned Kenya as an important player in the natural resource sector in the region. It is critical that we learn from mistakes made by others and put in place a robust fiscal system that will enable the country to reap maximum benefits for the resources,’’ said Mosioma.

In support to the national initiatives, TJNA purposes to address the heavy loss of revenue through IFFs from the extractive sector by highlighting the loopholes in Kenya’s legal and tax system.

Sealing illicit flows and tapping revenues from the extractive sector is seen as a major avenue to help government fund critical sectors of health and education which have been ravaged by the pandemic.

Covid-19 relief measures by the government, among them exempting from PAYE persons earning Sh24,000 and below, reducing corporate and personal income tax rate from 30 per cent to 25 per cent, VAT rate cut from 16 per cent to 14 per cent are expected to deny KRA the much needed revenues.

According to National Treasury CS Ukur Yatani, overall measures, including reduction of turnover tax rate from three per cent to one per cent, are estimated to cost the exchequer Sh 172 billion in revenue foregone by the government in one financial year.

“We are considering a review of tax expenditures and incentives to minimise revenue loss,” Yatani said at last week's Annual Tax Summit.

The mining and quarrying sector remains critical to the country's GDP, having contributed about Sh50.3 billion in 2019, Economic Survey 2020 indicates, which was an increase from Sh49.1 billion the previous year.

Australian miner-Base Titanium alone represents 65 per cent of Kenya’s minerals output value contributing about Sh20 billion annually to the country’s exports.

The country's mining sector is however yet to reach its full potential as numerous ores and industrial minerals, which have been established to be in substantial quantities, remain unexplored.

These minerals include soda ash, fluorspar, titanium, niobium and rare earth elements, gold, coal, iron ore, limestone, manganese, diatomite, gemstones, gypsum, natural carbon dioxide and oil.