Kenya losing Sh360bn to tax competition annually - report

Kenya's revenue loss due to tax competition and corporate incentives remains sizeable, with Oxfam putting the amount at close to three per cent of the country's Gross Domestic Product (GDP).

The 2022 Economic Survey estimates the country's nominal GDP at Sh12 trillion, meaning at least Sh360 billion of tax revenue is lost every year. 

The study conducted in partnership with the Tax Justice Network and The Institute for Social Accountability (TISA) under the Okoa Uchumi banner scores Kenya lowest among nine Africa countries surveyed on tax competition.

"Kenya provides a wide range of incentives in the form of capital deductions, tax holidays, special rates in free zones, exemption from certain income taxes, amongst others," the report reads in part. 

It adds that while Kenya may have the some of the highest Corporate Income Tax (CIT) rates in the East African region, it offers some of the most permissive incentives.

Kenya Revenue Authority estimates indicate that Kenya lost up to 5.15 per cent of its GDP in 2017 and 2.96 per cent in 2020 through generous tax incentives.

Tax holidays and incentives specific to Export Processing Zones are considered the most harmful.

"This puts to question the cost-effectiveness of tax incentives in such zones, Kenya continues to pursue the use of free zones to attract foreign investment by establishing Special Economic Zones, “says the report.

Tax Justice Africa's Everlyn Muendo says the proliferation of these incentives is worsened by a lack of coordinated regime in providing and administering the incentives within the free zones.

"There is a growing lack of transparency in the administration of tax incentives in Kenya. This is despite the constitutional mandate to publish tax expenditures and the IMF recommendations on the country’s fiscal transparency,"Muendo says. 

The report scores Kenya at 1.5 out of 10 rating in terms of tax competition, lowest rate compared to Senegal, Tunisia, Nigeria, Uganda, Palestine, Pakistan, Bangladesh, Vietnam and Cambodia who have an average of 4.6. 

The study wants Kenya to refrain from and eliminate tax exemptions and incentives to the elite (individuals and corporate). 

The report comes at the time when Kenya is pushing to expand its tax base in order to raise more revenue to meet its Sh3 trillion fiscal needs and cut on loans. 

Last month, President William Ruto asked KRA to double its collections from Sh2.1 trillion to over Sh4 trillion.

“I need help with our debt situation. I have agreed with KRA that as a country, must move from Sh2.1 trillion to between Sh4-5 trillion,” he said.

The country has also signed a number of double tax agreements that prevents firms domiciled in partner states but doing business in the country from paying taxes. 

For instance, while Mauritius is Africa's leading foreign direct investor in Kenya, bringing $1.43 (Sh143bn) billion and $1.08 (Sh108bn) billion to the East African country, more is lost through tax avoidance. 

Financial experts fear Kenya could be losing Sh15 in revenue for every Sh12 received from the Indian Ocean country due to a tax agreement that allows Mauritius domiciled firms to only pay taxes back home.

Kenya lost $1.78 billion (Sh178bn) and $1.35 billion (Sh135bn) in tax revenues to Mauritius in the last two years respectively, courtesy of the Double Tax Avoidance Agreement signed in 2012.

It has similar arrangements with another 15 states, a move contested by several tax justice networks. 

According to Jared Maranga, Transfer Pricing and International Taxes expert at TJNA, the spiral effect is high and unsustainable public debt, which is passed on to already, overburdened local taxpayers, pushing up the cost of living.

He added that it is unacceptable that the Kenyan government is shifting the tax burden to the ordinary citizen, while deliberately opening doors for the elite and unscrupulous businesses to evade and avoid taxes through DTAAs with secretive tax haven.

Past two regimes signed close to 12 DTAAs, a move that TJNA oppose some like the one between Kenya and Mauritius in court. 

Even after winning the seven years court battle in 2018 on the grounds the agreement did not go through Parliament, the victory was short lived as former President Uhuru Kenyatta signed a new treaty a month later. 

The current government has embarked on the process of reviewing those agreements.

In September, the government said it is planning to sign an agreement with China to end double taxation of income or gains arising from one country and paid to residents of the other.

The deal, which will be subject to ratification by both the Chinese and Kenyan parliaments, is meant to create a conducive environment for investment and trade in goods and services between the two countries.

A part from tax competition, the report rated participating countries on other five parameters, scoring 7.6 out of 10 in terms of tax burden distribution. 

Others are 6.88 points on illicit financial flows and effective tax administration. It scored 4.9 and 4.6 in tax transparency and government spending.