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European Union warns Kenya over costly tax exemptions

By Seth Onyango
Friday, November 29th, 2019
Energy Cabinet Secretary Charles Keter (left) with new Kenya Power Managing Director Bernard Ngugi when they appeared before Senate Energy Committee over power billing and token scandals among other issues affecting the sector. Photo/PD/Samuel Kariuki

European Union (EU) has expressed concern over many tax exemptions in Kenya, saying they are chocking the economy.

According to EU Ambassador to Kenya Simon Mordue the economy’s best bet is to include the cost of such waivers as a fiscal expenditure in the budget to shield the incentives from abuse and curtail opportunities for graft.

“There is a limited amount of accountability on some of those tax exemptions...when my colleague showed me the list, I was like ‘this is so long’,” he told delegates yesterday during the ongoing Wage Bill Conference at Kenya International Convention Centre (KICC) in Nairobi.

Mordue said the growth in the public sector wage bill and non-priority expenditure was crowding out allocations to priority services delivery programmes thus constraining growth.

In a radical proposal, the envoy urged the country to consider higher taxes for the rich even as he urged the government to increase revenue collection from the current 15 to 30 per cent of the gross domestic product (GDP).

Mordue said the current revenue pool was not giving the economy a fiscal headroom to absorb the shock of ballooning debt and spur growth.

“If you look at the amount of taxes that Kenya today collects it is below what one could expect from a country at this level of development,” he said.

He argued that the ideal figure should be in the region of between 20 to 30 per cent of the country’s GDP.

On taxing the rich, he said that top marginal tax rate in the highest bracket is 30 per cent, below what most industries countries impose on them.

Existing regime

Still on tax exemption, Mordue said the existing regime should be examined to ensure the country is not getting a raw deal.

He proposed that the incentives be subjected to legislative process which allows them to be consolidated under the tax law where their fiscal costs are reviewed annually, as part of a tax-expenditure review.

In most jurisdictions, he added, the approval process of tax incentives is consolidated under the authority of the Minister of Finance and enforced and monitored by the tax administrator.

If adopted, Mordue’s proposal would make granting of tax incentives based on law rather than discretion. Kenya, like most low to lower-middle income countries, uses costly tax holidays and income tax exemptions to attract investment.

However, International Monetary Fund (IMF) argues that tax incentives targeted at sectors producing for domestic markets or extractive industries generally have little impact.

Mobile capital

Conversely, those geared toward export-oriented sectors and mobile capital are relatively effective — but the former need to be tempered by considerations of World Trade Organisation consistency.

Kenya Revenue Authority (KRA) is mandated to administer the exemption of institutions including some businesses to encourage foreign direct investment.