Every day, the National Treasury, it appears, is devising new ways to tax Kenyans more.
But even as the government squeezes more taxes from Kenyans, it appears to be letting off the hook dozens of multinational firms from paying taxes.
Kenya has been handing tax holidays to companies, whose turnover runs into billions of shillings every year, in what is justified as incentives to draw in more Foreign Direct Investments (FDI) while promoting domestic investment and exports.
Thus, while mama mbogas struggle to make ends meet and decry high tax levels, foreign companies are saving billions through numerous tax holidays.
In the financial year ending June 2021, for example, the government lost Sh259.5 billion (about 2.15 per cent of the country’s Gross Domestic Product (GDP), or the value of all goods and services produced in the economy).
This is more than enough to construct, rehabilitate and maintain roads in the current financial year ending June 2022.
The quest to get more from Kenyans is seen in recent remarks by President William Ruto.
When speaking during the Kenya Revenue Authority’s Tax Payers day in late October this year, President Ruto directed the taxman to increase the number of tax-paying Kenyans by use of technology.
He noted that KRA could be doing a lot better by employing technology and considering the resources at its disposal in growing tax bracket. President Ruto even appeared to criticise KRA on its failure to take advantage of what appeared to him to be low-hanging fruit in so far as growing the tax bracket by going after the ubiquitous informal sector is concerned.
“The imperative of embracing technological solutions to KRA’s strategic issues is clear. There are only seven million people with KRA PINs. At the same time, in the same economy, Safaricom’s M-Pesa has 30 million registered customers, transacting billions daily,” said Ruto.
He added: “The fact that this opportunity remains unclear to KRA demonstrates why radical changes are necessary. Every Kenyan with an ID should have a PIN. Technology and a considerate, fair and professional mobilisation will do the job quite well. Safaricom, a telco, has registered more people than KRA, a powerful state organisation. It is very clear that the magic lies in technology and strategy, not power and resources.”
Perhaps this will be one of the new approaches the new administration will be taking to grow tax collections, borrowing heavily from past administrations that have been squeezing Kenyans into a corner by loading them with more taxes but without a corresponding delivery in public services.
This is even as the government extended its leniency towards multinationals, and even local firms, offering multi-year tax holidays.
This is unlike the situation for Kenyans where all their income is subject to income tax, charged at 30 per cent for firms and highly paid employees.
No tax for CRBC
This is seen in the agreements between Kenya and China on the construction of the Standard Gauge Railway that the Transport Ministry has recently made public. While not all contracts have been made public, the agreements now in the public domain show the extent the Kenyan government was generous with tax holidays to China Road and Bridge Corporation (CRBC).
“Goods and services procured under this agreement for the project will be free of taxes in Kenya and where under any law tax or other duty is required by law in Kenya to be imposed by any agency such taxes or duty will be borne by the end-user,” says one of the contracts.
“All payments by the borrower (Kenya) under this agreement shall be paid in full to the lender without set-off or counterclaim or retention and free and clear of and without any deduction or withholding for or on account of any taxes or any charges.
“In the event that the borrower is required by law to make any such deduction or withholding from any payment hereunder, then the borrower shall forthwith pay to the lender (Exim Bank of China) such additional amount as will result in the immediate receipt by the lender of the full amount which would have been received hereunder had no such deduction or withholding been made.”
This is even as the contracts require CRBC to pay all taxes due to China. “All taxes, duties and fees of whatever nature levied in connection with this contract inside the territory of China shall be borne by the seller (CRBC),” reads the contract.
CRBC is not the only Chinese company benefiting from generous tax exemption deals. A 2017 double tax avoidance agreement between Kenya and China gave Chinese investors and firms in Kenya huge tax reliefs, with Kenya appearing to be getting the short end of the stick by significantly reducing tax revenues.
Among the benefits include the capping of withholding tax on dividends paid to Chinese shareholders in companies operating in Kenya at five per cent.
The deal also exempts Chinese lenders from paying withholding tax on interest payments, which stands at 15 per cent for other foreign lenders.
Other tax incentives that the Chinese companies get include construction firms being required to pay corporation tax on individual projects that last longer than a year.
Chinese firms are not the only ones getting huge tax holidays from Kenya.
Some Japanese firms and their employees implementing some of the mega projects in the country were given similar privileges.
Japanese also enjoy tax privileges
In a legal notice early last year, the National Treasury Cabinet Secretary directed that the income that Japanese companies and workers earned from 15 projects would be exempted from income tax.
The then Treasury Cabinet Secretary Ukur Yatani said this was according to Section 13(2) of the Income Tax. “Cabinet Secretary for National Treasury and Planning directs that the income which accrued in or was derived from Kenya by Japanese companies, Japanese consultants and Japanese employees involved in the projects…. shall be exempt from income tax…” read part of the notice that was issued by Yatani on February 26, 2021.
Section 13 (2) of the Income Tax reads: “The Minister may, by notice in the Gazette, provide… that any income or class of income which accrued in or was derived from Kenya shall be exempt from tax to the extent specified in such notice.” The exemption, said Yatani, was given under the financing agreements that contractors signed with Kenya.
This is even as a 2020 study by the KRA indicated that the tax incentives were not necessarily leading to increased investments or creating more jobs in the country and had outlived their usefulness.
Kenya’s foregone revenue of Sh478 billion in 2019 was an increase of almost five-fold from Sh100 billion in 2012, according to the report dubbed, Economic Impact and Cost-benefit Analysis of Tax Expenditures in Kenya.
The taxman blamed political interests, business lobbies and lack of transparency for the spike in costly tax incentives.
An analysis shows that the Japanese projects exempted from paying income tax had a value of about Sh328 billion.
Some of the projects included the Olkaria V Geothermal Power Development Project which cost Sh66.9 billion.
Others include the first phase of the Sh38.2 billion Mombasa Special Economic Zone Development Project, the first and second phases of the Mombasa Port Area Road Development Project which cost Sh29 billion, the first phase of the Mombasa Port Development Project (Sh22 billion) and the Sh18.2 billion power transmission line from Lessos to Kisumu.