Kenya: New Financial centre bets on tax incentives to attract foreign investors

By Herald Aloo
Posted on Wednesday, 20 July 2022 08:33

The Nairobi International Financial Centre (NIFC site)

After years of preparation, Kenya finally launched the Nairobi International Financial Centre (NIFC) on 4 July. The new centre is expected to compete with its peers, including Africa’s leading hubs in South Africa and Mauritius.

The goal of NIFC, a flagship initiative under the economic pillar of the country’s Vision 2030, is to support the business environment, streamline regulatory issues, attract foreign investors, boost capital flows and bolster employment.

Nairobi is already hosting regional headquarters of major global companies such as Diageo Plc, Amazon, Huawei, and Visa Inc which are operating within Africa or sub-Saharan Africa.

America tech firm Microsoft launched a new office and lab in Nairobi last March for its premier engineering hub.

This has set up the pace for investment into the country, but the NIFC CEO is pushing for the implementation of tax incentives and predictability to catalyse more investment into Kenya within this fiscal year.

Commitment

Before the launch of the financial centre, Kenya “didn’t have (tax) incentives. Investors were really waiting to see what incentive would apply,” says NIFC acting CEO Oscar Njuguna.

He adds: “There was a lot of interest up until now, but no one was really committing because they wanted to see what the rate capital gain tax (CGT) would be. That mechanism has not been available until when we are officially opening.”

Some of the taxes that have been a concern to both domestic and foreign investors include the unpredictability of the CGT, corporate tax, and inflationary adjustments also known as indexation. In the Finance Bill 2022, CGT rate, which is tax charged on net proceeds from sale of property, was tripled to 15% effective July.

There is however a mechanism crafted to address CGT concerns. According to the CEO, investors who join NIFC when CGT, for instance, is 15%, will use the same rate when they are exiting the market or selling off property even if subsequent increments come into force.

“We are not creating predictability in tax rates for today but for the duration of investment,” says Njuguna.

Sector-specific incentives are also in the offing. For instance, firms that operate carbon neutral trade in Kenya will enjoy a 15% fixed corporate tax rate for 10 years instead of the normal 30% rate, which is designed to address climate change.

Investment capital funds, green energy firms, and fintech players tops the list of some of the sectors that the agency will prioritise in its early stage. Three firms signed up at NIFC during the launch, including new start-up ARC Ride Kenya, insurer Prudential plc, and Singapore-based AirCarbon Exchange (ACX).

Dispute resolution

Kenya’s tax environment, worsened by prolonged dispute resolution processes, has been an ongoing issue for many investors, hurting revenue streams and operations for businesses.

This has led to the sudden closure of businesses in the Kenya market as the Kenya Revenue Authority (KRA) maintains aggressive tax policies to finance government operations and infrastructure projects.

Betting firms SportPesa and Betin quit operations in 2019 in Kenya over protracted legal tax battles and inconsistent inflationary adjustments on excisable goods and services such as betting.

Tax resolution in Kenya is currently anchored on the Alternative Dispute Resolution (ADR) mechanism handled by KRA, which determines cases lodged by firms disputing tax dues.

But compared to other African countries with financial centres, Kenya’s taxes are quite costlier and complex.

But given the tax dispute resolution is an internal segment within KRA, companies have suggested that the current dispute resolution mechanism as skewed, given KRA’s double role, acting both as judge and defendant.

Unlike KRA’s ADR process, an internal dispute court within NIFC will operate independently like a commercial court on matters of financial frauds and tax cheats and disputes.

But compared to other African countries with financial centres, Kenya’s taxes are quite costlier and complex. For instance, South Africa has varying corporate tax rate that goes up to 28% depending on the taxable income while Kenya has a constant corporate tax rate of 30% for companies outside NIFC.

Mauritius provides flat corporate tax of 15% while Morocco’s financial centre offers total exemption on corporate taxes for 5 years after which 15% rate applies.

The NIFC CEO, however, says that the country’s tax regime remains competitive despite heavy reliance on tax revenues that could hinder investors flow.

“We have to balance (taxes) and be competitive. I don’t think we have to be competitive in terms of low taxes only but also in efficiency. We have to be efficient across the board in terms of issuing work permits for investors,” says Njuguna.

Going against the grain

The launch of the centre comes at a time when Kenya is distancing itself from the global 15% minimum tax deal being pushed by the United States that would see Kenya repeal collecting digital service taxes on tech giants, an area that remains critical to NIFC.

Other than Kenya, Nigeria, and Algeria, 136 countries signed the deal last year to allow multinationals to pay taxes only where they are headquartered, even if they earn profits from other countries.

Kenya remains fretful about the deal’s dispute resolution mechanism and is also seeking a clear revenue-sharing formula to ascertain whether it will earn more revenues compared to its current 1.5% digital tax rate before backing the pact.

Njuguna admits that it is “critical enough we look at how to tax the digital technology and fintech sector because that is going to be a real engine of economic growth.”

“We will be making more proposals on that (digital taxes) space,” he says.

The NIFC, which was first proposed in 2014 aims to raise over $2bn in targeted incremental cumulative investments by 2030. Firms considering to operate via the NIFC must apply for certification from the NIFC Authority, and invest a minimum of KSh5bn ($42,000).

NIFC will charge KSh1m for certification and an annual fee of Sh500,000.

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