Multiple tax incentives and exemptions handed out to the ultra-wealthy and large investors in the past decade are undermining Kenya’s ambition to grow revenues, the International Monetary Fund (IMF) has said.
The IMF, in a new analysis of tax policy and administrative changes in the East African Community countries, says that Kenya’s tax-to-GDP ratio has been on a downward trajectory since peaking in 2014 after the country implemented policies that have ended up narrowing the tax base.
The IMF analysis tracked tax policy and administrative changes between 1988 and 2022, with the bulk of changes undertaken in Kenya found to have resulted in a reduction of taxes payable.
"While in all EAC countries except Rwanda and Uganda, tax changes primarily consisted of base changes, Kenya was the only country in the sample where base-narrowing measures were announced more frequently than measures to strengthen administrative practices. Kenya was also the only country in the sample where the frequency of tax policy changes introducing a reduction in taxpayers’ liabilities exceeded 60 percent of total tax policy changes,” the IMF said.
“While the frequency of tax measures is not an indicator of the actual revenue impact of a tax measure, it does provide an indication of the likely direction of change in tax collection if specific measures are sustained over time where the frequent introduction of base-narrowing measures would result in an erosion of the tax base.”
The IMF has called for the reversal of measures narrowing the tax base, starting with the implementation of the Medium-Term Revenue Strategy (MTRS).
“Kenya needs to strengthen tax collection consistent with the authorities’ objectives of sustained increase in tax revenues to meet their development agenda. In this regard, a key milestone is the timely adoption of Kenya’s first MTRS which aims to increase revenues by five percentage points of GDP by FY2026/27 through measures that broaden the tax base and strengthen tax compliance,” the IMF added.
The IMF’s push to tax the rich more comes at a time when the William Ruto administration has stepped up its onslaught on the payslips of the middle class and the rich.
Kenya has since 2014 handed out an array of incentives and exemptions on personal income tax, corporation tax, VAT and trade taxes, resulting in the observed decline in the share of taxes to total GDP output.
Kenya’s tax revenues have steadily fallen since peaking at 15.5 percent of GDP in 2014 and touched a low of 13.1 percent of GDP in 2020. The implementation of the 2023 Finance Act, notwithstanding its ambitious target to improve tax revenues, is expected to only lift the tax-to-GDP ratio to just 14.4 percent of GDP.
According to the IMF analysis, the drag on tax revenues is likely attributable to the incentives granted to the rich and large investors.
In 2014, for instance, aeroplanes and other aircraft exceeding 2,000 kilogrammes in weight were exempted from VAT, handing relief to rich individuals and companies who import such equipment into the country.
In 2015, special economic zone (SEZ) enterprises, developers and operators were exempted from all taxes and duties payable under the Excise Duty Act, Income Tax Act, East African Community Customs and Management Act and the VAT Act.
The special incentives are meant to attract large domestic and foreign investors into making investments in the SEZs.
Incentives and exemptions handed out in recent tax legislation include the reduction of the corporate income tax rate from 30 to 15 percent to real estate developers putting up at least 400,000 housing units in a year of income.
In 2016, motor vehicles purchased or imported for direct and inclusive use in official aid and funded projects were exempted from VAT.
Most recently in 2023, aircraft parts were exempted from VAT, having previously attracted VAT at the standard rate, while developers of hotel buildings and buildings and machinery used in manufacturing were cleared for a 100 percent investment deduction. Bulk storage and handling facilities supporting standard gauge railway (SGR) operations were also qualified for a 150 percent investment deduction.
Last year’s move to cut taxes for local branches of foreign companies has also resulted in reduced liabilities for the firms, which have saved billions in the process.
US power generating company Ormat Technologies Inc., for instance, disclosed a tax benefit of $9.4 million (Sh1.5 billion) after the reduction of its corporate tax rate from 37.5 percent to 30 percent. American Tower Corporation also reported tax savings from the incentive.
The tax savings made by the foreign firms have come amidst backlash of mounting taxes and levies on Kenyans, including increased payroll deductions which have been matched by employers.
Expected higher deductions to the National Social Security Fund (NSSF) and the State-backed Social Health Insurance Fund (SHIF) are expected to ramp up the deductions.
Tax measures implemented under the controversial 2023 Finance Act include the doubling of VAT on petroleum products and the introduction of the 1.5 percent housing levy, which is to be matched by employers.
