The Trade, Investment, and Industry Ministry has lined up wider incentives as the State races to net investors' billions for newly created special economic zones (SEZs) across the country.
A review of proposed changes to the SEZ Act revealed plans for deeper tax exemptions and an expanded range of economic sectors that would be covered under the concept.
For example, the Trade ministry in its draft Special Economic Zones (Amendment) Bill, 2023 proposes to change the Income Tax Act to exempt SEZ enterprises, developers, and operators from corporate income tax for the first 10 years from the date of first operation.
“The Principal Act is amended by inserting the following new schedule immediately after the second schedule. Corporate tax rate of 10 per cent for the first 10 years; as per Head B of the Third Schedule to the Income Tax Act Cap 470 paragraph 2 (h), licensed SEZ developers, operators, and enterprises are charged a corporation tax rate of ten percent for the first ten years from the date of the first operation and thereafter fifteen percent for another ten years,” said the Bill.
Currently, SEZ enterprises, developers, and operators are entitled to a reduced 10 per cent corporate income tax rate for the first 10 years from the date of the first operation, 15 per cent for the next 10 years, and a standard rate of 30 per cent for the period thereafter.
“The proposed amendment intends to make SEZ enterprises, developers, and operators quite optimal from a tax perspective,” Alex Mathini, Andrew Oduor, and Bernard Kirii, partners at law firm, Bowmans said in a note.
The Bill also proposes to amend the SEZ Act to provide that a licence issued to an SEZ developer, operator, or enterprise shall be valid for 10 years, subject to inspection by the SEZ authority and payment of annual license fees.
Currently, the period of validity of an SEZ licence is left to the discretion of the SEZ authority—which limits certainty among investors and hurts prospects of long-term investment.
Further, the Special Economic Zones (Amendment) Bill, 2023 targets to expand the types of special economic zones in Kenya to include education and digital zones.
“The education zones are intended to host centres of excellence for advanced and world-class teaching and learning. This will now open up an avenue for educational sectors to set up in SEZs,” the partners at Bowmans said.
“In addition, the digital zones are intended to attract players in the evolving digital space by creating a favourable environment for the provision of digital products and where electronic residency and digital incorporation could be established.”
The ministry also seeks to widen the scope of economic activities within the SEZs by providing for commercial areas.
In the Bill, it proposes to amend the SEZ Act to provide for commercial areas by stating that they shall comprise non-customs-controlled areas within an SEZ specialising in shopping, dining, entertainment, general wholesale, retail, and other commercial activities.
In addition, the Bill also proposes to provide for the licensing of persons intending to provide services within a SEZ without the benefits set out by the SEZ Act. Such services would include the services listed above. Persons intending to carry out the services shall be required to apply for a SEZ Business Service Permit.
“The proposal is intended to expand the scope of activities that can take place within SEZs which is in line with the government’s initiative to make SEZs hubs for economic activity,” Mathini, Oduor, and Kirii said in their note.
The ministry additionally proposes to amend the law to recognise SEZ housing which is defined as buildings within an the zone that are constructed as support infrastructure and owned or used by a developer, operator, enterprise, or resident within an SEZ zone for residential purposes.
In addition, the Bill proposes to levy tax at the rate of 2.5 per cent on the sale of SEZ housing. The levy would be payable by the developer, operator, or enterprise on the sale of the SEZ housing.
“Currently, if an SEZ entity were to develop and sell housing within an SEZ, such entity would be subject to corporate income tax at the rate of 10 per cent on the taxable profits arising thereto,” the Bowmans team said.
“With the Bill proposing to exempt SEZ enterprises, developers, and operators from corporate income tax for the first 10 years, the introduction of the 2.5 percent tax on the sale of SEZ would still subject to tax the sale of SEZ housing. It should be noted that the tax is on the gross value rather than the taxable profits,” it added.
Trade, Investment, and Industry Cabinet Secretary Rebecca Miano last month said the law on SEZ and Export Processing Zone (EPZ) programmes would be overhauled by the end of this year to provide a more competitive setup for investors.
“In order to make our SEZ and EPZ programmes vibrant and to provide a globally competitive framework, we have committed to overhauling both regimes by the end of this year," she said in an interview with the Business Daily.
“This will provide a conducive environment which will create a virtuous cycle of attraction of investments, generation of employment opportunities, investment in infrastructure, utilisation of local resources and improvements in planned urban development; all resulting in improved standards of living,” she added.
Records by the ministry showed that currently there are over 25 gazetted SEZs with over Sh459.11 billion ($3 billion) in investments and over 90 EPZs with investments sitting at over Sh146.91 billion ($960 million).
In its 2023 Budget Policy Statement, the National Treasury stated that the government planned to use the Public-Private-Partnership model to deliver industrial parks and SEZs around the country.
“In this arrangement, the government will provide the private sector will provide the private sector with appropriate land and create necessary incentives, through fiscal tax measures and special power tariffs to stimulate private sector investment into SEZs,” it stated.
In addition to the overhaul of SEZ regulations, the ministry has been establishing County Aggregation and Industrial Parks (CAIPs) in all 47 counties with aggregation centres and value-addition sections.
The first phase of the project is expected to utilise 10 acres in each county with the construction of 4,000 square metres of sheds, half of which will feature cold storage. About 4,000 square metres of sheds will host 40 value addition investments from the local area.
So far, 12 CAIPs have been launched in the country and are at various stages of development.
