Kenya pins investment hopes on zone plan
ON SEPTEMBER 11 Kenyan President Uhuru Kenyatta assented to the Special Economic Zones Act, 2015 (SEZ Act), the Special Economic Zone (SEZ) Bill, 2012, having been introduced for debate and ratification by the House of Parliament in January 2013. The SEZ Act, which provides for the establishment of SEZs in Kenya, will come into effect on December 15.
Kenya’s cabinet approved a memorandum in 2009 on the establishment of the SEZ Programme to pave the way for the phasing out the Export Processing Zones (EPZ) Programme, which was introduced in 1990.
The SEZ Programme is intended to contribute to the achievement of the economic objectives and goals of Vision 2030, aimed at transforming Kenya into a globally competitive country through the establishment of free trade zones, business process outsourcing, and free ports.
The government announced in 2013 that it would build SEZs in the cities of Kisumu, Mombasa and Lamu, where pilot programmes are under way. About 3,400km2 of land have been set aside for development of such SEZs. The coastal city of Mombasa will be the largest SEZ with 2,000km2. Lamu and Kisumu will each respectively have 700km2.
Although the EPZ Act has not yet been repealed, it is understood that Kenya is to cease issuing EPZ licences before the end of this year amid concerns that this programme has failed to add any significant value to the economy.
At the expiry of their contractual period, existing investors in the EPZs will be required to start paying taxes according to Kenya’s general taxation laws. They will also have a choice to either relocate or reapply afresh to be considered for investments in the SEZs under rigorous conditions.
The types of enterprises that can be established under the SEZ Act are much wider than EPZs (which primarily focused on manufacturing enterprises) and include business service parks, freeport zones, free trade zones, industrial parks, information communication technology parks, regional headquarters, science and technology parks, and tourist and recreation centres.
The SEZ Act provides for a general tax exemption for all licensed SEZ enterprises, developers and operators on all taxes and duties payable under the Excise Duty Act, Income Tax Act, East African Community Customs Management Act and the Value Added Tax (VAT) Act on all SEZ transactions. Interestingly though, relevant amendments to the Income Tax Act and VAT Act introduced by the Finance Act 2015 on the same day only provide for more limited (and contradictory) relief, including a reduced corporate tax rate of 10% for the first 10 years of operation and 15% for the next 10 years, a 10% withholding tax rate on payments for services and interest to nonresidents and exemption from VAT in respect of the supply of taxable goods and services to SEZ enterprises, developers and operators. These discrepancies will have to be resolved before enterprises are licensed under the SEZ Act.
Licensed SEZ enterprises, developers and operators shall be entitled to work permits of up to 20% of their full-time employees and additional work permits may be obtained for specialised sectors subject to recommendation of the SEZ Authority. Exemption is also provided from certain provisions of the Foreign Investments and Protection Act, the Statistics Act, payment of advertisement fees and business service permit fees in terms of the respective County Governments’ Finance Acts, and certain industry-specific licences.
Not everyone is equally optimistic about the introduction of SEZs. Some investors have expressed reservations over controlled market access and the creation of the SEZs, whose investors will enjoy unlimited access to local and international markets. EPZ investors are restricted to selling only 20% of their produce to the Kenyan market whereas 80% is to be exported.
The Kenya National Chamber of Commerce and Industry is concerned about the potential response by current EPZ investors to the “skewed” treatment of EPZs and SEZs. As compared with the proposed blanked tax exemption to be available to SEZs, EPZ investors are only entitled to, inter alia, a 10year corporate tax holiday and a 25% tax rate thereafter; a 10-year withholding tax holiday, stamp duty exemption and VAT exemption on industrial inputs.
James Ojee, deputy commissioner of the Domestic Taxes Department at the Kenya Revenue Authority, said SEZs have been introduced to attract foreign direct investment. However, he told the EastAfrican: “We will allow tax exemptions at SEZs but under controlled conditions, being very careful not to lose out like EPZs.” He also indicated that the impact of SEZs on government revenues would be evaluated annually and if found to be lacking, a decision on the future of SEZs would be taken.
According to the East African, Fanuel Kidenda, CEO of the EPZ Authority, however, noted that tax incentives were integral in ensuring competitiveness of SEZ and EPZ investors on a global scale and it was more important to address systemic issues in the investment environment that have hindered the attraction, facilitation and retention of investments in Kenya.
In September, Kenyatta specifically invited US companies to take advantage of the new SEZ regime, which, according to him, had removed restrictions previously affecting companies based in EPZs. He said the Standard Gauge Railway, being built between Mombasa and Nairobi, will soon be extended to Naivasha, which will enable the swift transit of goods between the port of Mombasa and the wider East Africa, enabling companies operating in Kenya to benefit from a larger market.
It is expected that regulations, providing clarity on the criteria and processes for designating SEZs and the licensing of SEZ developers, operators and enterprises, are to be published. Only time will tell if the SEZ Programme will outperform the EPZ initiative and truly contribute to transforming Kenya into a globally competitive country.
Programme focuses on three cities to help realise the vision of becoming a globally competitive nation
Celia Becker is an Africa Regulatory and Business Intelligence executive at ENSafrica.