Kenya pins in­vest­ment hopes on zone plan

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Celia Becker

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.

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