Kenya risks missed opportunity as an investor’s tax hub

Nairobi, Kenya

Nairobi, Kenya

Kenya’s economic climate is flourishing as the country becomes the preferred investment hub for the East Africa region and beyond. With this designation has come increased investment activity, from both local and foreign investors. According to the 2015 Kenyan Budget Policy Statement released by the National Treasury earlier this year, Kenya is considered a “frontier” economy with bright prospects.

Indeed the 2014 UN’s World Investment Report also acknowledges Kenya as a favoured business hub in Africa. According to the report, foreign direct inflows (FDI) to Africa rose by 4% to US$57bn, driven by international and regional market-seeking and infrastructure investments. In East Africa, FDI increased by 15% to $6.2bn as a result of rising flows to Ethiopia and Kenya. Kenya is a favoured business hub, not only for oil and gas exploration but also for manufacturing and transport. Another trend noted in the report is that intra-African investments are also increasing, led by South African, Kenyan, and Nigerian transnational corporations.

Fortune magazine recently ranked Kenya among the top seven investment hubs in the world to look out for. According to them, improved political climate, oil exploration opportunities, abundant human capital and economic stability are among the reasons why Kenya is an attractive investment location in Africa. To top it up the recently released PwC report titled Into Africa: The Continent’s Cities of Opportunity has ranked Nairobi as the top city in financial services in Africa.

In view of the rosy picture painted, one could be inclined to get comfortable and enjoy the associated glory that may come with success. Such an attitude could unfortunately prove to be our Achilles heel.

More is needed to enhance the attractiveness of Kenya as a hub for investors. Especially in terms of the fiscal and tax policy that is currently in place. For investors, this is one area of focus which determines how to structure their investments into the region. Therefore, whereas Kenya may be their preferred destination for investments, it may not augur as well on whether it’s the preferred location from which to hold those investments.

This, in my opinion, is sadly a missed opportunity as our tax policy still much focuses (with good reason, some could argue) on maximising the tax revenue base and not so much on making this an attractive tax regime for multinationals, transnational, regional and local investors looking to Kenya and beyond.

Another area that is under considered by the tax policy is in relation to incentivising the Kenyan outbound investor. Until very recently this type of investor was practically unheard of if not unimagined. With improved economic climate, we are seeing a number of Kenyan owned and grown enterprises spreading out into the region to tap into the investment potential in other African countries. Indeed, some local investors are now seeking investments in more developed markets such as the UK, Europe and America.

For the tax policy to still not recognise the special needs of such investors and move towards establishing specialised taxation regimes for holding/parent companies, investment groups and regional/HQ offices in favour of maximising tax revenues is unfortunately near sighted. For the tax policy to remain inflexible even as Kenyan outbound investors look to establish holding companies for their regional/international expansion in other more tax friendly holding/parent company locations is plain bad business sense.

To a discerning tax policy maker, the two objectives of maximising tax revenues and becoming a tax friendly regime for inbound/outbound investors need not be mutually exclusive. However, to achieve both requires a significant mind shift from the current view held by most of the tax policy makers. As we edge closer to 2030 the marker for the achievement of the Vision 2030, but even closer to the fiscal budget for 2015/2016 much remains unsaid on this important topic but perhaps even more critical, more remains undone.

Elizabeth Ndiritu is the senior manager of tax services at PwC Kenya. This article was originally published on PwC’s Africa Upfront blog.