Tax experts are calling on the government to scrap the generous tariff breaks given to firms under the Export Processing Zones, saying they did not serve any purpose.

Instead of attracting the intended foreign direct investment (FDI), the gesture was one of the ways the government was losing revenue, they said.

“The government needs to eliminate all tax exemptions, holidays and other forms of special treatment to achieve equal treatment,” said Steve Okello, the head of Tax Services at PricewaterhouseCoopers.

Mr Okello said the failure of the Export Processing Zone (EPZ) to spur investment to a critical level was a clear testament that such incentives do not work.

“We need to look at the issue of investment in a more holistic way other than the current way where we have doled out incentives but the outcome has not been encouraging.”

The Economic Survey 2008 notes that EPZ programmes experienced various challenges including stiff competition and high cost of doing business.

The creation of the special factories in 1990 was designed to attract foreign direct investment, especially of heavy capital expenditure, to turn Kenya from an import-substitution to an export-based economy.

In addition, the zones were to create jobs for the growing unemployed, lead to technology transfer, and create a linkage between domestic producers and the exporters.

To get such investment, the government rolled out a red carpet welcome with a basket of incentives, a well developed infrastructure and reliable power and water supply.

The generous tax incentives include 10-year corporate tax holiday, 10-year withholding tax holiday on dividends and remittances, exemption from Value Added Tax (VAT) and customs import duty on inputs.

The businesses are provided with a lower corporate tax of 25 per cent compared to normal rates of 30 per cent, exemption from payment of stamp duty and 100 per cent investment recovery on equipment used in setting up operations.

Almost 20 years since, creation of jobs stands at 30,000 with declining wages, export products largely remain textile valued at Sh28 million and total investment stands at Sh20 million.

Ironically, the textile exports are largely driven by the US-led African Growth and Opportunity Act (Agoa) and not the government-backed incentives.

But even through the Agoa deal, Kenyan exports were yet to leave a mark on the international scene.

Local manufacturers have voiced their concern over the use of EPZ as conduits to dump products into the local economy, distorting prices.

“The initial objective of EPZ has been abused as unscrupulous business people are using them to get finished products into the local markets affecting our operations”, said Steve Smith, the managing director of Eveready East Africa.

Mr Smith says that the lack of proper enforcement of the laws and regulation governing EPZ-produced goods has impacted on local manufacturers as they find their way into the local market giving them undue advantage.

According to Mr Okello, the lack of envisaged investment is attributed to the fact that businesses are looking for more than just tax benefits.

“Investors are looking for more than tax benefits. They look at the prevailing political environment, an enabling environment, justice system and overall infrastructural set up and its attendant cost.”

Concern has been raised that the sites of the main EPZs such as Athi River is away from the port of Mombasa.

But other observers have supported the location of the factories, saying they targeted cheap labour available in the rural areas.

Round table

This distance coupled with an aging railway line and dilapidated road network has raised costs that further makes the goods more expensive.

Manufacturers have been lobbying policy makers, saying the high costs of doing business had made Kenya less competitive and many investors were closing shop and relocating to other regions such as Indonesia, Thailand and China.

Local businesses have been lobbying for favourable conditions through various forums, including dialogue with ministers and the Prime Minister’s Round Table.

But, Mr Okello said “a number of businesses have relocated as they exhaust their tax benefits defeating the whole purpose of having EPZ in the first place.”

There have also been claims that some companies change their names and re-emerge as new entities.

Latest AGOA Trade Data currently available on AGOA.info


Click here to view a sector profile of Kenya's bilateral trade with the United States, disaggregated by total exports and imports, AGOA exports and GSP exports.

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