12 Aug 2019
Section 4: Regulations & Tax Incentives in Kenya
Fitch Solutions Trade & Investment Risk Index
- While the longer-term trend points towards an increasingly open environment to foreign investment and regional integration, obstacles to foreign participation are significant and potential returns may be limited by populism and inward-looking regulatory shifts in the short-to-medium term.
- Consequently, Kenya performs poorly overall in Fitch Solutions’ Trade and Investment Risk Index, placing a low 122nd out of 201 countries globally, with a score of 45.1 out of 100. This score ranks the country in second place out of 11 states in East Africa, marginally behind Rwanda, which is indicative of its appeal relative to its East African peers.
Trade and Investment Risk Index: Methodology and Components
- Trade and Investment Risk Index quantitatively compares the challenges of operating in 201 countries worldwide. The index scores each country on a scale of 0-100, with 100 being the lowest risk. Each country has a headline Trade and Investment Risk Index score, which is made up of three categories, further broken down into sub-categories. The individual categories and sub-categories are also scored out of 100, with 100 the best. The overall Trade and Investment Risk Index score is calculated using the average of the Economic Openness, Government Intervention and Legal sub-component scores.
- Economic Openness: Analyses a country's openness to foreign investment and international trade. This is generated from indicators such as import, export and foreign direct investment (FDI) values as a percentage of GDP, which are used as a barometer of openness. A country that is more open to private and foreign businesses will score more highly on this indicator.
- Government Intervention: This score is composed of information on taxation and the availability of financing. The scoring system favours countries which offer lower taxation and open, sophisticated financial markets with easy access to loans.
- Legal: This score reviews the strength, transparency and efficiency of the legal system and bureaucracy in a given country. It measures the extent to which the rule of law is upheld, the prevalence of corruption, and the delays and costs involved with the bureaucratic procedures required to set up a business.
Tax System Overview
Foreign investors seeking to establish a presence in Kenya generally receive the same treatment as local investors, and multinational companies make up a large percentage of Kenya's industrial sector. For instance, the government's export promotion programs do not distinguish between goods produced by local and foreign-owned firms.
Outside of EPZs and SEZs, the tax burden on non-resident firms and branches of foreign companies remains higher than for local firms and onerous compared to regional peers such as Ethiopia and Rwanda. Payments of dividends and other income to non-resident individuals or entities are subject to higher withholding tax rates than local firms.
Incentives for Manufacturing Relocation
The government encourages FDI mainly in secondary and tertiary sectors, and offers incentives through the provision of export processing zones and various tax exemptions:
- Kenya’s Export Processing Zones (EPZ) and Special Economic Zones (SEZ) offer special incentives for manufacturing firms operating within their boundaries.
- Aircraft and aircraft parts, tractors, inputs for solar manufacturing, and services relating to goods in transit are fully exempt from VAT.
- Investors in metal manufacturing and products are able to deduct from their taxes a large portion of the cost of buildings and capital machinery. The government’s Manufacturing under Bond program, provides a 100% tax deduction on plant machinery and equipment and raw materials imported for production of goods for export.
- Effective from January 2018, the government of Kenya, via the Finance Act 2017, introduced a corporate tax reduction of 15% for newly incorporated companies carrying out local assembly of motor vehicles, in an effort to drive growth in the sector. The reduced rate will initially be valid for a five-year period and can later be extended for an additional five-year period. The additional five-year extension will only apply if the companies carrying out the local assembly of motor vehicles achieve a local content of 50% of the ex-factory value of their vehicles.
- Companies that produce automobiles locally avoid a 25% import tariff. A further positive that could attract local investment is the decision made by Tanzania in October 2016 to lift its 30% excise duty it levied on vehicles assembled in Kenya.
Free Trade Agreements
Kenya is an open economy with a liberalised capital account and a floating exchange rate. In 2018, foreign exchange reserves remained robust and provided more than four months of import cover on average. Investors in the country will face limited delays in import payments and limited liquidity risks for foreign currency.
While smaller businesses are at an inherent disadvantage in accessing finance, due to restrictive lending practices and high-risk premiums, larger firms entering the country generally face fewer difficulties obtaining financing, repatriating foreign currency profits and carrying out large transactions.