The attractiveness of a country to investors is determined by various economic and non-economic factors. These include the availability of suitable infrastructure, a conducive business operating environment, the cost of doing business and availability of skilled workforce.
Globally, it is common for governments to offer fiscal incentives that directly or indirectly lower the cost of investment or spur the consumption of certain goods or services.
The ability of a government to offer fiscal incentives is, however, limited due to competing budgetary demands on public resources and the need to grow tax revenue collections.
Additionally, the world is undergoing a global shift in the tax landscape through the introduction of, among other measures, the minimum corporate income tax of 15 percent.
This is meant to ensure that organisations pay a minimum level of income tax in each country that they operate in and discourage a race to the bottom where countries lowered their corporate income tax rates to even zero percent in a bid to attract foreign direct investment.
There is therefore need for implementation and adoption of innovative approaches to maintain a country’s attractiveness to investors.
Kenya is experiencing limited fiscal space due to high government debt servicing costs and increased expenditure.
One of the structural reforms in Medium Term Plan (MTP) IV under resource mobilisation is the enhancement of fiscal space through management of tax expenditures by removing non-beneficial tax incentives and exemptions. The National Tax Policy has also highlighted rationalisation of tax expenditure as a key item in its rollout.
Non-fiscal incentives present a sustainable way of promoting investment while at the same time reducing pressure on domestic revenue.
This will ensure that the government attracts private investment while it undertakes the necessary initiatives to build and maintain public infrastructure, provide essential government services, protect the vulnerable in society, among other core government functions.
The national government could focus on non-fiscal measures and incentives, working together with county governments.
According to the World Bank Report on Ease of Doing Business the key measures that were being used to assess a country’s progress include ease of starting a business, dealing with construction permits, getting electricity and registering property.
Access to credit, protection of minority interests, payment of taxes, trade across borders and enforcement of contracts were also considered as critical indicators in a country.
The above measures present a good benchmark against which the government could measure its progress in enhancing the attractiveness of the country.
Each of these measures has different nuances and metrics that are identifiable and measurable. All the three arms of government are also responsible for different elements and are thus required to play their roles effectively and in the spirit of nationhood.
There are other equally critical non-fiscal factors that the government should consider in a bid to address some pain points from the existing businesses. These include fast-track processing of tax refunds where a taxpayer is owed by the Kenya Revenue Authority.
While some progress has been made by allowing offset of approved refunds against tax payments under certain circumstances, we still have taxpayers who continue to experience delays in getting tax refunds.
The government has highlighted its intention to reduce the number of VAT exemptions. To mitigate the impact of such legislative actions it could adopt an approach of deferred VAT payments on major greenfield capital-intensive projects.
In such an approach payment of input VAT on the importation of goods and services as well as the local purchase of goods and services should be deferred at the initial to construction stage for a period of 3 to 5 years.
This would provide some relief from high cash demands enabling investors to invest such cash in setting up operations. The investors can thereafter account for the deferred input VAT once they commence operations.
The importance of a predictable tax policy cannot be gainsaid. While the final version of the National Tax Policy was released to the public very minimal can be said on the subsequent adherence to the principles set out in the policy. The government should own up the policy and deliberately implement it to enhance predictability of tax policy in the country.
By and large, the implementation of these measures and incentives requires concerted efforts by the three arms of government, different government institutions, ministries and other stakeholders. It is thus imperative that each party plays its role effectively for the betterment of the country.
The writer is an Associate Director at Ernest and Young LLP (EY)
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