DO AWAY WITH EPZ COMPANIES IN KENYA OR STOP ISSUING NEW LICENSES
Export Processing Zones (EPZ) program came into existence in 1990 following the enactment of CAP 517 Laws of Kenya, which also created the Export Processing Zones Authority (EPZA), as the regulatory body. However, while the program was officially adopted in 1990, production activities did not take off effectively until 1993. The introduction of the program follows several studies indicated their viability, thus making Kenya one of the early African countries to adopt EPZ in the 1990s. The factors which favoured establishment of EPZs in Kenya included among others, relatively large and dynamic private sector, a low cost but well trained labour force and relatively good infrastructure.
Objectives of EPZ program were/are:
i). Attraction of new investment
ii). Expansion & diversification of exports products and markets
iii). Employment creation
iv). Technology transfer & skills upgrading
v). Linkage development through local resource utilization & foreign exchange earnings
This was part of the Export Development Program (EDP) being undertaken by the Government to transform the economy from import substitution to a path of export led growth. EPZs are designed to further integrate Kenya into the global supply chain and attract export-oriented investments in the zones, thus achieving its economic objectives of job creation, diversification and expansion of exports, increase in productive investments, technology transfer and creation of backward linkages between the zones and the domestic economy.
EPZs continue to provide investors with a predictable, attractive and efficient modus operandi for tackling regional and global markets for goods and services. Attractive tax incentives, a facilitating operating environment, good physical infrastructure and day-to-day support by EPZA staff have all resulted in over 80 firms from all over the world deciding to make the Kenya EPZs their home. Many of these have made additional investments and expanded their operations, as a manifestation of their initial success.
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% after 10 years of operation compared to normal rates of 30%, exemption from payment of stamp duty and 100% investment recovery on equipment used in setting up operations.
However, tax experts are calling on the government to scrap the generous tariff breaks given to firms under the Export Processing Zones, saying they do not serve any purpose. Instead of attracting the intended foreign direct investment (FDI), the government is losing much needed revenue. I think the government needs to eliminate all tax exemptions, holidays and other forms of special treatment to achieve equal treatment and level playing field for businesses.
Failure by Export Processing Zone (EPZ) to spur investment to a critical level is 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 generously given out incentives but the outcome has not been encouraging. Kenya has the most generous tax holidays with aim of attracting FDI compared to other Eastern Africa countries. Regrettably, Kenya attracts fewer investors than the other EAC countries with lower tax breaks. You will be surprised how much Kenya earns in terms of salaries and wages to Kenyans, income tax from salaries and wages, foreign exchange, infrastructure put by by EPZ firms etc compared to lost income in taxation only! Check figures with EPZA.
Senior Accountant, Dreamcatcher Productions LimitedCPA, BBM (Moi University, Finance and Banking)