Africa Business Communities

[Column] Bob Koigi: Harmful tax practices slam the brakes on East African Community prosperity

That the spirit of fostering free trade and movement of people among East African member states has gained traction over the years is in no doubt. That the community has made impressive strides in improving business relations among themselves and create a competitive regional bloc cannot be gainsaid.

But the regional body is still grappling with an array of policy hiccups that have threatened to slam the brakes on the enviable achievements so far. Of great concern is the tax competition that has seen many of the member states lose the much needed revenue to fund pressing national projects.

Tax incentives and exemptions that almost every country has embraced to attract foreign direct investment has been termed by experts as unnecessary and dangerous to local economies and businesses.

For starters governments have been forced to heavily tax ordinary citizens to bridge the shortfall occasioned by these harmful tax practices. A report by Tax Justice Network-Africa and Action Aid International indicate that tax incentives reduce revenues available to fight poverty.

According to the report dubbed “Tax Competition In east Africa: A race to the bottom”, Kenya alone is said to lose revenue amounting to Ksh100 billion every year through these harmful tax practices. This would amount to around 3.1 percent of GDP.

“Much of the lost revenue from tax incentives is due to generous provision of tax incentives as part of the tax competition among countries in the region. Countries are being tempted to increase tax incentives in the belief that it will attract FDI, creating ‘a race to the bottom’,” the report adds.

The primary beneficiaries of tax menace are the large domestic firms and foreign multinational companies.

If such a substantial amount of revenue lost could be raised through the scrapping off incentives more essential public services could be delivered through these funds. This would translate into more than two Super Highways and finance part of Free Primary Education.

It’s also said in the report that every year Kenya sacrifices an amount equal to more than twice its entire health budget of Ksh 41.5 billion due to its use of tax incentives such as tax holidays for foreign businesses.

Tanzania, another of the most affected countries in EA in terms of revenue lost through tax incentives, according to the report would have been able to increase its education budget by a fifth and its health budget by two/fifth if the revenue losses of $266 million were spent on public service.

Both Rwanda and Uganda’s revenue losses from tax exemptions would be sufficient to more than double spending on health or nearly double that on education for each country.

Worse still, research shows that these incentives are not necessary to attract investments to Kenya or any other country in the region.

An IMF report argues that countries that have been most successful in attracting foreign investors have not offered large tax or other tax incentives and that proving such incentives was not sufficient to attract foreign investments if other conditions such as proper infrastructure was not in place.

Experts now agree that EAC Governments need to immediately remove excessive tax incentives, promote transparency on the tax incentives they give, and coordinate with the East African Community to avoid harmful tax competition and to foster development.

Multiple award winning Kenyan journalist  Bob Koigi  is the Chief Editor of East Africa at Africa Business Communities


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