An analysis of Kenya’s governing framework on tax incentives: Making a case for the adoption of policies that protect its people and economy

Abstract

Tax incentives are tools used by governments to encourage Foreign Direct Investment in various sectors of the economy such as the manufacturing and export sector, the extractives industry, the financial services sector, and the agricultural sector. Incentives may take the form of tax deferrals, exemptions, allowances and credits. When properly governed, these incentives have been deemed to be advantageous in promoting the growth of these sectors. In Kenya however, the regulatory framework is lacking in policies that promote transparency, integrity, accountability, and efficiency which are elements of good governance. This study highlights the shortcomings of this regulatory framework. It makes the assertion that the current regulatory framework creates loopholes for bribery, corruption, and tax avoidance. Due to these shortcomings, the tax incentive regime has had a negative impact on Kenya’s economy and its people as it promotes inequity and social injustice. This dissertation, using South Africa as a comparative study, discusses the regulatory policies that Kenya should adopt to prevent these harmful practices. It recommends a re-design of Kenya’s tax incentives that will repeal those that are ineffective; the establishment of a clear eligibility criterion in awarding of incentives; the adoption of rule-based based incentives that do not allow for discretion by the tax authorities; and the enactment of sunset provisions that would prevent the permanence of these incentives. The study relies on literature review to make the above findings and conclusions.