Taxation of Technology Cities for Sustainable Development

In the pursuit of transforming Kenya into a middle-income country by 2030, the government initiated the ambitious Konza Technopolis project in 2008. Konza Technopolis, or "Konza," is envisioned as a beacon of technological innovation, boasting world-class digital infrastructure, robust information and communication technology systems, and elevated living standards for its citizens.

Yet, over a decade into its inception, the pace of Konza's development has not matched the initial expectations. This raises a fundamental question: Are the tax incentives, designed to attract both foreign and local investments, delivering the desired results? It may be time for the government to reconsider its approach and strive for a more balanced strategy that ensures both fiscal sustainability and developmental progress.

Governments globally use tax incentives as vital tools to boost targeted economic sectors, especially in developing nations like Kenya, where the focus is often on areas like Science, Technology, Engineering and Mathematics (STEM) infrastructure and commerce. Kenya's National Treasury, through Parliament, implemented comprehensive incentive programs covering various taxes: Corporate Income Tax (CIT) deductions, VAT rebates for Special Economic Zone (SEZ) firms, Stamp Duty exemptions, reduced Withholding Tax (WHT), Excise Duty waivers, and relief from Import Declaration Fees (IDF) and Railway Development Levies (RDL). The incentives provided were as follows:

• Corporate Income Tax (“CIT”) deductions: Rate of tax charged on the annual tax charged is as follows:
  • 10 % for the first 10 years after the start of operations.
  • 15% for the next 10 years.
  • 30% for the years thereafter.
• Value Added Tax (“VAT”): Supplying goods and services to a Special Economic Zone (“SEZ”) enterprise is taxable at the zero rate of VAT.
• Stamp Duty: Perpetual exemption from stamp duty on any executing documents or instruments relating to business activities of SEZ Enterprises, Developers and Operators.
• Withholding Tax (“WHT”): WHT rate of 5% on all payments by the SEZ enterprise, developer or operator to non-resident persons.
• Excise Duty: Perpetual exemption from Excise Duty.
• Import Declaration Fee (“IDF”) or Railway Development Levies (“RDL”): Perpetual exemption from paying IDF and RDL.

Despite this comprehensive suite of incentives, the investments and developmental strides expected in Konza have been slower to materialize than initially envisioned. The gap between expectation and reality prompts a critical examination of whether these incentives are effectively fulfilling their intended purpose.

A 2007 study conducted by the Organisation for Economic Co-operation and Development (OECD) on "Tax Incentives for Investment – A Global Perspective: Experiences in Middle East and North Africa (MENA) and non-MENA countries" indicates that governments should aim for a balanced approach. This approach should marry fiscal incentives with creating a favorable investment climate characterized by transparency, simplicity, stability, and predictable tax policies. This perspective suggests that tax incentives alone may not be the ultimate solution for attracting foreign direct investment (FDI) and fostering sustainable growth.

In Kenya, the annual changes to tax laws have become a source of uncertainty, often causing businesses to struggle in planning for long-term investments. The Organisation for Economic Co-operation and Development (OECD) report emphasizes the notion that volatile tax policies can deter rather than attract investment. In other words, the very incentives designed to reduce the cost of doing business may inadvertently increase costs by introducing uncertainty into the equation.

To achieve a sustainable balance and attraction of Foreign Direct Investment (FDI), Kenya needs to consider several factors. At times, these are competing objectives, such as reducing the cost of doing business for non-resident entities, while also collecting enough revenue from non-residents to develop an attractive physical investment environment (including modern infrastructure and a skilled local labor force). A sustainable approach by policymakers is key in this context.

Therefore, in combination with the existing incentive framework, the Government should consider some of the following policy interventions:

1. Simplify tax laws and compliance processes to enable businesses to predict their tax costs in upcoming financial years and plan their expenditures proactively;
2. Evaluate the effectiveness of existing tax reliefs and incentives. If there is minimal uptake and no tangible benefit to the state, these incentives should be either repealed or reworked; and
3. Consider reducing the tax percentage charged, with the aim of broadening the existing tax base.

In this delicate dance between fiscal sustainability and development, Kenya has an opportunity to refine its approach, foster innovation, and create a lasting legacy. By embracing these alternative approaches to taxation and investment, the country can chart a course toward a brighter future, where technology-driven progress and fiscal responsibility go hand in hand.