The Role of Tax incentives in Cushioning the EPA Impact
Ask any coach and He will tell you that when his fate depends on competitors’ match, the situation is out of control. So, it is with Kenya as our fate will be determined by Tanzania and other EAC Countries. The truth is, we are in a catch 22 situation. This is the time for Kenya to think outside the Box and redeem its flower and export sector.
Faced with the pressures of loss of foreign direct investment, loss of employment , capital movement and the threat that companies will relocate unless provided with concessions to cushion the EU tax regime such as more lax regulations and lower taxes, government must respond by promoting tax incentives to attract and retain investment capital.
Having limited economic options Kenya should move to tax competition as a central part of their sector development strategy to attract and retain the companies in the country.
A number of growers say the business is no longer a profitable undertaking under the current business cost regime. In case the EPA is not signed, this will require urgent measures to cushion producers against unhealthy competition from countries with less costly systems.
Under the prevailing circumstances, it is important the private sector and government agree on a platform that is supportive of a sector that gives Kenya national pride. It is said that Kenya is where Netherlands was 20 years ago, and if we are not careful, we could be where Netherlands is now (no longer a major producer) in 20 years and Ethiopia will be where Kenya is today – a major producer. But we still have every reason to celebrate the industry. The flower industry has come of age, in a 30-year journey that has seen it now take pole position in major markets globally.
However, the sector suffers from policies that have indirect effect on agricultural incentives such as: (i) Import tariffs on nonagricultural products, (ii) Price, and (iii) Macroeconomic (especially exchange rate) policies that affect the economy-wide balance between traded and non-traded goods in addition to turning the terms of trade against the flower sector and in favour of industry. These incentive-distorting policies received minimal attention.
Today Multiple taxation by the governments is negatively affecting the sector and is likely to pose an existential threat in the coming years if not reviewed. Flower farmers are paying taxes to the national and county governments as well as to other government agencies. This harsh tax regime and lack of incentives in the country has slowly eroded the competitiveness of the sector.
Flower farms pay agricultural produce cess and have to get single business permits from the counties. All flower farms are required to remit taxes to the Ministry of Irrigation, the Water Resource Management Authority (Warma) and the National Environment Management Authority (Nema).
In addition, the counties have also introduced branding taxes where branded vehicles have to remit levies to any county they pass through at different rates.
An overview of the taxes and levies in the Kenyan flower industry:
- Export levy of KSh 0.2 per kilo of every produce being exported – HCDA.
- Local market levy per weight or by tonnage of the truck – Local Authority.
- A phytosanitary services levy KSh 0.2 per kilo of produce exported.
- Phytosanitary certificate levy of KSh 400 per certificate – KEPHIS.
- Water levy of KSh 0.37 per litre of irrigation water – WARMA.
- A minimum levy of US$ 400 for composting organic matter – NEMA.
- Tax on land payable to the local government.
- Personal and income taxes for all the permanent and pensionable staff.
Despite the higher costs due to multiplicity and duplication of taxes by the national and county governments, the sector has continued to bloom but how long can it hold.
Kenya can redeem itself and save the sector from a slump. Double taxation is discouraging new investors eyeing flower industry, making many growers venture into Ethiopia where cost of production has been reduced.
This has opened growing competition, mainly by the fast growing Ethiopian flower industry that enjoys heavy subsidies from the government, stoking fears that it could overtake Kenya in both production and exports.
Investors in the flower sector should enjoy the following:
- 10-year corporate income tax holidays.
- 10-year withholding tax holiday on dividends and other remittances to nonresident parties.
- Perpetual exemption from VAT and customs import duty on inputs (greenhouses, greenhouse covers, and cold chain systems).
- Subsidised dam construction and irrigation equipments.
- Subsidised capital equipment and other resources.
- Perpetual exemption from payment of stamp duty.
- Subsidised financing loans.
The justification for this tax incentivisation should be based on the argument that:
- Increased government revenue.
- More inward investments which will lead to job creation
- It will lead to technology/ know-how spill over
- Facilitate a backward/forward linkage to local economy
Attraction of more investors and retention of flower firms will attract more revenue to the government. Despite some economists arguing of government tax loss, there are no concrete numbers of the amount of revenue that governments incurs through tax incentives. However, this will widen the tax net further, create employment, improve living standards and plough more businesses in the country.
Urban Rural Migration
The arguments that high numbers of people moving from other parts of the country to work in the flower farms has severely overstretched the facilities at host county.
Article by Floriculture Magazine