30th March 2017 was the national 2017/18 budget day for Kenya. This was a first since the country is used to budget readings in June. In the budget speech by the Cabinet Secretary (CS) for the National Treasury, there were several instances where tax incentives for Special Economic Zones (SEZs) were mentioned.
In Kenya, the setting up of the SEZs is one of the strategies towards achieving Vision 2030. Currently, the setup of SEZs is governed by the Special Economic Zones Act (2015) which came into effect on 15th December 2015 and the Special Economic Zones Regulations (2016).
What are Special Economic Zones?
Part II (4)(4) of the Special Economic Zones Act (2015) defines Special Economic Zones (SEZs) as:
“a designated area where business enabling policies, integrated land uses and sector on-site and off-site infrastructure and utilities shall be provided or which has the potential to be developed whether, on a public, private or public-private basis where any goods introduced and specified goods provided are regarded in so far as imports duties and taxes are concerned as being outside the customs territory and wherein the benefits under this Act apply.”
Therefore, SEZs operate under special laws outside the customs territory. This means that any supplies from the country to any of the zones are considered as an export for customs. Besides, any supply to the country from any of the zones is considered an import for customs.
Government Purpose for Special Economic Zones
The Kenya government set up the Special Economic Zones with the purpose of creating an enabling environment in the zones through:
- Development of integrated infrastructure facilities.
- Creation of incentives for economic and business activities.
- Removal of impediments to economic or business activities that generate profits for enterprises.
Enterprises Attraction to Special Economic Zones in Kenya
Business enterprises the world over are attracted to locate areas because of various production factors, including location advantages. The SEZs in Kenya have been set up in areas with location advantages. It is expected that the enterprises in the SEZs will exploit specific production advantages such as access to raw materials, cheap labour, access to power, access to markets, etc.
For example, the SEZs that are currently in operation in Nairobi, Mombasa and Kisumu expect to attract business enterprises to use the available raw materials, such as tea and coffee, plus the cheap labour available in Kenya. The SEZs in Naivasha are expected to use proximity to the electric power from the Olkaria geothermal power plant. It is expected that the power will be cheaper because of the proximity to the power generation plant.
The proximity to the factors of production by the enterprises in the SEZs is expected to effectively reduce production costs. This should translate into lower prices for their products, thus increasing their competitiveness in their export markets.
What Business Can Be Set Up in Special Economic Zones?
In the Kenyan SEZs, any type of business operation can be set up as long as the businesses are legal elsewhere in Kenya. Some of the business activities that are allowed in the SEZs are:
- Trade.
- Manufacturing.
- Other business.
- Service activities.
The business enterprises can sell their products as exports to the Kenyan market or other markets.
Parties Involved in Special Economic Zones Set-ups
According to the Act, SEZs can be set up by the public, private or as public-private partnerships. However, there are four parties involved in the setup of the zones:
a. The Kenya National Government
The Kenya national government is the Special Economic Zones project owner and, most times, the landowner. The government has set aside public land for the development of the SEZs.
b. Special Economic Zone Developer
Most times, the Kenya government does not develop the Special Economic Zones, but the development of the facilities is done by participants from the private sector. The developers apply and are allocated land by the government to develop Special Economic Zones. The developers mostly develop the infrastructure.
According to the Act, a developer is a “corporate body which is engaged in or plans on developing and which may or may not also operate or plan to operate a Special Economic Zone under the Act”. The developer must be licensed under the Special Economic Zones Act. Hence, the developer is involved in the developing Special Economic Zone and may or may not operate the Special Economic Zones.
The infrastructure developed by the developers has been defined by the Act as buildings and other similar facilities, internal roads, power generation, water, drainage, sanitation and water treatments plants, networks, telecommunication, etc. These are the facilities that are appropriate for the development and operation of the Special Economic Zones. The developer is, most times, from the private sector.
c. Special Economic Zone Operator
The Special Economic Zones developers may not operate the facilities they develop. However, other parties may be interested in operating the facilities. The developer may decide to give the management of the facilities to a separate entity to manage. According to the Act, a Special Economic Zone operator has been defined as a “corporate body engaged in the management of a Special Economic Zone and designated as such under the ACT.”
d. Special Economic Zone Enterprise
According to the Act, an enterprise means “a corporate body which has been licensed under the Special Economic Zones Act to operate in the Special Economic Zone.” The corporate bodies are mostly enterprises that are in the zones to conduct their business. The enterprises may trade, manufacture or engage in other activities in the zones.
Initial Tax Incentives
Special Economic Zones were established under the Special Economic Zone Act (2015) which became effective in October 2015. During the reading of the National budget in June 2015, the Cabinet Secretary (CS) to the National Treasury proposed several tax incentives for the developers, operators and business enterprises in the Special Economic Zones in Kenya, which were not even in operation then.
According to 2015/2016 budget, which was read before the Special Economic Zones (2015) Act became effective but whose proposals were ratified and incorporated into the Act, Special Economic Zones were granted the following direct tax incentives:
- Exemption from Value-added tax.
- Corporate tax rate at the rate of 10% for the first ten years and 15% for the next ten years.
- Normal 150% investment deduction for investments outside Kisumu, Nairobi and Mombasa for investments of more than kshs 200 million.
- Exemption from duties and taxes under the EAC Customs Management Act (2005) and subsequent amendments.
- Waiver of exchange controls for repatriation of profits and capital to the parent country.
- License fees, stamp duty and advertisement fees exemption at the County government level.
Therefore, Special Economic Zones differ from the Export Processing Zones (EPZ) whose primary aim was to promote production for export, hence they were market-oriented. Special Economic Zones have been set up to exploit factors of production. This is likely to attract more foreign direct investments (FDI) inflows into the country.
The readers are advised to get a copy of the Special Economic Zones Act (2015) and subsequent amendments to the Act. It is also beneficial for the readers to be familiar with the tax changes in 2016/2017 and 2016/2017 budgets.
Feel free to send us questions or topics on tax and investments in Kenya that you would wish to be covered in this Website.
Disclaimer
This post is for general overview and guidance and does not amount to professional advice. Consequently, www.taxkenya.com, it’s owner or associates do not take any responsibility for results of any action taken based on the information in this post or for any errors or omissions. Kenyan taxpayers must always rely on the most current information from the KRA. The tax industry in Kenya is very dynamic.
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