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The East African : May 31st 2015
44 The EastAfrican BUSINESS MAY 30 - JUNE 5, 2015 Kenya should conside≥ sc≥apping VAT levied on se≥vices to goods in t≥ansit COMMENTARY JOB KABOCHI “Importers will start considering other, more cost-effective avenues within the region.” as a favourable investment destination. To maintain this status, it is imperative that Kenya’s tax regime does not place additional tax burdens on international trade. Unfortunately, recent legislative changes threaten Kenya’s position as an investment hub. These changes also go against the spirit and the letter of the East African Community’s Common Market Protocol. For example, Kenya repealed T its VAT Act (CAP 476) and introduced VAT Act 2013. Among other changes, the Act introduced VAT at 16 per cent on taxable services in respect of “goods in transit.” These services — warehousing, storage, transportation and packaging, for example — were previously subject to VAT at the zero rate (0 per cent). The change in VAT rate has had a negative impact on revenue growth and regional expansion objectives for companies supplying services in respect of goods in transit and the recipients of their services. The cost of such services increased by 16 per cent due to the VAT incurred by the recipients of the services in relation to transit goods, who in most instances are non-residents without a tax presence or he Kenya Investment Authority was established to promote the country’s image globally VAT registration in Kenya. For example, assume a down- stream oil company importing petroleum products through the port of Mombasa for sale in Kampala. Assume further that the importer was required to pay Ksh10,000 (VAT exclusive) for transport services through Kenya. With the VAT law change in September 2013, the company would have further had to incur VAT of Ksh1,600 thus bringing its total cost to Ksh11,600. Additionally, the Ugandan company was required to self-assess 18 per cent reverse VAT in Uganda on the services imported from Kenya. Cumulatively, the total cost of Ksh10,000 worth of transport services ended up being Ksh13,688. To heighten the matter, the Finance Act, 2014 enacted on 19 September 2014 amended the VAT Act 2013 and changed the VAT status of services in respect of goods in transit from standard-rated (16 per cent) to exempt. It is our understanding that the change was aimed at easing the burden associated with the non-recoverable VAT. However, the VAT exemption did exactly the opposite, the suppliers of services to goods in transit are now not entitled to credits in relation to any VAT incurred in course of their operations on the basis that they are no longer engaged in the supply of services his expenses is ideally passed to the Uganda customer. Accordingly, while on the face of it the services are exempt from VAT, the total Kenyan cost for the Ksh10,000 worth services ends up being Ksh11,120, not to mention that the Uganda recipient of the services is obliged to self-assess 18 per cent reverse VAT bringing the total cost of the services to Ksh13,122. Even if the recipients of serv- ices were to absorb the costs or a portion of these costs to remain competitive, eventually their profit margins and ability to continue operating will suffer, leaving them with no option but to pass on the costs to end customers of their goods. Further, while Kenya’s com- petitiveness is key to the government’s vision for growth, the VAT exemption regime has an impact on the country’s business environment, its image as an investment destination and its position as a regional hub. Left unchecked, this VAT re- gime may force importers of goods through Kenya to considering other, more cost-effective avenues within the region, thereby potentially undermine Kenya’s significant investment in infrastructure and other welllaid plans to grow the economy. The exemption regime also undermines the spirit and the letter of the EAC Common Market Protocol. Adopted by all EAC member countries in 2007, the Protocol guarantees the free movement of goods, services and people and specifically prioritises the facilitation of trade. Perhaps, it is time the govern- VAT Act 2013 introduced VAT at 16 per cent on taxable services in respect of “goods in transit.” Picture: File that are subject to VAT. The fact that they are not able to claim credits for the VAT incurred has meant a 16 per cent rise in the cost of providing their services, which ideally is factored into the price of their services and ultimately borne by the purchaser of the relevant goods. Deriving from the hypotheti- cal example above, let us assume that the Kenyan service provider is obliged to incur costs of Ksh7,000 (exclusive of VAT) in the provision of the transport services, say storage and packaging. As the transporter is not entitled to VAT credits, the 16 per cent VAT costs (Ksh1,120) in relation to ment considered reverting to the zero-rating of services relating to transit goods to align its VAT laws with those of its neighbours Uganda and Tanzania as well as international best practice. Job Kabochi is tax partner specialising in indirect taxes (customs, excise and VAT) with PwC Kenya 10-yea≥ extension but new Bill unlikely to make Agoa successful By KEVIN J KELLEY Special Correspondent THE US Senate recently approved a 10-year extension of the African Growth and Opportunity Act (Agoa), a preferential trade programme that has significantly benefited only Kenya among East African countries. The legislation passed the Sen- ate on a 97-1 vote, but the House of Representatives may not take the necessary action to finalise the proposal prior to President Barack Obama’s scheduled visit to Kenya in July. Launched in 2000, Agoa is set to expire in September. The 10-year renewal also applies to Agoa’s “third-country fabric” provision, which is of great importance to Kenya and other African textile exporters. It allows products made from yarn produced in countries outside Africa to qualify for duty-free treatment. Most Kenyamade apparel contains fabric manufactured in Asia. Agoa has given a big boost to Kenya’s textile sector, but has had little impact on Tanzania, Rwanda and Uganda, as well as on most African countries that do not export energy products. And the version of the Bill backed by the Senate appears unlikely to make Agoa more broadly successful. Even in the case of Kenya — which ranks as Africa’s largest exporter of Agoa-covered textiles and apparel —the trade programme has fallen short of its architects’ hopes. But Kenya has seen significant gains in employment as a direct result of the $423 million’s worth of products, mostly textiles, that it sold on US markets last year. The rise and fall of Agoa trade involving Tanzania, Rwanda and Uganda matters little because its volume is comparatively tiny. Tanzania exported $18.3 million in goods to the US through Agoa in 2014, while the totals for Uganda and Rwanda were $1.5 million and $630,000, respectively. $423m Limited efforts have been made to enhance the sale of food products to the US, but barriers remain formidable, and the Senate’s Agoa renewal legislation does little to lower them. The Bill would instead require African countries to develop and publish “utilisation strategies” that designate sectors in which Agoa could bring economic gains. Several members of Congress Worth of products, mostly textiles, that Kenya sold on US markets under Agoa last year Agoa’s advocates in the US have argued for years that the programme has substantial but largely untapped potential to boost agricultural production in Africa. view Agoa as unnecessarily one-sided. They say that Africa’s economic growth in recent years should be accompanied by greater reciprocity in trade benefits. Proponents of this approach also point out that African countries have negotiated agreements with the European Union that establish preferential treatment for EU member-states’ exports. The Senate’s Agoa-renewal Bill takes no specific action in this regard. It only requires US trade officials to report to Congress on plans for negotiating free trade agreements with African nations. In any event, US exports to many sub-Saharan states are already booming. Even as Agoa sales declined sharply in most countries other than Kenya, sales of US goods and services to Africa rose six per cent last year. Exports to Kenya soared by 152 per cent, reaching $1.6 billion, mainly as a result of aircraft sales. US exports to other East African countries were generally as anaemic as were Agoa imports. Tanzania bought $304 million worth of products from the US last year — 26 per cent less than in 2013. Sales to Uganda totalled $78 million, a 36 per cent drop from the amount for 2013.
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