KENYA: PROPOSED AMENDMENTS TO THE SPECIAL ECONOMIC ZONES ACT
The Ministry of Investments, Trade and Industry published the Draft Special Economic Zones (Amendment) Bill, 2023 (the Bill) that seeks to amend the Special Economic Zones Act, No. 16 of 2015 (the SEZ Act) and a section of the Income Tax Act, Chapter 470 of the Laws of Kenya (the Income Tax Act) in a bid to grant more incentives to stakeholders operating in special economic zones (SEZs).
Should the Bill be passed into law, SEZ enterprises, developers, and operators will be exempt from corporate income tax in the first ten (10) years of operation.
There were concerns previously that the government intended to do away with certain incentives relating to SEZs occasioned when the government released the Medium-Term Revenue Strategy Paper (the MTRS) in which the government stated that there was a need to phase out preferential corporate income tax rates, such as those granted to SEZs, as they were contributing to the erosion of the tax base.
However, government policymakers have maintained that the incentives relating to SEZs were part of the government's long-term strategy to make SEZs more vibrant and would therefore not be done away with.
The release of the Bill which proposes to grant further tax incentives to SEZs reinforces the assurances given by government officials that SEZs are part of the government’s long-term strategy and this will help to do away with the concerns.
We highlight below the significant proposed amendments and their effects:
Summary of the Key Amendments
Proposed amendment (schedule to the Bill)
The Bill proposes to amend the Income Tax Act in respect of the taxation of SEZ enterprises, developers, and operators to exempt SEZ enterprises, developers, and operators from corporate income tax for the first ten (10) years from the date of first operation.
Accordingly, SEZ enterprises, developers and operators will be subject to CIT as follows:
Currently, SEZ enterprises, developers and operators are entitled to a reduced corporate income tax rate as follows: ten percent (10%) for the first ten (10) years from the date of first operation and fifteen percent (15%) for the next ten (10) years and the standard rate of thirty percent (30%) for the period thereafter.
The proposed amendment intends to make SEZ enterprises, developers, and operators quite optimal from a tax perspective.
Proposed amendment (clause 4)
The Bill proposes to amend the SEZ Act to recognize SEZ housing which is defined as buildings within an SEZ that are constructed as support infrastructure and owned or used by a developer, operator, enterprise, or a resident within an SEZ zone for residential purposes.
In addition, the Bill proposes to levy tax at the rate of two-point-five percent (2.5%) on the sale of SEZ housing. The levy would be payable by the developer, operator, or enterprise on the sale of the SEZ housing.
Currently, if an SEZ entity were to develop and sell housing within an SEZ, such entity would be subject to corporate income tax at the rate of ten percent (10%) on the taxable profits arising thereto.
With the Bill proposing to exempt SEZ enterprises, developers, and operators from corporate income tax for the first ten (10) years, the introduction of the 2.5% tax on the sale of SEZ would still subject to tax the sale of SEZ housing. It should be noted that the tax is on the gross value rather than the taxable profits.
This proposal, if adopted, will lead to differential tax treatment of SEZ enterprises, developers and operators who deal with SEZ housing since they will be expected to remit tax on every unit sold, regardless of whether they are in a taxable position. This is likely to be a worse situation, from a tax perspective, than the current corporate income tax at the rate of ten percent (10%).
Proposed amendment (clauses 3 and 4)
The Bill proposes to exempt from taxes, including customs duties, any goods that are sold by an SEZ enterprise operating within the customs-controlled area of an SEZ to another SEZ enterprise operating in a customs-controlled area of a different SEZ.
Although not well-drafted, the Bill reinforces the position that goods sold by one SEZ enterprise to another, shall not be deemed to have entered the customs territory. Accordingly, taxes, including customs duties, should not be applicable on such goods.
Proposed amendment (clauses 2 and 11 of the Bill)
The Bill proposes to amend the SEZ Act to provide for commercial areas. Commercial areas shall be non-customs-controlled areas within an SEZ specializing in shopping, dining, entertainment, general wholesale, retail, and other commercial activities.
In addition, the Bill also proposes to provide for the licensing of persons intending to provide services within a SEZ without the benefits set out by the SEZ Act. Such services would include the services listed above. Persons intending to carry out the services shall be required to apply for a SEZ Business Service Permit.
The proposal is intended to expand the scope of activities that can take place within SEZs which is in line with the government’s initiative to make SEZs hubs for economic activity.
Proposed amendment (clause 9 of the Bill)
The Bill proposes to amend the SEZ Act to provide that a licence issued to a SEZ developer, operator or enterprise shall be valid for ten (10) years subject to inspection by the SEZ authority and payment of annual license fees.
Currently, the period of validity of an SEZ licence is left to the discretion of the SEZ authority.
The proposal intends to ensure that there is certainty among licence holders by providing that once a licence is granted, it shall be valid for ten (10) years. Licence holders are still entitled to apply for a renewal of the licence upon the lapse of the ten (10) year period.
Proposed amendment (clause 2 of the Bill)
The Bill proposes to expand the types of special economic zones to include (a) education zones and (b) digital zones.
The education zones are intended to host centres of excellence for advanced and world-class teaching and learning. This will now open up an avenue for educational sectors to set up in SEZs. In addition, the digital zones are intended to attract players in the evolving digital space by creating a favourable environment for the provision of digital products and where electronic residency and digital incorporation could be established.
Proposed amendment (third schedule)
The Bill proposes to amend the SEZ Act to list all the tax incentives applying to SEZ enterprises, developers, and operators. At the moment, one has to review the various tax laws to determine the specific incentives applying to entities operating in SEZs.
The proposed amendment makes it quite easy for persons interested in setting up in SEZs to determine the tax incentives that they would be entitled to.