Governments, like people and businesses, make plans every year. But we usually expect those annual plans to fit into some kind of longer-term scheme that does not change constantly. Frequent changes in government plans upset the expectations of households and taxpayers. A predictable taxation plan ensures that the government meets current revenue needs while avoiding surprises for taxpayers.
The International Monetary Fund (IMF) emphasizes the importance of transparency, clarity, and predictability in tax systems to support private investment.[1] Frequent revisions affect investment decisions and make tax compliance harder, ultimately affecting government revenues and inhibit economic growth.[2] Kenya’s government should therefore eliminate perennial revisions of tax laws, ensure that more analysis of tax proposals is done before they are introduced, and adopt a collaborative approach to tax policy design involving the finance ministry, tax authority, and external stakeholders.
Every year, the National Treasury prepares and submits a Finance Bill containing amendments to various tax laws to Parliament for enactment. In some cases, new taxes and taxation rules enacted through a Finance Act are changed or even reversed in the subsequent year’s Finance Act. A subset of all of Kenya’s tax laws seem to be targeted for nearly constant review. Various actors including the Kenya Association of Manufactures (KAM) have long complained that these revisions affect investment decisions. In addition, numerous reforms to the treatment of investment deductions, foreign exchange losses and interest restrictions have a negative impact on investment decisions and cashflow for businesses.
Predictable tax systems allow governments to meet their goals of enhanced private investment and revenues.[3] Predictability fosters taxpayers confidence, encourages voluntary compliance and supports effective tax administration- all of which bolster revenue mobilization in the short and longer-term. Stable tax policy also supports longer-term private investment, leading to increased revenues for the government through income and consumption taxes.
In light of these benefits, why does the government introduce significant changes to the tax code every year? One possible reason is that the National Treasury does not conduct proper analysis of the impact of proposed taxes prior to introducing them. The draft National Tax Policy recognizes this and prescribes more robust assessments to quantify the impact of proposed tax changes before their introduction.
It is also possible that the National Treasury fails to sufficiently engage key stakeholders before amending tax laws. The challenge with tax reforms is that they are not only technical, but also highly political.[4] If key interests are ignored, policy may turn out to be unimplementable or sub-optimal.
The International Monetary Fund (IMF) and the G20, for example recommend a collaborative tri-partite approach involving the finance ministry, tax authority, and external stakeholders to ensure well-informed tax law design. Furthermore, they emphasize the importance of public consultation, legislative approval, and post-implementation monitoring as critical practices for enhancing certainty and the effectiveness of tax policies.[5]
Kenya already has good examples of how to implement greater consultation around tax reform. For example, KRA’s experience in reviewing the VAT refunds formula demonstrates that stakeholder engagement can lead to better outcomes. Manufacturers rejected the first formula introduced in 2017, arguing that the formula was impractical, especially for exporters. This then triggered a review of the formula, but this time round KRA deliberately engaged multiple stakeholders. KRA held various consultative forums with all the key players including the private sector, the National Treasury, and the National Assembly. The result was a superior formula in 2019 that allowed exporters to fully claim their share of input tax relating to zero rated supplies.[6]
If they can be implemented, Kenya’s draft National Tax Policy has a set of robust recommendations to address unpredictability including: a comprehensive review of tax laws every five years to align them with other government policies; periodic review of the tax laws in response to emerging trends in the business environment and government agenda; and review of the tax code in response to emergencies, pandemics, or natural disasters. [7] These proposals along with broader stakeholder engagement will address most of the drivers of unpredictability in the tax system.
In conclusion, to address the challenges associated with an unpredictable tax regime, it is important for the government to reduce the frequency of discretionary changes to the tax code.
At the same time, the government should set a definite timeline for a new tax provision to be operational before it is reviewed, especially for tax incentives targeted at promoting investments as proposed in the draft National Tax Policy. While one might argue that this may lock-in ‘bad’ tax policies, the chances of having a bad tax policy will be significantly reduced if the government conducts thorough impact analysis before proposing tax changes. Better analysis and citizen engagement are the key to improved revenues.
references
[1] https://www.imf.org/external/pubs/ft/pam/pam49/pam4904.htm
[2]https://african.business/2023/06/finance-services/tax-policys-role-in-attracting-investment-for-global-development
[3] https://taxjustice-and-poverty.org/fileadmin/Dateien/Taxjustice_and_Poverty/Introduction/05_Principles.pdf
[4] https://internationalbudget.org/wp-content/uploads/politics-of-tax-reform-october-2020.pdf
[5] https://www.imf.org/external/np/g20/pdf/2017/031817.pdf
[6] https://www.kra.go.ke/images/publications/Achieving-Effective-Stakeholder-Engagement_A-Case-Study-of-VAT-Refunds-Formula.pdf
[7] http://www.parliament.go.ke/sites/default/files/2023-05/The%20National%20
Treasury%20and%20Economic%20Planning%20National%20Tax%20Policy-2.pdf
