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’s flower sector as our fate in the flower sector is determined by others. 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.
Flower farms push for special zones Flower producers want the enterprises granted Special Economic Zones (SEZ) status to cushion them against runaway costs that are fast eroding competitiveness in the export markets. Kenya Flower Council chief executive Clement Tulezi said while the SEZ Act was assented to in September, 2015, and came into effect on December 15, 2015, regulations to operationalise it were yet to be gazetted.
“We deal in export-bound only products that warrants us to enjoy SEZ status. New regulations will create licensing processes and state fees applicable while enabling flower enterprises to enjoy tax benefits that come with this authorised economic operator special status,” he said. Mr Tulezi said SEZ the status will help ease challenges attributed to new punitive regulations on control of plastics and double inspection of imported fertilisers.
Flower companies are losing the market to Ethiopia.
“Flower companies pay up to 45 levies and taxes per year where the costs borne are passed onto flower buyers making our flowers uncompetitive on the global flower market. Kenya must abolish these taxes and levies or continue losing out investments to its neighbouring countries that offer tax incentives, VAT exemption of equipment and inputs, deduction on cost of energy, availability of water and accessibility to land,” he said.
KFC also called on the government to allocate development funds to the multibillion shilling industry saying this could help smallholder farmers venture into flower farming thereby creating new jobs and businesses.
Taxation Slowly Eroding Flower Growers Competitiveness
For the longest time ever, VAT refunds from Kenya Revenue Authority (KRA) have been a thorn in the fresh to the Kenyan exporters.
Over the last one decade, there have been relentless cries from exporters about the amount of money held by the government in form of VAT refunds. But nowhere else is the cry louder than the Kenya flower industry with over one billion shillings being outstanding at anyone given time.
To spur growth of the exporting sectors, the government zero rated exports of products and services as an incentive. But in a country that saw its economy almost ruined by the infamous goldenberg scandal, the government instituted stringent measures to verify exports that take place. Before the launch of i-tax platform by KRA, the process was manual, lengthy and costly as exporters had to employ at least 1 clerk to follow up the paper trail. Further, delay in making entries by the customs meant lengthy wait by exporters for all the documents to be in order.
A critical success factor of any business is a healthy cash flow and with the vital VAT refunds slowing down, exporters face cash flow challenges and increased cost of doing business as a result of short term borrowing to address this. This coupled with other challenges such as the ongoing fertilizer shortage means falling competitiveness of Kenya’s flowers and stifled growth and expansion of the industry.
All is not doom as our source at KRA’s domestic tax department indicates that there is a proposal to have tax credits such the VAT refunds, applied to tax liabilities across all tax heads. This means, for instance, once a refund claim has been approved, it can be used to offset other tax liabilities, e.g. corporate tax. The proposal is expected to be incorporated in the next budget cycle.
The Role of Tax incentives in Cushioning the EPA Impact
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.
Why?
A number of growers say the business is no longer a profitable undertaking under the current business cost regime. It now requires 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:
- Import tariffs
- Price
- 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
Tax Regime 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.
Taxes and Levies
An overview of the taxes and levies in the 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 non-resident 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
Government revenue
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 governments is misplaced. The authorities are not able to provide adequate education, health and housing facilities due to the massive population increase. This is a big lie that doesn’t consider the number of investors in the housing sector moving to the areas; the high purchasing power in the area, more cash flow hence increases of trade.
Floriculture is a rural investment. Encouraging more investors into the sector will reverse the ever growing rural urban migration.
Job Creation.
According to statistics the flower sectors has created thousands of jobs in Kenya. Arguments have been put forward that over 75% of the jobs are casual labourers earning on average US$40 per month, which is 33 cents above the one dollar per day poverty level margin. In other words the employment creation has been meagre with the workers sustained in perpetual poverty.
This is a big lie, Over 75% of the workers in the flower sector are within the tax bracket for they earn over Ksh.15,000. Floriculture has the highest wages in the agriculture sector with computerized payroll systems hence the highest personal income tax payer in agriculture. So, it is true that job creation benefits have been achieved or but not actually manufacturing poverty and oppression.
Technology / Know-how Transfer.
Technology transfer from multinationals to small scale growers is immense. With the introduction of very stringent market regulatory standards many small scale growers have heavily benefited. However, the national agricultural research institutions have not been able to benefit due to their stringent regulations.
Forward/Backward Linkages.
Investments in the flower sector are not footloose investments, they are capital and intensive. They are not short-term investments
that are not rooted in the local economy as it has been argued by some economists. Linkages between the cut flower industry and the domestic economy is not limited to labour, but a new and integral part of the national economy.
Considering the nature of investments, it may not be easy to create a short term nature of investments attracted by these tax incentives hence avenues for exploitation as companies move to new jurisdictions after the expiry of their tax holidays.