Tax Incentives and Investment Growth of Export Processing Zone Firms in Kenya

Abstract

Export Processing Zones across the world are aimed at contributing to the economic growth in those respective economies Kenya included through Foreign Direct Investments (FDI). However, most economies never realize the investment growth of their EPZ through FDI due to the declining revenue levels as a result of challenges encountered from government policies, tax challenges, climatic challenges, environmental and macroeconomic variables among others. For instance, Kenya’s EPZ companies raked in Sh67.3 billion in sales in 2018 year, being a 7.28% decline in percent growth compared to Sh72.2 billion realized in 2017. For investment growth of EPZ firms’ tax incentives play a critical role otherwise their performance keeps on declining like the current situation in Kenya. Poor African nations depend on tax holidays and import obligation exceptions, while western European nations permit investment allowances. It is for this reason that this study was carried out to establish the relationship between tax incentives and investment growth of Export Processing Zones (EPZs) firms in Kenya. The specific objectives for the study were; to establish the effect of investment allowances on investment growth of EPZ firms in Kenya; to determine the effect of investment tax credits on investment growth of EPZ firms in Kenya; to find out the effect of tax holidays on investment growth of EPZ firms in Kenya; and to assess the effect of value added tax on investment growth of EPZ firms in Kenya. The theories that underpinned the study included Tax Discrimination Theory and Modigliani-Miller Theorem (MM Theory). This study utilized descriptive research design. The target population of this study was 114 firms registered and licensed by Export Processing Zone Authority (EPZA) as at 2018. The study utilized primary data and secondary data. A semi-structured questionnaire that had both open and close-ended questions was used in data collection. Secondary information on the variables was obtained from sources like Export Processing Zones Authority (EPZA). Data was analyzed using multiple regression analysis to establish the relationship between tax incentives and investment growth of EPZ firms in Kenya. The results were presented in tables. The study concluded that the effect of investment allowances, investment tax credits, tax holidays and value added tax on investment growth on EPZ firms in Kenya were positively and statistically significant. The examination presumed that Investment Tax Credits influence the speculation development of EPZ firms. The examination inferred that assessment occasions are appealing to venture experts in creating and progress economies with simple corporate duty frameworks given their simplicity of organization. The investigation inferred that VAT has various highlights that hypothetically make it very direct and as easy as conceivable in that; solitary rate charge (5%) makes it simpler to regulate. The investigation prescribed that the administration ought to think about the financial estimation of capital stipend impetus, investment tax credits, tax holiday’s incentive and VAT incentives. The study suggests the examination could be reached out in subtleties to the next non-charge motivations that can influence the speculation development of organizations. Different factors, for example, accessibility of characteristic assets, large scale financial dependability, advertise size, receptiveness to exchange are basic to national improvement.