Investment Incentives and Effective Corporate Tax Rate for Manufacturing Firms in Kenya
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Date
2024-04
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Kenyatta University
Abstract
Effective corporate tax rate is a financial policy subject of interest to firms, policy makers and researchers. The main problem is how to reduce it since it measures real level of tax burden at firm level. The Government of Kenya has implemented various investment incentives aimed at lowering effective corporate tax rate so as to influence investments, facilitate capital formation, increase productivity and grow manufacturing firms. However, effective corporate tax rate in Kenya is still a problem averaging 31.3 percent for the last 10 years and has not been declining towards zero as recommended by the World Bank. Such high effective corporate tax rate militates against desired competitive corporate environment for the manufacturing sector. The sector has deteriorated to 7.4 percent contribution to gross domestic product which is less than 15 percent as envisaged in Kenya Vision 2030. This undesirable phenomenon therefore prompted the design of this study. The general objective of the study was to determine the effect of investment incentives on effective corporate tax rate for manufacturing firms in Kenya. The specific objectives were to determine the effect of profit based incentive on effective corporate tax rate; establish the effect of capital investment incentive on effective corporate tax rate; establish the effect of custom duty incentive on effective corporate tax rate; determine the intervening effect of corporate performance on the relationship between investment incentives and effective corporate tax rate; and evaluate the moderating effect of inflation on the relationship between investment incentives and effective corporate tax rate for manufacturing firms in Kenya. The theories underpinning this study were optimal corporate taxation, political power, neoclassical investment and inflation tax. The study adopted positivist philosophy and longitudinal research design. The target population was 1,092 firms registered with Kenya Association of Manufacturers. Stratified random sample of 278 firms provided secondary data for the period 2010 to 2020. Descriptive statistics were used to show attributes, quantify and describe the basic characteristics of the study variables. Inferential statistics concentrated on diagnostic tests, panel regression and test of hypothesis. The diagnostic tests focused multicollinearity, normality, homoscedasticity, linearity, stationarity, autocorrelation and model specification. The direct, intervening and moderating effect models were analysed to establish the parametric significance of the variables at level of 5 percent. Forms for data presentation were textual, tabular, graphical and charts. This study adhered to ethical standards at all stages. The findings have established that investment incentives had negative statistically significant effect on effective corporate tax rate for manufacturing firms in Kenya. The results showed that corporate performance had intervening effect while inflation had moderating effect on the relationship between investment incentives and effective corporate tax rate. The study has made some recommendations which are corporate executives should make effective corporate tax rate as part of outcome variable in the financial modelling and should develop corporate tax strategy. In addition, the National Treasury should develop a consolidated Fiscal Incentives Policy and Act; reform and implement investment incentives framework; design an appropriate profit based incentive programme as part of fiscal policy instrument; design fiscal policy that has capital investment incentive so as to provide tax advantage to manufacturing firms; design and implement robust strategic custom duty incentive policy tailored for manufacturing sector; develop a differentiated corporate tax framework; and develop and implement corporate tax-inflation adjustment framework to be part of tax system in Kenya. The study has added to finance knowledge that fiscal policy affects corporate operations. However, there is need for further investigation on other possible investment incentives that were not covered in this study.
Description
A Thesis Submitted to the School of Business, Economics and Tourism in Partial Fulfillment of the Requirements for the Award of Degree of Doctor of Philosophy in Business (Finance) of Kenyatta University April, 2024
Supervisors:
1. Jeremiah Koori
2. Farida Abdul