By
Brenda Osoro
Kenya’s mineral resources primarily contribute to the nation’s revenue through taxes paid by mining companies. According to government estimates, the extractives sector currently makes up just one percent of the country’s national income and less than two percent of total export earnings.
However, the landscape of both society and the extractives industry is rapidly evolving. Anticipated increases in mining discoveries and untapped natural resources are expected to significantly elevate these figures. Projections indicate that, with further exploration and development, the sector could contribute up to ten percent of the national income, positioning Kenya as a key mining hub in East Africa.
This presents a valuable opportunity for the country to leverage the sector for accelerated development, particularly in the aftermath of the COVID-19 pandemic. Kenya’s GDP is projected to contract significantly, falling from the initial estimate of 6.2 percent to 3.4 percent in 2020, as per the Central Bank of Kenya. In response, the government has implemented tax relief measures to stimulate businesses and alleviate the pandemic’s impact on individuals.
Given the compromised state of many revenue sources due to the pandemic, the extractives sector emerges as a potential major contributor. Revenues generated could support crucial sectors such as education, tourism, and healthcare, which have been severely affected by COVID-19.
However, despite the promising opportunities, substantial challenges accompany them. The fiscal policies governing the mining sector, including taxes and incentives, play a pivotal role in attracting long-term investments and maximizing revenues for the country. Kenya finds itself in a “race to the bottom,” with nations competing to offer tax incentives that diminish rates, ultimately reducing revenue potential.
This race has resulted in significant losses for the country. Striking the right balance in the fiscal regime is essential to attract investors without compromising tax collection. Additionally, foreign firms exploit double taxation agreements (DTAs), designed to prevent taxation on the same income twice, to reduce their tax payments legally.
A case in point is Tata Chemicals Magadi, Africa’s largest soda ash manufacturer, reaching an agreement for a 99% tax exemption and a reduced land rate of KES 150 per acre, causing substantial revenue losses for the county.
Closing loopholes in Illicit Financial Flows (IFFs) becomes imperative. Good governance is a crucial factor in domestic resource mobilization (DRM). Transparency International (TI) Kenya reports that corruption cases in the extractives sector often go unreported due to information gaps in legal frameworks and lack of confidence in relevant institutions.
Given the complexity of tax rules governing extractive industries, there is a pressing need for training and capacity building to ensure effective enforcement of these laws. Corruption not only deprives citizens of their national heritage but also hampers revenue collection, affecting essential service provision.
As the extractives industry is still in its early stages, operating within an unclear fiscal regime, there is a compelling need for a transparent and accountable financial system that aligns with sustainable development goals (SDGs).
In the context of the government’s focus on controlling and ending the humanitarian crisis caused by COVID-19, there is a collective effort needed to explore additional revenue streams, specifically from the extractives sector, to revive the economy.
The author is a Program Assistant at the East African Tax and governance Network.
Email: bosoro@taxjusticeafrica.net
