Effects of Tax Incentives on the Performance of Export Processing Zone (Epz) Firms in Kenya

Abstract

The contemporary world is characterized with intergovernmental competition for the sole purpose of attracting multinational companies and this has made fiscal incentives to become a global phenomenon. Poor African countries rely on tax holidays and import duty exemptions, while industrial western European countries allow investment allowances or accelerated depreciation. It is for this reason that the general objective of this study is intended to establish the influence of tax incentive in Kenya on the performance of EPZ firms in Kenya. The specific objectives were to investigate the influence of corporate income tax incentive, capital allowance tax incentive, VAT incentive, excise duty tax incentive and custom duty incentive on performance on EPZ firms in Kenya. The performance of EPZ firms was measured by profitability, gross margins and the number of jobs EPZ firms created. The study adopted a descriptive and explanatory research design. The study used a stratified sampling approach because the number of the EPZ firms in Kenya was categorized into 4 strata. The total numbers of firms used in the study were 86 registered EPZ firms in Kenya according to Export Processing Zones Authority (EPZA). The study adopted a census survey design. Census survey was adopted because the population of interest was small. A sample size of all the 86 registered EPZs firms was used in this study. Primary data was obtained using questionnaires. Secondary data from the registered firms was collected on; ROA, number and value of jobs created and the length of stay of the firms. The secondary data was collected from operating EPZ firms in Kenya annual report. The study assessed the performance of EPZ firms against the tax incentives they benefited for the last ten years. The study used both descriptive and inferential statistics to conduct data analysis. Descriptive statistics included frequencies, percentages, mean and standard deviations while inferential statistics were correlations and regression analysis. The means plot of total sales, exports and ROA indicated an increasing trend from 2003 to 2014. The result further indicated the decreasing trend in the number of employees recruited by EPZ firms in Kenya. The results indicated that the number of jobs decreased significantly between 2007 and 2009. From 2011 employees working with EPZ increased until 2014. The results of multivariate regression model adopted revealed that corporate income tax incentive had a positive and significant relationship with performance of EPZ firms measured using ROA. The results of multivariate regression model further revealed that corporate income tax incentive had a positive and insignificant relationship with vi performance of EPZ firms measured using the number of jobs. The results of bivariate regression models adopted revealed that at 5% significance level corporate income tax incentive, capital allowance tax incentive, excise duty incentive and custom duty incentive as well as VAT incentives had a positive and significant relationship with performance of EPZ firms measured using ROA and the total number of jobs. The study found out that Firm size moderate the relationship between tax incentives and the performance of EPZ firms in Kenya and thus moderation is supported. The study conducted analysis on the EPZ firms to find out the survival rate of the EPZ after 12 years period of tax holiday. Within this 12 year period EPZ firms benefit from tax incentives available. The result revealed that in 2003 there were 66 EPZ firms, out of which only 22 still existed after the 10 year period. This finding implies that tax incentives may be valuable in attracting EPZ firms but the survival/performance of these firms depends on other factors different from tax incentives. The findings also could imply that EPZ firms leave when their tax holiday period of 12 years is about to expire to avoid paying taxes. Based on the findings the study concluded that the government should continue to offer tax exemptions for it to attract and maintain foreign investors in the country. This study recommends that stakeholders in tax policy should reconsider the economic value of corporate tax incentive. These incentives had the capacity to increase the ROA of EPZ firms as well as the number of jobs. In addition, the study recommended that the government should consider the economic value of capital allowance incentives. The study recommended that the country could increase the level of capital inflow in to the country as well as the level of investment and growth in order to increase the level of employment and the level of industrialization in the country. Further, it was recommended that the government should reconsider its VAT policy by encouraging more VAT rebates to firms in order to boost their productivity and increase the volume of exports. Lastly, study recommended that the government should offer increased excise duty incentives in order to cut down on imports and in that way promoting the growth of demand for domestic products in the country. The government could pursue this strategy in order to curb smuggling and also to promote the growth of the tourism industry.