BY ANTONY MUTUNGA
Ever since nations realized that in order to survive and prosper, there was a need to come up with revenue, every country focused on ways to levy from the citizens and attract more people to their shores. Therefore, this saw the rise of taxation which for years has been the major way through which governments finance their expenditure. However, despite being an advantage to the government, taxation did not sit well with the citizens.
For instance, during the Roman Empire citizens would do anything to avoid paying taxes such as burying their expensive belongings when the taxman came calling.
As a result, authorities saw an opportunity to use tax policies as a strategy to gain more support as well as punish those who were not loyal. The Roman Empire, for instance, would grant tax-free status to regions that supported them while those who were against them would be rewarded with increased taxes. This saw the introduction of tax havens, the wealthy would prefer to stay in such areas as because of their tax free status they would not have to part with a chunk of their belongings.
Cities that were practicing such policies were able to grow and prosper as they would attract more and more investors. Fast forward to the present and the same still holds as the wealthy still use these countries to secure their belongings and reduce their tax obligations. Despite still holding the original purpose, the use of tax havens has developed over the years. Not only is it used by the wealthy to personally secure their properties but even corporate entities increasingly started to use tax havens to evade paying taxes.
Over the years many nations have attracted the title of tax haven but none has been more popular globally as Switzerland. The small alpine country has been home to the riches of the wealthiest in the world ever since it was granted neutrality in 1815 congress of Vienna. Switzerland has since remained neutral and not engaged in any war making it an excellent location for the wealthy to stash their cash.
According to the Tax Justice Network Financial Secrecy Index (FSI) 2018 report, Switzerland is the grandfather of the world’s tax havens, one of the world’s largest offshore financial centres, and also one of the world’s biggest secrecy jurisdictions. In the report, the country is ranked first with a high secrecy score of 76 thanks to the size of its offshore financial services which is 5% of the global market.
Other than Switzerland, other countries that make up the top tax havens according to the FSI 2018 report include the USA, Cayman Islands and Singapore. In Africa, Kenya has the highest secrecy score of 80 and was ranked position 27 in the FSI followed by Liberia, Mauritius and South Africa which ranked 38, 49 and 50 respectively.
Kenya’s ranking is attributable to fact the government had started its plans to establish the Nairobi International Financial Centre (NIFC) when President Uhuru signed into law the Nairobi International Financial Centre Act 2017. The law aims to facilitate and support the development of the NIFC. Even though the country’s share of the offshore world only stands at 1.19% of the global market according to the FSI, the share is expected to increase as a result of the NIFC.
The government finally made a move after planning to establish the centre since 2008. The aim of the centre is to cement Nairobi as the regional financial hub in the eastern and southern region of Africa and attract more foreign direct investments. Despite being a move that will strengthen the position of Kenya as a financial hub, the decision also creates some challenges which many believe will turn our country into a modern tax haven.
In the past, tax havens would mostly attract investors who would start businesses in the region as they would accrue minimum tax. Nowadays, corporations and the wealthy do not necessarily invest in the countries directly, they only save up their cash in these havens because of the secrecy they hold, knowing that they can evade paying taxes in their home countries. As a result, tax havens are now known for increasing the rate of illicit financial flows with the net effect of undermining economic growth.
The fact that most international financial centres have been involved in facilitating money laundering, tax evasion and tax avoidance, they have turned into a euphemism for tax havens. For instance, in Seychelles they have been linked to laundering and corruption. Consequently, Kenya’s move to establish its own centre is seen as a move to increase financial secrecy which is used by the wealthy to escape from the financial regulations.
Kenya is currently struggling with corruption, which has increased over the years to the point of becoming the norm in government institutions. This has seen billions of shillings lost as a result of corruption. Our economy has become one where everyone is concentrated on their own interests that government officials have moved to use public funds instead of using them for the interest of the citizens. Most of the stolen money has been transferred abroad or laundered back into the economy.
Therefore, the argument is that with NIFC, this would only get worse as it would promote base erosion and profit shifting. With the NIFC in place and the current tax rules, corporate entities would be able to avoid their tax obligations, hurting the economy which relies on corporate tax.
According to Jared Maranga, policy-lead tax and investment at Tax Justice Network, the NIFC is modeled after other International Financial Centres across the world which usually promotes tax havens. “They act as conduits for illicit financial flows in the form of tax avoidance, tax evasion, and money laundering, as well as contributing to profit shifting,” he said.
Apart from this, Kenya might also end up facing a similar fate to one that Ghana faced when the country also set up its own international financial centre. Almost in a similar situation as Kenya, Ghana was looking to attract more investors to its shores with the aim of acquiring more foreign direct investment. However, things did not go according to plan as a result of weak internal regulations, which have seen the country face challenges to this day even after they had already gotten rid of the centre.
The current form of the NIFC signed into law by President Uhuru still needs more consultation before it is implemented. The provisions in the law relating to the establishment of the centre are weak as they fall short of transparency and accountability. Kenya cannot afford to follow in the footsteps of Ghana or it will find itself facing several catastrophes such as being open to exploitation and blacklisting.
Kenya needs to learn from successful havens such as Switzerland which have been able to increase their economic growth and minimize illicit financial activity. We need to pursue reforms which promote transparency and accountability such as disclosure of beneficial ownership information and enforcement of the law in the event of violation. Without this, Kenya will fall into the hands of the global financial elite and instead of reaching its mission of attracting more FDI, it will be run down as economic growth is undermined.