Negative ramifications foreseen with enactment of NIFC Bill
NAIROBI- 31 August 2017 –On 21 July 2017 Kenya’s President Uhuru Kenyatta signed the Nairobi International Financial Centre Act into law essentially transforming the city of Nairobi into a tax haven through the establishment of the Nairobi International Financial Centre (NIFC). The enactment of the Bill is seen as a major setback in the country’s efforts to grow its revenue base as well as its ability to finance its development plans on the whole.
A study by Tax Justice Network Africa and partners analysing the NIFC 2016 Bill, showed that the proposed NIFC could lead to profit shifting and tax base erosion through the NIFC to other offshore tax havens and secrecy jurisdictions. This could have a significant impact on funding Kenya’s development agenda. Increased tax competition amongst countries in the region as states seeks to attract foreign direct investment. This approach to attracting investment is now widely accepted as doing more harm than good to developing country economies. A study by TJNA and Action Aid in 2016 estimated the Kenyan economy loses approximately USD 1 billion per year through the provision of tax incentives. The Bill also brings about the issue of Secrecy as several provisions relating to the establishment of the NIFC fall short of transparency and accountability. The independence and accountability of the bodies tasked with the management of the Centre is also shrouded in secrecy.
According to a report by the African Development Bank Working Paper No. 275 of 2017 Kenya is interesting because it is the resource-poor (minerals and fuels) African country that exhibits the largest stock of capital flight. During the past four decades, it is estimated that the country lost over US$10.6 billion in accumulated illicit financial flows, a figure that exceeds the country’s stock of debt, which amounts to US$8.4 billion. This points that with NIFC the numbers of amounts lost are likely to increase in volumes.
International Financial Centres[i] across the world are synonymous with promoting tax havens and acting as conduits for illicit financial flows in the form of tax avoidance, tax evasion, and money laundering, as well as contributing to profit shifting. NIFC may not be an exception to the foregoing characterisation considering it modelled in line with the already established International Financial Centres. It is worth to note that Africa loses approximately USD 70 – USD 80 billion annually to tax havens in the form of illicit financial flows. These are significant revenues that could have otherwise been put to use in the provision of access to quality public services, which are currently compromised and not readily available to millions of people across the continent.
The move by the government is definitely a significant step backwards in the work of tax justice campaigners across the globe especiallyas they seek to put an end to tax havens, reduce tax competition and fight illicit financial flows from Africa.