Inside State's brewing battle with manufacturers over incentives

The government is putting manufacturers in a bind with its constantly shifting policies on tax incentives, as some firms find themselves at loggerheads with the taxman

When Blue Nile Rolling Mills Ltd applied for a Special Operating Framework Arrangement (Sofa) with the government in 2020, it was among companies that were taken up for the Vision 2030 initiative.

On one hand, the agreement required the manufacturers to employ at least 300 Kenyans, provide commodities that would cut off imports (100 per cent import substitution), export at least 40 per cent of their products and spur the growth of small and medium enterprises within the country.

On the other, the then Jubilee government through the Ministry of Investment, Trade and Industry (MITI) and the Ministry of National Treasury and Planning offered the investors a tax holiday and preferential tariffs on raw materials for the product to be manufactured.

Blue Nile had a galvanized wire (GI-wire) of which it is the only one that manufactures the same in the East Africa region by 2019 when it was signing the agreement.

GI wire is used to make hangers, staples, pins, weaving Maasai beads and electrical wires among other things.

The agreement was rooted on the 2012-2030 National Industrialisation Policy, which was documented through Sessional Paper Number 9 of 2012.

Former Treasury Cabinet Secretary Henry Rotich in a circular dated October 18, 2018, directed that there should be a strict compliance with the law and guidelines in a bid to ensure accountability.

“In order to ensure adherence to these guidelines and the law while implementing projects supported through exemptions, specific internal audits of the entire process right from the request, processing, approval and utilisation of the same shall be done by the National Treasury on regular basis,” Rotich wrote.

He said that the agreement with the investors must have been agreed upon by Treasury.

“For the avoidance of doubt, exemptions under this framework shall not be concluded without the involvement of the National Treasury. In this regard, therefore, the accounting officer must provide evidence or concurrence of the National Treasury in the negotiated and agreed exemptions under this framework,” he continued.

Blue Nile applied for Sofa on September 28, 2019, and the agreement was signed four months later with the Finance Act 2018 being the operational law.

“The shared objective that informed the agreement was to promote and facilitate investment and inclusive economic growth in Kenya as this was a 100 per cent import substitution project,” Blue Nile chief executive Kotni Rao told The Standard.

He said the government estimated that it would save the country at least it $15 million (Sh1.9 billion at current rates) in foreign currency per year, from the deal.

“To that end, we committed ourselves under the agreement to enhance local production of galvanizing wire products tailored for the small and medium enterprises.

“Further, the agreement binds us to create direct employment of at least 300 jobs. We have employed over 1000 employees directly,” said Rao, adding that they were to transfer technology know-how to Kenyans for ‘made-in-Kenya products.’

On its end, the government committed to offer the company a five-year income tax exemption. It also offered another 10 years exemption of Import Declaration Form and Road Development Levy.

The government charges at least 1.5 per cent IDF and 1.5 per cent on raw materials for the manufacturers.

“All companies that are bound by Sofa were offered these incentives and not just Blue Nile. All eligible manufacturers were free to apply for it,” Rao said.

At the same time, the government agreed to charge income corporate tax at 10 per cent for the first five years.

According to Rao, by the time the firm was signing the agreement, there were no duties and export and investment promotion levies were not provided for in the law.

Come 2021, the government changed the terms of Sofa in the Finance Act 2021. However, it gave a transitional clause which then continued the agreement signed under the Finance Act 2018.

When Kenya Kwanza government came into power, it then introduced a Sh10 billion investment condition for a company to get Sofa.

This is when Blue Nile started getting unclear signals on its imported raw materials. It emerged that at one point Kenya Revenue Authority held its raw materials but it cleared the same after it was disclosed that the agreement was still alive.

Advisories from Attorney General’s office cautioned that the government could not walk away from its first agreement.

From the exchanges between the office, MITI Cabinet Secretary and Treasury CS, the government was risking legal battles that would expose Kenyans to pay the companies that had been given the incentive.

“It is our opinion that the government is stopped from withdrawing the incentives under Sofa, which was the basis of the financing of the project,” wrote the Attorney General on November 17, 2023.

“The agreement created a legitimate expectation upon the investor that they, and their business would be protected from the whimsical taxation regime.

“Any withdrawal of such incentives would attract disputes, which if pursued would likely attract or expose the government to liability.”

The AG’s position on Sofa was similar to the one by MITI’s Principal Secretary who informed his Treasury counterpart and the AG, who requested that Blue Nile should be exempt from new taxes and levies imposed in 2023.

He stated that the exemption would undermine implementation of the agreement.

Rao said this is the basis of claims that Blue Nile was not paying tax to government.

However, according to him, KRA, the Trade ministry, Treasury and AG - if not the whole government - are aware of the agreement and subsequent conversations around it.   

This year, government again introduced a transitional clause in the Finance Bill, 2024 on Sofa. Treasury had proposed that Section 7 of the Miscellaneous Fees and Levies Act be amended.

This created a storm with investors arguing it was against the agreement during memoranda presentation.

However, President Ruto refused to assent to the Bill and sent it back to Parliament.