In a recent report, the international lender highlighted that Kenya’s foreign direct investment (FDI) inflows are significantly lower than its potential, mainly due to the instability caused by unpredictable tax policies.
In 2022, FDI accounted for just 0.3% of Kenya's GDP, trailing far behind neighboring countries such as Tanzania (1.7%) and Uganda (6.5%).
This underperformance is concerning, given Kenya's strategic position as a gateway to the East African region.
The World Bank's Kenya Economic Update report attributes this shortfall to the frequent and sudden tax changes that disrupt business planning and reduce investor confidence.
"Frequent and unanticipated tax policy shifts create a volatile business climate, erode investor trust, and hinder strategic planning," the World Bank stated.
This instability not only complicates tax compliance but also impacts the cost structures of businesses, especially those involved in import and export.
The report cautioned that such unpredictability discourages investment and could lead to decreased government revenue.
FX Pesa market analyst Rufas Kamau supported the World Bank’s view, explaining that high taxation could drive investors away. "New taxes will hurt the tax base.
Foreigners will exit and invest in other countries," Kamau told TUKO.co.ke. He also warned that excessive taxation and regulation could foster the growth of black markets, as individuals seek to evade heavy taxes.
The Kenyan government’s proposed Finance Bill 2024 includes new taxes such as a 6% Significant Economic Presence Tax (SEP) on non-resident firms operating in digital marketplaces, replacing the current 1.5% digital service tax. Other proposed taxes include levies on edible oil and a 2.5% motor vehicle tax.
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