Effect of tax incentives on foreign direct investment in the oil and gas sector in Kenya

Abstract

Over the years, foreign direct investment inflows to Kenya have not been consistent with certain cycles of low inflows. This has been attributed to deterioration in economic efficiency, as well as increasing problems with poor infrastructure and high costs of living. Previous surveys have also described the lack of well-structured and attractive tax incentives as a major barrier to the growth of FDI. The purpose of this study was to assess the effect of tax incentives on foreign direct investment in the oil and gas sector in Kenya. The specific objectives included: to determine the effect of capital deductions, income tax, VAT incentives and import duty incentives on foreign direct investment in the oil and gas sector in Kenya. The research was informed by the theory of innovation diffusion, social exchange theory and stakeholders’ theory. Explanatory research design was used in the study. The target population included five oil and gas companies. The target respondents were 136 senior managers from five oil and gas companies in Kenya. A census of all the managers was done. Primary data was collected using structured questionnaires. The study applied quantitative methods to analyze data. These included descriptive statistics (percentages, means and frequencies). Further, inferential statistics (Pearson’s correlation and regression) were conducted to determine the relationship between tax incentives and foreign direct investment. The findings indicated that capital deductions (β1=0.377, P = .000); income tax (β2= 0.286, P = .000); VAT incentives (β3= 0.124, P = .020); and import duty incentives (β4= 0.375, P = .000) had a positive and significant effect on foreign direct investment. The adjusted R 2 of the regression model was 0.789. The study concluded that tax incentives contribute significantly towards foreign direct investment in the oil and gas sector. Based on the findings, the study recommended that the government should strengthen aspects related to tax incentives. These include; wear and tear allowances, investment allowances, industrial deductions, loss carry-forward, withholding tax incentives, tax credit incentives, allowable deductions, exemption of goods and services from VAT, import duty incentives on machinery, raw materials, office equipment and customs duty. This study focused on the oil and gas sector in Kenya. Further studies could be conducted in other sectors for comparison purposes.