Effect of tax incentives on the performance of export processing zones enterprises in Mombasa county, Kenya

Abstract

Governments around the world are keen to boost their level of exports. Tax incentives are one common tool that can boost the performance of EPZ firms across the globe. In Kenya, the performance of EPZs firms has been declining in the past decade in comparison to other EPZs in both Africa and Asia. The purpose of this study was to establish the effect of tax incentives including capital deductions, VAT incentives and corporate income tax incentives on the performance of EPZs firms in Mombasa County in Kenya. The specific objectives of the study was to determine the effect of capital deductions on the performance of EPZs firms in Mombasa, to establish the effect of VAT incentives on the performance of EPZs firms in Mombasa and to determine the effect of corporate income tax incentives on the performance of EPZs firms in Mombasa. The study explored the optimal tax theory, benefit theory of taxation and Q theory of Investment. This research adopted an explanatory research design based on panel data for a period of ten years starting from 2010 to 2019. The population comprised 28 firms registered and licensed by Export Processing Zone Authority (EPZA) as at 2019 in Mombasa Country. The study used secondary data which was collected from EPZA and which was analyzed using multiple regression analysis to establish the relationship between the particular tax incentives and performance of EPZ firms as indicated by net profit. The findings of the study revealed that Capital Deduction (β=10.989, P=0.004), VAT incentive (β=1.983, P=0.023) and Corporate Income tax incentive (β=2.340, P=0.033) have a positive and significant effect on the performance of EPZs firm in Mombasa. The study concludes that Capital Deduction as measured by investment deductions has a positive and significant effect on the performance of EPZ firms in Mombasa. The study also concludes that VAT incentive as measured by VAT zero rating has a positive and significant effect on the performance of EPZ firms in Mombasa. The study also concludes that Corporate income tax incentive as measured in the form of tax holiday has a positive and significant effect on the performance of EPZ firms. Based on the findings, the study therefore recommends that the government increases the level of capital deductions, VAT incentives and Corporate Income Tax incentives allowed by EPZs firms given their positive effect. This will increase the investments by EPZs firms which will in turn spur more production in Kenya. Further studies should be conducted to identify other potential determinants of the performance of EPZs firms in Mombasa such as the presence of local skilled labor force, foreign exchange policies, foreign trade policies and employment income tax incentives.