The impact of taxation on foreign direct investment In Kenya

Abstract

The study was carried out in order to establish whether taxation had an impact on I()reitcn direct investment. Foreign direct investment in Kenya has seen a somewhat stagnated growth over the past decade while taxation levels seemed to decline. It is with this in mind that this study sought to investigate the probable effect that taxation ;IS a disincentive has on FDI. Data was collected from various government sources that deal with either taxation or FDI. The taxes that were employed in the study include marginal effective tax rate. marginal effective tax rate far transfers, marginal clfecti vc tax rate for reta ined earnings and an e lfecti ve tari ff rate, These stem from the formulation developed by Auerbach (1990), The tool used to analyse the data was regression were an appropriate model was formed to find out the magnitude and direction of the impact of taxation on FDI. FDI was considered the explanatory variable while the other four taxes were viewed as the independent variables in the model In the study analysis carried out various test were used including the Pearson Correlation Coefficient. The findings of the study observed a taxation and foreign direct investment had a linear relationship within the period 1994-2003, The effective tariff rate showed a positive correlation to FDI. while the other three taxes rates exhibited negative correlation to FDI. This study suggested that FDI in Kenya showed a great deal of sensitivity to the tax regime.