In 1998 the Organization for Economic Cooperation and Development (OECD) adopted a report that established an international framework to counter the spread of harmful tax competition. It argued that provision of preferential tax regimes undermined development. I argue it also undermines the realization of human rights.
Despite this stance, several developing countries seem to be looking towards setting up International Financial Centers (IFCs). Fifteen years after that report by the OECD, Kenya has become one of them. On July 27, 2013, it issued a cabinet brief approving the establishment of the Nairobi International Financial Centre. The brief indicated that the purpose of the center is to connect Kenya to international financial markets by providing for international banks to operate in Kenya. In this regard, the Cabinet directed that the center be set up by December 2013. The idea is to develop a financial center that will contribute to the Gross Domestic Product of the country by at most tripling it. The specialization the financial center would aim at is on banking, reinsurance, insurance, capital insurance, and the stock market. In addition, there is a hope that the process of registration of companies will be sped up. This will include international companies setting up locally in a fixed region in order for them to be more accessible for the local, regional and international borrowing. The order envisions that as long as one party is international the services of the IFC should be usable.
So, is an IFC the magic bullet? Why would a developing country that receives aid decide to forego tax revenue and grant bank secrecy? What are the human rights implications of a move of this nature? This is a lot of technical terminology but how does one see past this to look at the substance of an IFC? IFCs affect three main areas: ease of doing business, bank secrecy, tax reductions. Do these elements help or hinder a state in the achievement of human rights? Using the case of Kenya and its intention to set up an IFC we will look to see how an IFC in Nairobi will potentially impact human rights.
Firstly, realization of any human right requires resources: fiscal resources. Tax collection is a right of all States. The argument not to pay taxes by any institution has the inevitable detrimental effect of undermining the tax collection of a State and therefore reducing the monies it has available for development. Kenya will have an increased tax-exempt base, which may lead to higher administrative costs if related to the inflow of foreign investors and use of existing infrastructure without remuneration. This would also result in higher taxes to cover the maintenance needs of the State, as it does not receive adequate revenue from the companies in the IFC that are using and wearing out the states facilities like roads, airports and ports. If an IFC is allowed to operate the burden to contribute taxes is not only being shifted to the poor citizens of developing countries but also the citizens of developed countries who continue to provide aid to make up the shortfall. Every person has the right to health, housing, sanitation, amongst others. Offering tax incentives will reduce the revenue collected by the government. This in turn will result to reduced government spending that will jeopardize the availability of basic necessities. Any agreement to reduce State resources means, therefore, that there will be less money to spend on those services.
Second, freedom of information. Bank secrecy in its very nature prevents governments from accessing information about their citizens and prevents citizens from accessing information as to how the IFC operates and benefits them, who is investing in their country, and whether crimes are taking place. Unless all these issues can be canvassed the setting up of an institution with secrecy goes against the very basic principle this right espouses.
Third, the right to participation. In a complex policy environment such as finance, strengthening the plurality of voices and perspectives in the regulatory process is important to reduce the risks that regulators find themselves exposed to one-sided evidence from the regulated financial sector. However there is no indication that government intends to use this constitutionally-protected provision as it decides on the fate of the IFC.
Finally, the right to work. The IFC will provide a venue for employment. Labor relations become a matter of concern in this regard. In addition, there will be a limited availability of experts and this will undermine the ability to hire locals. It is important that there should be a minimum of 1-2 Kenyans hired within entities in the financial center and similarly to Dubai or Mauritius that there must be at least one local director. However the model being described is similar to a tax holiday within a particular zone or fixed geographical area. Kenya has traditionally had a very bad experience with labor relations in Export Processing Zones (EPZs) in the country where it has been impossible to police these zones and ensure that domestic labor or even international labor are well treated and paid. This must be kept in mind in drafting any legislation that is to govern the IFC.
In conclusion, failure to engage the citizens in making a decision of such far-reaching consequences, not explaining consequences for tax collection, secrecy, and who will cover the expenditure shortfall, or even the suspension of increases in taxes like VAT and customs until the IFC is set up, will only result in the actions of the State clearly contravening its human rights obligations. Kenya needs to seriously re-think how it is moving forward on this project.
Attiya Waris is a Senior Lecturer at the University of Nairobi Law School in Kenya.