Kenya con­fi­dent about re­in­stat­ing CGT

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Celia Becker

FOL­LOW­ING an amend­ment in the 2014 Fi­nance Act, Kenya re­in­stated cap­i­tal gains tax (CGT) with ef­fect from 1 Jan­uary 2015. CGT was orig­i­nally in­tro­duced in 1975 in the Eighth Sched­ule to the In­come Tax Act, but suspended in 1985 as an in­cen­tive to at­tract in­vest­ment in min­ing, real es­tate and the stock ex­change.

With the Nairobi Se­cu­ri­ties Ex­change ranked as the sec­ond best per­form­ing stock ex­change in Africa in 2013, a boom­ing prop­erty mar­ket and the re­cent dis­cov­ery of min­eral, oil and gas de­posits, the gov­ern­ment con­cluded that th­ese in­dus­tries no longer re­quire in­cen­tivis­ing. It is es­ti­mated that CGT could raise up to $85m a year, which would con­trib­ute to sub­si­dis­ing ever in­creas­ing re­cur­rent and devel­op­ment ex­pen­di­ture (Kenya re­ported a $2bn bud­get deficit in 2014).

CGT is to be levied at the rate of 5% on gains ac­cru­ing to a com­pany or in­di­vid­ual on or af­ter 1 Jan­uary 2015 on the trans­fer of prop­erty sit­u­ated in Kenya. “Prop­erty” is widely de­fined and in­cludes land, build­ings and mar­ketable se­cu­ri­ties (listed and un­listed shares).

A trans­fer is deemed to take place where a prop­erty is sold, ex­changed, con­veyed or dis­posed of in any man­ner (in­clud­ing by way of gift), or on the oc­ca­sion of loss, de­struc­tion or ex­tinc­tion of prop­erty (whether or not com­pen­sa­tion is re­ceived), or on the aban­don­ment, sur­ren­der, can­cel­la­tion or for­fei­ture of, or the ex­pi­ra­tion of rights to prop­erty.

The tax is cal­cu­lated on the amount by which the trans­fer value (the value of the con­sid­er­a­tion or mar­ket value in the case of re­lated party trans­ac­tions) ex­ceeds the “ad­justed cost” of prop­erty, which is de­fined as ac­qui­si­tion costs and costs sub­se­quently in­curred to en­hance or pre­serve it, pro­vided such costs had not been de­ductible for tax pur­poses pre­vi­ously.

In­ci­den­tal costs (in­clud­ing stamp duty, legal fees, ad­ver­tis­ing costs and any costs in the ac­qui­si­tion or trans­fer of prop­erty which con­sist of ex­pen­di­ture wholly and ex­clu­sively in­curred by the per­son ac­quir­ing the prop­erty or the trans­feror for the pur­poses of the trans­fer) are de­ductible in de­ter­min­ing the trans­fer value of prop­erty.

Cap­i­tal losses are de­ductible against cap­i­tal gains in the year the losses are made and any ex­cess loss may be car­ried for­ward for a pe­riod of four years.

Although the CGT rate is one of the low­est in the re­gion — Uganda levies CGT at a rate of 30% and Tan­za­nia at 20% on for­eign­ers and 10% on res­i­dents — some un­cer­tainty sur­rounds its in­tro­duc­tion. While the Fi­nance Act 2014 pro­vides for a CGT rate of 5%, the Eighth Sched­ule in Part II pro­vides for a 7.5% rate on gains from in­vest­ment shares (shares listed on the Nairobi stock ex­change). The Kenya Rev­enue Author­ity has been re­fer­ring to the 5% in re­cent public no­tices, which seems to be the ac­cepted rate.

The trans­feror has the re­spon­si­bil­ity of prov­ing the ac­qui­si­tion cost of prop­erty, which may be prob­lem­atic where prop­erty has been owned for an ex­tended pe­riod (in terms of the In­come Tax Act, records are re­quired to be re­tained only for a pe­riod of 10 years). In in­stances where this in­for­ma­tion is not avail­able, the amount of the con­sid­er­a­tion for ac­quir­ing the prop­erty shall be deemed to be equal to the mar­ket value of the prop­erty at the time of the ac­qui­si­tion or to the amount of con­sid­er­a­tion used in com­put­ing stamp duty payable on the trans­fer by which the prop­erty was ac­quired, whichever is the lesser.

No gen­eral pro­vi­sion is made for the in­dex­ing of ad­justed costs, which means that a sig­nif­i­cant gain may arise purely as a re­sult of in­fla­tion. The ad­justed cost of shares was orig­i­nally de­fined as the mar­ket price at which the shares could have been pur­chased at arm’s length for shares ac­quired be­fore 13 June 1975 and the value of con­sid­er­a­tion for shares ac­quired on or af­ter 13 June 1975. How­ever, the CGT Guide­lines is­sued by the Kenya Rev­enue Author­ity as a public no­tice in Jan­uary this year, in­di­cates that, where shares were ac­quired dur­ing the pe­riod un­til 2004, the ac­qui­si­tion cost of shares shall be the high­est price of those shares in the year they were ac­quired, as ob­tained from the Nairobi Se­cu­ri­ties Ex­change and for se­cu­ri­ties ac­quired from 2005, the ac­qui­si­tion cost will be the ac­tual cost as per the Cen­tral De­pos­i­tory Sys­tem ac­count state­ment. Where a pool of se­cu­ri­ties ac­quired at dif­fer­ent dates and at dif­fer­ent prices is sold, the ad­justed cost will be com­puted on a first-in-first-out ba­sis. PwC Kenya has ex­pressed un­cer­tainty re­gard­ing the legal en­force­abil­ity of the public no­tice, as such sub­stan­tive amend­ments to leg­is­la­tion must typ­i­cally be passed through an act of par­lia­ment.

Although the tax author­ity guide­lines con­firm that CGT is a trans­ac­tion-based tax payable by the trans­feror upon the trans­fer of prop­erty by no later than the 20th of the month fol­low­ing the trans­fer, for in­vest­ment shares the re­spon­si­bil­ity to col­lect and ac­count for the tax will be on stock­bro­kers, who should en­sure that CGT is with­held/col­lected be­fore re­leas­ing the sale pro­ceeds to their clients. This places a sig­nif­i­cant com­pli­ance bur­den on stock­bro­kers, which may re­quire sys­tem up­grades and re­sult in sig­nif­i­cant ad­min­is­tra­tion costs, es­pe­cially where his­tor­i­cal doc­u­ments are re­quired to de­ter­mine the ac­qui­si­tion cost. The Eighth Sched­ule oner­ously pro­vides that a stock­bro­ker who fails to col­lect and re­mit the tax shall be jointly and sev­er­ally li­able with the trans­feror for the pay­ment of tax.

The Kenya As­so­ci­a­tion of Stock­bro­kers and In­vest­ment Banks raised con­cerns that the tax will be dis­cour­ag­ing to ex­ist­ing and po­ten­tial in­vestors and that the Nairobi Se­cu­ri­ties Ex­change will lose its com­pet­i­tive edge as a re­sult, while oth­ers are of the view that the rel­a­tively low tax rate will en­sure a min­i­mal ef­fect. The longer term im­pli­ca­tions of the rein­tro­duc­tion of CGT on the Kenyan econ­omy will only be re­vealed in due course.

Long-term ef­fects of the tax on in­vest­ment still to be determined

Celia Becker is an Africa Reg­u­la­tory and Busi­ness In­tel­li­gence ex­ec­u­tive at ENSafrica.

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