Kenya targets profit from sale of shares in return of capital gains tax

Sellers of stocks through the Nairobi Securities Exchange will be charged five per cent of any profit they make following clarification by Kenya’s parliament that the proposed capital gains tax (CGT) affects all forms of assets.

Last week, parliament amended the Finance Bill 2014 to require that the sale of property be subjected to the CGT, which the government had said last year would only affect transactions involving land — including mining blocks — and buildings.

The chairman of the Parliamentary Finance Trade and Planning Committee Benjamin Lang’at has now clarified that the tax applies to all forms of assets including bonds as well as listed and private shares that are traded over the counter.

“Property in this case means moveable and immovable assets, including those that are liquid,” Mr Lang’at told The EastAfrican on Thursday.
The government expects to raise at least Ksh9 billion ($85 million) annually from the tax.

Investors will be allowed to deduct the cost of acquiring, developing and maintaining the assets before the tax is assessed. The Bill is waiting for assent from President Uhuru Kenyatta, after which it will be enforced for deals closed from January next year.

“Subject to this Schedule, income in respect of which tax is chargeable under section 3(2)(f) is the whole of a gain which accrues to a company or an individual on or after January 1, 2015, on the transfer of property situated in Kenya, whether or not the property was acquired before January 1, 2015,” states the Finance Bill passed by parliament last week.

Those holding property in the form of shares will continue paying withholding tax on dividends.

The capital gains tax was suspended in 1985, when Kenya was seeking to spur growth in the real estate market and deepen local participation in capital markets, goals that appear to have been realised with the NSE ranked among the top five bourses in Africa.

The real estate sector, driven largely by speculators and diaspora inflows, boasts one of the best returns in the world, with top end homes being sold for as much as $10 million.

Property prices, especially for undeveloped land, tend to double every three years, especially where electricity, water and roads are developed.

READ: The return of capital gains tax on assets in Kenya was long overdue

A report by Knight Frank last year ranked Nairobi’s property prices as the fastest rising on the continent, and among the top 10 in the world.

The government had considered introducing a betterment tax on properties whose value appreciates because of infrastructure development, but this appears to have been dropped in favour of the capital gains tax.

The return of the tax 30 years down the road has raised fears that Kenya could lose its competitiveness as an investment destination, but policy makers and some analysts say this may not be the case because Kenya’s rate is the lowest on the continent.

“In more developed economies in Africa, such as Egypt, Nigeria and South Africa, this tax has been in operation and there is no evidence of a negative effect on either the real estate and the securities exchange sectors,” said Ibrahim Khalif, a senior tax manager at Deloitte East Africa.

Concerns have been raised that the new tax is likely to push up the cost of housing, and that it could be difficult to administer.

“The net effect will be an increase in property prices as sellers look to pass on the tax to buyers. This may result in an adjustment in the sector, particularly for individuals or small developers,” said Timothy Kamau, the head of investor relations at Home Afrika, a NSE-listed real estate company.

Property taxes in Kenya have, since the suspension of the capital gains tax, been slanted in favour of the seller, with the buyer being required to pay stamp duty of between two and four per cent of the value of the land and buildings.

Kenya now joins Tanzania and Uganda, which charge capital gains tax of 20 per cent and 30 per cent respectively.

Globally, tax havens like Mauritius and Seychelles have not enacted taxes on the appreciation of assets. Zambia and South Sudan are also yet to introduce taxes on transaction margins.

Kenya’s decision to introduce the CGT is seen as a way to get a share of the profits from the numerous real estate projects coming up in the country.

Delta Corp, a subsidiary of Indian conglomerate Reliance Industries, said early this year that it had made a profit of Ksh2 billion ($23 million) in the past seven years from its property holdings in Kenya. Had the law been in effect, the government would have earned Ksh100 million ($1.1 million) from the group.

“Capital gains tax is not in itself such a bad idea, but we have to ask ourselves what the policy reason for the introduction is. Is it to encourage people to hold property for longer periods? Is it to promote better capital allocation?” asked Onchi Maiko, the regional head of investment banking at KCB Capital Ltd.

In other areas, capital gains taxes are used to encourage investors to hold their properties for longer periods of time. In the UK, capital gains tax for properties held for less than a year is 50 per cent, which then falls with time.

In Malaysia, non-residents are encouraged to hold properties for at least five years, failing which the government imposes a 30 per cent withholding on gains under what is called a “real property gains tax.”

“One area that the tax policy makers and administrators should consider is the effect of inflation on the value of assets that were bought many years ago. Thus a rise in the price of an asset may reflect either a rise in demand for that asset or simply price inflation or a combination of both. This concept, known as indexation, is used widely in the administration of this tax,” said Mr Khalif.