Money Markets
The National Treasury building in Nairobi. Photo/Salaton Njau
By GEOFFREY IRUNGU, girungu@ke.nationmedia.com
In Summary
- The controversial levy returns in all but name as the government eyes minerals revenue.
- The Finance Bill 2014 proposes that a firm acquiring more than 50 per cent stake in mineral blocks would pay a premium tax, technically called net gain tax, on the value of the transaction after deducting attendant costs.
- Analysts view this as testing of the waters before possible gradual introduction of capital gains tax in other sectors, including real estate.
Deals involving stakes in oil and other mineral
blocks will for the first time be subjected to capital gains tax as the
Treasury looks for ways of extracting more revenue from natural
resources.
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The Finance Bill 2014 proposes that a firm acquiring more
than 50 per cent stake in mineral blocks would pay a premium tax,
technically called net gain tax, on the value of the transaction after
deducting attendant costs.
“The amount of net gain to be included in income
chargeable to tax is if the interest derives more than 50 per cent of
its value from immovable property in Kenya, the full amount of net
gain,” said the gazette notice.
Analysts view this as testing of the waters before
possible gradual introduction of capital gains tax in other sectors,
including real estate.
“The law is targeting capital gains in those
transactions in the mineral sector, including oil and gas even though it
doesn’t call it capital gains tax,” said Fred Omondi, a tax partner at
Deloitte East Africa.
“We have had only withholding tax imposed on the transactions, but now capital gains tax will apply as well.”
The withholding tax on dividends from mining
operations will also be raised from 10 per cent to 20 per cent if the
Finance Bill is passed by Parliament without amendments
Where the net gain is less than 50 per cent and the
stake less than 50 per cent, the income tax payable will be determined
by a formula that takes into account the stake sold and the value of the
block.
Mr Omondi said the Treasury might have found it
prudent to introduce the controversial levy indirectly through the
Income Tax Act. There is no legal framework for capital gains tax, which
was suspended in 1978 to spur growth of the money markets and the
property sector.
Recent attempts to introduce it in Parliament have
met with stiff resistance from legislators, suggesting intense lobbying
by investors who stand to lose the most from the tax.
The Treasury has been keen to re-introduce the tax
to increase revenues from the growth seen in the real estate market as
well as in the trading of securities at the stock exchange.
Kenya is taking a cue from Uganda where income tax
has been imposed on sale of shares in oil and gas companies after
significant discoveries were made some seven years ago.
“Income upon which tax is chargeable under this Act
is income in respect of disposal of an interest in a person, if the
interest derives 20 per cent or more of its value, directly or
indirectly, from immovable property in Kenya; and a natural resource
income,” said the Kenya Gazette supplement.
Experts said the target was transactions that have
taken place in Kenya with major oil and gas explorers selling various
stakes to foreign firms.
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