Kenya's president approves 5% capital gains tax

by Reuters 0

According to investors, this law could affect investment in property, equities and the country’s nascent oil and mining sectors.

(WATCH VIDEO: Kenya votes to reintroduce capital gains tax)

The finance bill approved by parliament in late August will take effect on Jan. 1, changing how taxes are applied in East Africa’s biggest economy, the presidency said in a statement late on Sunday.

Kenya’s government is trying to raise funds for development projects to spur economic growth and create jobs, but analysts say such taxes could deter foreign investors.

The plans for a capital gains tax were first announced in June 2013’s budget, leading to a sharp decline in share prices as investors fretted the tax might sap the appeal of equities. The shilling also came under pressure, reflecting concerns about possible damage to the economy.

“It will have an effect, especially on equities and fixed income. Paying taxes is not something people enjoy doing. It complicates a lot of things. So I would say yes, it would really affect how foreign investors view the market,” a senior fixed income analyst at one investment bank said on Monday.

Capital gains tax was dropped by the country in the mid-1980s to attract foreign and local investment.

“I think given the fact that it is optically such a low number, and keeps Kenya at the bottom of capital gains tax… we’ll look through this and move on,” said Aly Khan Satchu, independent analyst.

“If … they are thinking of putting it higher, then I think we are in a little different situation.”

Tanzania, the region’s second-biggest economy charges a capital gains tax at 20 percent for foreign-owned firms and 10 percent for residents. Uganda has a capital gains tax of 30 percent while nearby Mauritius does not tax capital gains.

Kenya’s Finance Minister Henry Rotich has said he expects the economy to grow by 5.8 percent this year from 4.7 per cent in 2013, driven by plans for new railways, roads and airports.

(WATCH VIDEOMarket analysis: Kenya dismisses concern over capital gains tax)

Rotich set spending for the financial year starting on July 1 at 1.5 trillion shillings ($17.8 billion) in his budget speech in June, saying the capital gains tax would apply to mining, gas, oil exploration and extraction operations.

Under the new law, a firm acquiring a stake in mineral blocks or oil exploration block will pay a premium tax, or net gain tax, on the value of the transaction.

Rotich and other Treasury officials were not available to give details of how the tax would be applied or how much it could raise annually.

Analysts estimated the country could rake in an additional $85 million a year.