Tax dispute threatens returns from unit trusts

While the tax collection agency contends that the law remains hazy in its current state, the KRA says little will change in the principle behind the law.

“We may need to re-examine that law further but just for administrative purposes and not in principle,” says Mr Duncan Onduro, senior assistant commissioner at KRA’s policy unit.

Some of the alleged tax defaulters have been paying bond and money market unit trust investors an annual average return of eight per cent meaning that KRA’s demand for its 15 per cent withholding tax may pull down the rate of return by up to two percentage points.

Capital positions

It might also be that some providers deducted the withholding tax but failed to remit the money to KRA instead choosing to account for it as revenue.

That means any fines and penalties incurred will hit the fund managers’ cash and capital positions and exert pressure for an increase in management fees that will hit the investors’ earnings.

Unit trusts account for nearly five per cent of the Nairobi Stock Exchange’s market capitalisation or about Sh45.7 billion, with the three top players controlling more half of the business.

The KRA is sticking to its guns, saying that the law remains that unit trust providers should charge the withholding tax as the law reads in its current form.

With the tax collection agency not known to back down on its demands, it remains to be seen how the matter will be resolved.

“The law is very clear on this matter, it is only the modality of this law that is yet to be finalised,” says Mr Onduro.