Court gives stockbrokers, KRA one week to negotiate

Stockbrokers have been given one week to negotiate with the taxman over implementation of the re-introduced capital gains tax that has been the cause of a three-week stalemate between the two.

Justice Isaac Lenaola on Tuesday directed that the Kenya Association of Stockbrokers and Investment Bankers (Kasib) negotiate with the Kenya Revenue Authority and return before him on February 3 to either record a consent or commence preparations for trial.

Kasib and KRA told the judge that they had engaged in fruitful talks since the stockbrokers moved to court, and that a deal could be in the pipeline.
The new laws were assented into law on January 1.

If implemented, they will see Nairobi Securities Exchange (NSE) investors pay a five per cent tax on gains made from any share sales at the stock market.

The levy also applies to sale of other property such as land, treasuries and private equity.

The tax was suspended in 1985 in a bid to attract more investors to the Nairobi bourse and ease land transactions.

The court was expected Tuesday to rule on whether or not to issue any orders regarding implementation of the tax, but Kasib and KRA instead convinced Justice Lenaola to adjourn the matter and give them time to strike a deal.

“Let the parties discuss the matter and take directions or record a consent before Lady Justice Mumbi Ngugi on February 3,” Justice Lenaola said.

The negotiations come just a day after KRA boss John Njiraini announced that the capital gains tax could be deferred so as to iron out the contentious issues that have been at the heart of the stalemate with the stockbrokers.

While KRA is considering relaxing the provisions, stockbrokers are seeking a shelving of the amendments compelling them to collect the capital gains tax entirely.

READ: Stockbrokers take capital gains tax row to High Court

KRA had initially stuck its ground on implementation of the law, but Mr Njiraini’s statement will come as relief for them as it could pave the way for reaching a middle ground on the dispute.

The new laws have caused panic among stockbrokers, who argue that implementation of the tax could drive activity down, as it did in Zimbabwe.

“One emerging securities exchange which imposed a transactional-based capital gains tax is Zimbabwe. After the introduction of this tax, the total market capitalisation of the Zimbabwe Securities Exchange has fallen from approximately $15 billion to less than $5 billion,” Kasib warns.

Stockbrokers insist that the law is too vague to implement as it is not clear on several issues, including the rate of taxation.

Kasib CEO Willie Njoroge says in court papers that section 10 of the amended Act provides that investors pay five per cent tax while Section 16 gives a 7.5 per cent rate.

“The Finance Act introduced a new rate of taxing capital gains (five per cent) without repealing the previous rate (7.5 per cent). The Kenyan taxpayers now run the risk of being subjected to two different rates of taxation for the same tax,” Mr Njoroge said.

He added that some of the guidelines given by KRA on the remittance of the capital gains tax rely on sections of the Act that were repealed.

By repealing Sections 35 and 3(B) which provided for the remittance of tax by stockbrokers after every transaction, they no longer have a basis for withholding tax from investors. This, Kasib says, could leave stockbrokers at the risk of facing a legal backlash from investors.

Kasib reckons that some stockbrokers had begun deducting money from their clients so as comply with the new laws, but that the move left them at risk of being sued by those whose money had been deducted.

The deletion of the two sections also means that the definition of the capital gains tax is not clear.

They further claim that the vagueness of the laws could leave both stockbrokers and investors at risk of facing criminal charges for breaking laws whose interpretation they are not entirely versed with.

One of the provisions of the Act has also come under fire as it seeks to deduct tax on trades that were made before their enactment.