Pressure mounts on Treasury to bring back capital gains tax

The recent sale of multi-billion shilling Kenyan businesses without any revenues accruing to the government has sparked pressure for the reintroduction of capital gains tax – 25 years after it was suspended.

The tax – usually charged on profits from the sale of assets held for at least 12 months – was suspended in 1985 as part of measures to make Kenya more attractive to foreign direct investment, but tax experts now argue that it should be reintroduced to put the country in line with global trends.

Kenya also eliminated foreign exchange controls and allowed profit repatriation as part of the measures to make the economy more attractive to foreign capital but the conclusion of multi-billion shilling deals that left the government without a penny in revenues has raised eyebrows among ordinary Kenyans and raised a furore in high public offices.

“We are losing a lot of revenue by simply not taxing wealth made from capital gains leaving the working class to carry the country’s financial burden,” said Martin Kisuu, a tax expert and partner at audit firm PFK.

Mr Kisuu reckons that the suspension of capital gains tax to encourage investment has outlived its purpose and needs to be reintroduced to enhance equity in tax payment.

“We need to tax wealth such as capital gain to broaden the revenue base and nurture an equitable tax regime,” said Mr Kisuu.

To show how critical capital gains tax can be to the national revenue kitty, experts give the example of Uganda, which is expected to make a windfall of approximately Sh32 billion (Kenya shillings) from the sale of one of the oil blocks owned by Heritage Oils to Tullow Oil, a British exploration firm.

President Yoweri Museveni told the country’s parliament during the annual State-of-the-Nation address that the taxman would earn $400 million from the Heritage-Tullow transaction despite Heritage lobbying to have the capital gains tax burden reduced.

In contrast, Kenya has earned nothing from the multi-billion transactions involving multi-national companies that have taken place within its borders in recent months.

The transactions span the telecommunication industry, property, land, petroleum and the financial sectors.

Critics of the capital gain tax suspension point to the change of ownership at the country’s second largest mobile phone service provider from KenCell to Celtel, Zain and ultimately Bharti Airtel as an example of deals that had the potential of earning the exchequer billions of shillings in revenue but from which the government got nothing.

KenCell, which was Kenya’s first mobile phone firm, was 60 per cent owned by Vivendi — a French conglomerate and 40 per cent by Sameer Group owned by local business magnate Naushad Merali.

Celtel International, the Europe based phone firm owned by Sudan-born billionaire Mo Ibrahim, paid $250 million to acquire Vivendi’s stake in the firm in 2005.

Tax experts say that deal alone was worth $75 million had it been subjected to a capital gain tax of 30 per cent.

Celtel only run the business for two years before selling its stake to Mobile Telecommunication Company (MTC) of Kuwait at a price of $2.8 billion. Mr Merali also took advantage of the window and sold half of his 40 per cent stake reaping $50 million.

The government is estimated to have lost $840 million in potential revenue from Celtel International and $15 million from Merali’s Sameer Group.

Mr Merali did a repeat performance late last year when he sought and got from the regulators the authority to sell 15 per cent of his 20 per cent stake in Zain Kenya for Sh4 billion – a deal which would have earned the government an estimated Sh1.2 billion in revenues had the capital gains tax been in force.

Zain is again in the process of selling its interests in Kenyan mobile phone operator to India’s Bharti Airtel for an estimated Sh7.5 billion.

That means the government could earn Sh2.4 billion from this deal alone in capital gain tax.

Billions of shillings are also estimated to have been lost when an amorphous entity called Mobitelea got a five per cent stake in Safaricom as a token for facilitating British telecoms giant Vodafone’s acquisition of a mobile phone business licence in Kenya and later reaped billions when it sold the stake back to Vodafone without paying a cent to the government in taxes.

More revenue has been lost in similar deals involving the exit from Kenya of petroleum multi-nationals such as Agip, Esso, Mobil, Chevron and BP.

Attempts to reintroduce capital gain tax in the recent past have however been met with hostility in Parliament – which shot down a 2006 proposal by the then Finance minister Amos Kimunya to reintroduce it.

“Parliamentarians strongly opposed reintroduction of capital gain tax, a decision that was mainly driven by the realisation that it would subject them to paying tax on land and property purchases,” said Nikhil Hira a tax partner at Deloitte and Touché.

A Treasury advisor Michael Chege says that Kenya’s revenue would be growing at a higher pace had the government been taxing the wealthy class.

“There is a strong case for re-introducing the corporate gain tax but anyone contemplating such a move should expect a lot of resistance from the wealthy and political classes who stand to lose,” said Prof Chege.

Though Mr Hira supports the re-introduction of the tax, citing its possible impact on revenue collection, he says it should be levied at a modest rate of 10 per cent rather than 30 per cent.

“We need to encourage investment especially now that the country requires the private sector to actively partner the public sector in the delivery of critical services,” he said.

Opponents of capital gain tax are however arguing that its introduction in certain sectors of the economy could discourage investment and slow down growth.

“Reintroducing the capital gain tax in the construction industry will definitely dim the rising enthusiasm for investment in the real estate sector and derail efforts to increase the supply of housing units in the market resulting in disproportionately high prices,” said Frank Ireri, the managing director of Housing Finance.

But Mr Ireri is not totally opposed to reintroduction of the tax, arguing that it should be applied in areas such as the sale of businesses to help boost the national revenue kitty.

Critics argue that taxing nascent industries such as real estate development would slow down growth and ultimately cut down on revenues earned from related sectors such as VAT charged on building materials and from the manufacturing sector.

Both Prof Chege and Mr. Hira reckon that the re-introduction should also factor in inflation, especially for transactions involving disposal of property that was either acquired or developed earlier.