KRA plans capital gains tax penalties for brokers

The Kenya Revenue Authority’s (KRA) war with stockbrokers over the payment of capital gains tax intensified on Monday after the taxman announced that it was moving in to impose punitive penalties against those who have refused to comply.

The KRA’s action came after last Thursday’s deadline it had set for submission of the tax revenues expired with only half of the brokers in compliance. 

The capital gains tax (CGT), which came into force at the beginning of the year, has been facing stiff opposition from brokers who argue that they are ill-equipped to collect and remit the revenues to the KRA.

The KRA had earlier signalled that it was ready to negotiate with the brokers, but appears to have hardened its position on April 30 when it gave the market intermediaries 14 days to comply or face punitive action.

“We are in the process of pursuing those who are yet to comply. The law outlines measures KRA can take in the event of failure to comply with a demand notice from the commissioner,” said Alice Owuor, the KRA commissioner for domestic taxes.

The KRA’s war with the brokers is seen to be partly responsible for the steep decline in stock market activity that has wiped out Sh149 billion in investor wealth since January.

“There has been considerable turbulence in the stock market. It is still not very clear how to go about applying the CGT because there are costs involved. Investors are not sure how to go about it. That is why the market is down 40 per cent year-on-year,” said Geoffrey Odundo, the CEO of the Nairobi Securities Exchange (NSE) .

Mr Odundo said the market was awaiting direction given that nothing formal had come out of the discussions that have so far taken place.

The tax appears to have particularly dented foreign investor confidence in the NSE, prompting a selling spree that has slowed down activity at the bourse.

READ: Brokers accuse KRA of shifting goal posts on tax

A delay in resolving the stand-off, therefore, signals a prolonged drag on the stock market, which has been one of the top-performing sectors of the Kenyan economy.   

The KRA has at its disposal a wide range of enforcement actions against CGT tax defaulters, including fresh auditing of non-compliant companies to determine the amounts due.

A determination that a company is in default sets in motion a series of punitive action, including demand for immediate payment of taxes due together with a 20 per cent penalty on the outstanding amount.

The Income Tax Act says “any amount of tax that remains unpaid after the due date attracts a penalty of 20 per cent that immediately becomes due and payable”.

The taxman is also legally empowered to charge a two per cent interest for every month that the tax remains unpaid more than one month after the due date until the full amount is recovered.

The brokers are allowed to object to any assessment of taxes due through a formal letter to the commissioner stating reasons for the objection.  

The KRA said on Monday it was analysing the filings of the brokers who had submitted returns to determine the extent of their compliance.

This latest hardening of positions also puts the KRA in conflict with the Capital Markets Authority (CMA), the sector regulator, which had assured the brokers that the tax had been postponed till July.

The KRA insists that the tax revenues should have been remitted by last Thursday because the law that came into force in January still stands.

The Treasury had also indicated that the law would be put on hold until it is amended to shift the burden of paying the tax from brokers to investors.

The CMA’s acting director in charge of policy, regulatory affairs and strategy Luke Ombara said on Monday that discussions were underway on how to resolve the impasse, including a proposal to replace the CGT with a transactional levy.

Mr Ombara said the market intermediaries had proposed the levy as a percentage of the value of transactions instead of the CGT which they see as prohibitively expensive to implement.

The levy could earn the KRA up to Sh600 million a month, for a total of Sh7.2 billion a year. 

“The market intermediaries have indicated that it would take half of their working time determining and calculating the amount of CGT due from every transaction,” said Mr Ombara.

Besides, the brokers have to use a special ICT system to account for splits, bonuses, dividends and convertible bonds that have been offered to investors to arrive at a fair value of a share.

“The CMA has put the issues on the table for discussion and that is what is happening now. We are discussing the way forward with the market intermediaries, the KRA and the Treasury,” said Mr Ombara.

The market has remained tense in recent months as positions hardened. The NSE 20 Share Index is down 40 per cent from a year earlier having shed nearly five per cent in the past four months alone.