Stockbrokers now hire top law firm to file case over tax

Stockbrokers have hired a top law firm to file a court petition challenging the new capital gains tax in the face of a two-week stalemate with the Kenya Revenue Authority (KRA) over its implementation.

While the law re-introducing capital gains tax after a three-decade freeze came into effect on January 1, the stockbrokers have not started collecting the levy from share sales, citing implementation difficulties.

The Business Daily understands that the market intermediaries have now engaged the law firm of HHM Oraro Advocates to seek the court’s ruling on clauses that they feel make deducting capital gains tax from investors impractical.

“We have engaged our lawyers to advise on the legal options available to us, even as we continue engaging the KRA on the matter,” said the Kenya Association of Stockbrokers (Kasib) chief executive Willie Njoroge in an interview.

Representatives of the stockbrokers, who fear that the ongoing non-collection of the new tax could leave them facing colossal claims from the taxman, last week held a meeting at KRA’s Times Tower headquarters to seek a way out of the stalemate.

The meeting was attended by stockbrokers, the KRA, the Central Bank of Kenya (CBK), the Kenya Bankers Association, the Nairobi Securities Exchange, the Capital Markets Authority and the Central Depository Systems Corporation. Another meeting is scheduled for this week.

At the heart of the matter is an apparent conflict in law that in one section requires stockbrokers to deduct capital gains tax at the rate of 7.5 per cent, and says the dealers should retain five per cent of investor’s net gains from share sales in another.

The other major sticking point is the actual calculation of the net capital gain from share sales to be submitted to the taxman, with the brokers claiming they lack the capacity to ascertain the payable amount.

The stock dealers have suggested that investors be obligated to submit their capital gains to the KRA as part of their annual income tax, but the revenue agency wants the intermediaries to bear the responsibility of deducting and submitting the levy.   

“It is difficult for example to ascertain the tax payable by an investor who claims to have bought shares in the 1950s, yet we have no way of verifying records that far back,” said a prominent stockbroker who requested anonymity to avoid antagonising the taxman.

“Furthermore, thousands of trades take place every day at the stock market, deducting and remitting the levy would mean filling in thousands of capital gains tax forms every day.”

The KRA has, however, sought to address the brokers’ complaints by issuing a raft of guidelines for assessing tax payable.

READ: Brokers obligated to collect capital gains tax, KRA says

Investors who bought shares after 2005, when there was already an electronic system in place to record trading at the stock market, will pay a capital gains tax based on the difference between their selling and purchase price, less transaction costs.

The purchase cost for those who bought shares between 1998 and 2004 will be assumed to be the highest price recorded by the NSE during the specific year of acquisition.

Investors who bought shares before 1998 will be assumed to have acquired at the highest price recorded by the NSE in 1998.

The capital gains tax was re-introduced at the beginning of the year to fall on investors selling property such as land, shares, government securities and private equity.

The KRA said investors will pay the tax at a rate of five per cent of the difference between acquisition price and selling price, less any transaction costs.

The implementation of the tax on other asset sales has not raised issues. Land sellers will be expected to submit the tax with their bank as is done with stamp duty.

The CBK has been tasked with deducting the capital gains tax from investors who sell Treasury bills and bonds in the secondary market.

The brokers have been pushing for suspension of the tax to give time to clarify issues arising from the implementation of the levy.

READ: Brokers want KRA to suspend capital gains tax on stocks

The KRA has in the past warned stockbrokers who fail to retain the tax of being liable as if they were the beneficiaries of the gain. The brokers were at one point said to have been contemplating halting operations at the stock market to minimise potential liability to the taxman.

Stockbrokers believe the taxman is passing on to them responsibilities which are not contained in the Act. They argue that the Act states they are to collect and remit the tax, but the KRA is adding responsibility by requiring them to calculate the investors’ liability.

“The responsibility to collect and account for the tax will be on the stockbrokers,” reads part of the guidelines, with the brokers taking issue with the word “account”.

Kasib further argues that the taxman did not amend the Eighth Schedule to cater for changes that have occurred in the market since 1985 when the rules were last used.

It says stockbrokers were no longer involved in the transfer of shares as stated in the schedule but the responsibility had been passed on to the Central Depository and Settlement Corporation, which came into effect in 2005.

Tax experts have come out to support some of the issues raised by the stockbrokers. Auditors PKF point out that Parliament’s deletion of some sections in the Finance Act weakened the government’s position in implementing the tax.

“My opinion is that the KRA has not fully understood the changes made in the Finance Act 2014, which brought back CGT. The Act actually amended section 35 (that for withholding tax) to remove subsections (3A) and (3B) which required taxes to be withheld for CGT – therefore no withholding of CGT,” said Rajan Shah, a partner at PKF.

James Ojee, deputy commissioner at KRA’s policy unit, however, dismissed the auditors’ position, arguing that the section – 3(2)(f) in the Income Tax Act – had not been deleted.

“Gains accruing in the circumstances prescribed in, and computed in accordance with, the Eighth Schedule,” reads the section. Tax experts also pointed at differences between the Finance Act and the Eighth Schedule.

“While the Finance Act 2014 provides for a CGT rate of five per cent, the Eighth Schedule in Part II provides for a 7.5 per cent rate on gains from investment shares,” noted Taxwise Consultants.

The brokers also argue that they do not have personal identification numbers (PIN) of their investors which are required when submitting taxes.

They have also pointed out that foreign investors, who are also liable to pay the tax, do not have PIN numbers.

The KRA has previously said that it was willing to share its database with the stockbrokers so that they can search for PIN numbers of investors who sell shares.

Kasib has also argued that no other country that charges capital gains tax on shares had designated stockbrokers as collecting agents.