Companies

Centum hires expert for UAP deal tax advice

mworia

Centum chief executive James Mworia (left) with billionaire investor Chris Kirubi. PHOTO | COURTESY

Billionaire investor Chris Kirubi and NSE-listed investment firm Centum have hired a consultant to help establish the capital gains tax payable on their combined sale of shares in UAP Holdings worth Sh8.8 billion.

Mr Kirubi and Centum have agreed to sell their 9.58 per cent and 13.75 per cent stakes respectively to Old Mutual Holdings at a time when the government has reinstated the capital gains tax at a rate of five per cent.

The formula for calculating the tax due on specific transactions has, however, remained a contentious issue, even as both the Treasury and the Kenya Revenue Authority (KRA) have remained firm on the new levy arguing that it remains ready to issue guidelines on any specific transactions that may be contentious.

“We will give to Caesar what belongs to Caesar,” said Mr Kirubi, while declining to discuss details of the amounts payable.

The main issue of contention could be the effective purchase price of UAP shares by Centum and Mr Kirubi, given that both have increased their stakes at different times over the more than one decade that they have held the stock. The tax consultant, who Centum declined to disclose, will be expected to agree with KRA on the purchase price applicable for purposes of calculation of the levy.

According to the UAP annual statement for 2005, Centum’s original investment in UAP was Sh157.9 million.

Mr Kirubi is said to have held the UAP shares for close to 15 years, but the Business Daily could not get records of his purchase price.

In 2007, UAP reorganised its shareholding structure, forming a holding company that ultimately owned the insurance and other financial services units under the group.

The two parties were part of shareholders who were diluted 43 per cent in 2012 when UAP raised a total of Sh5.3 billion by selling shares to the public and convertible loans to PE firms.

The UAP shares were sold at Sh60 each during the public offer, compared to the current over-the-counter market price of Sh140.

The transaction price revealed on Friday by Old Mutual implies that Centum and Kirubi sold their stake at about Sh180 per share.

All these are scenarios that the KRA will take into account when calculating the capital gains tax due, which is nevertheless expected to amount to millions of shillings.

READ: Kirubi earns Sh2.8 billion from sale of UAP Holdings stake

Both Centum and Mr Kirubi have seen the value of their stakes surge, fuelled by UAP’s increased profitability on the back of expansion in the East African region.

The selling price represents a capital gain of about 33 times for Centum’s original investment, excluding dividends earned over the years.

The capital gains tax applicable from January 1 applies on sale of property, shares and treasuries.

The law allows the deduction of costs such as legal fees from the selling price, which helps to reduce investors’ tax liability.

Centum’s consultant is expected to advise the firm on the full extent of its allowable deductions as per the Income Tax Act.

The taxman has the discretion to determine what costs are “just and reasonable”. KRA says transferors like Centum and Mr Kirubi have the responsibility of proving their cost of acquisitions and should provide such information.

“However, in instances where this information is not available, then the amount of the consideration for the acquisition of the property shall be deemed to be equal to the market value of the property at the time of the acquisition,” the taxman said in a statement.

Mr Kirubi’s gross receipts —omitting the impact of the capital gains tax — will stand at Sh3.6 billion while Centum will earn Sh5.2 billion.

Old Mutual said the acquisition, which will see it emerge as the single largest investor in UAP with a 23.33 per cent stake, is in line with its continental expansion plans.

“This investment is another significant step in delivering the group’s aim of becoming an African financial services champion,” said Old Mutual emerging markets chief executive Ralph Mupita in a statement.

“UAP is an ideal and complementary fit to our existing Kenyan businesses and we look forward to deepening and broadening our relationship in the future.”