Markets & Finance

Treasury targets capital gains tax in Finance Bill

treasury

The National Treasury building in Nairobi. Photo/Salaton Njau

Deals involving stakes in oil and other mineral blocks will for the first time be subjected to capital gains tax as the Treasury looks for ways of extracting more revenue from natural resources.

The Finance Bill 2014 proposes that a firm acquiring more than 50 per cent stake in mineral blocks would pay a premium tax, technically called net gain tax, on the value of the transaction after deducting attendant costs.

“The amount of net gain to be included in income chargeable to tax is if the interest derives more than 50 per cent of its value from immovable property in Kenya, the full amount of net gain,” said the gazette notice.

Analysts view this as testing of the waters before possible gradual introduction of capital gains tax in other sectors, including real estate.

“The law is targeting capital gains in those transactions in the mineral sector, including oil and gas even though it doesn’t call it capital gains tax,” said Fred Omondi, a tax partner at Deloitte East Africa.

“We have had only withholding tax imposed on the transactions, but now capital gains tax will apply as well.”

The withholding tax on dividends from mining operations will also be raised from 10 per cent to 20 per cent if the Finance Bill is passed by Parliament without amendments

Where the net gain is less than 50 per cent and the stake less than 50 per cent, the income tax payable will be determined by a formula that takes into account the stake sold and the value of the block.

Mr Omondi said the Treasury might have found it prudent to introduce the controversial levy indirectly through the Income Tax Act. There is no legal framework for capital gains tax, which was suspended in 1978 to spur growth of the money markets and the property sector.

Recent attempts to introduce it in Parliament have met with stiff resistance from legislators, suggesting intense lobbying by investors who stand to lose the most from the tax.

The Treasury has been keen to re-introduce the tax to increase revenues from the growth seen in the real estate market as well as in the trading of securities at the stock exchange.

READ: PineBridge warns capital gains tax to halt NSE bull run

Kenya is taking a cue from Uganda where income tax has been imposed on sale of shares in oil and gas companies after significant discoveries were made some seven years ago.

“Income upon which tax is chargeable under this Act is income in respect of disposal of an interest in a person, if the interest derives 20 per cent or more of its value, directly or indirectly, from immovable property in Kenya; and a natural resource income,” said the Kenya Gazette supplement.

Experts said the target was transactions that have taken place in Kenya with major oil and gas explorers selling various stakes to foreign firms.

UK oil explorer Cove Energy got into trouble in 2012 after the Kenya government demanded more than Sh3 billion in taxes after the company sold five oil blocks in the Lamu Basin following its acquisition by a Thai company PTT Exploration & Production. Cove Energy had sold assets in Kenya and Mozambique worth $1.9 billion (Sh153 billion).

The government wanted the UK firm to remit the money equivalent to 30 per cent of the valuation of the blocks.