Interest earned from future infrastructure bonds with tenures of at least three years will for the first time attract withholding tax at a rate of five percent if proposals in the Finance Bill 2024 sail through Parliament.
The infrastructure bonds (IFBs) have been tax-free since they were first issued in February 2009.
The National Treasury has now proposed taxing income from the bonds.
This means that interest accruing from already issued infrastructure bonds will remain exempt from withholding tax. “In respect of interest arising from a bond, note or other similar security that has a maturity of at least three years and used to raise funds for infrastructure and other social services, five percent,” reads the Bill.
Other regular Treasury bonds are subjected to withholding tax at the rate of 15 percent for papers maturing within five years and 10 percent for those with a tenor of more than five years.
Infrastructure bonds are used for specified infrastructure projects with their tax-free status helping drive high investor interest.
Infrastructure bonds labelled as green bonds shall, however, remain exempt if they have tenures of at least three years.
The draft Kenya green bond programme describes them as instruments whose proceeds are earmarked for projects with environmental benefits, mostly related to climate change mitigation or adaptation.
The government is, however, yet to issue a sovereign green bond as it finalises on a framework to guide the floating of the instrument.
Slapping withholding tax on interest from IFBs could reduce their attractiveness even as the tax rate at five percent remains relatively lower compared to regular bonds.
Investors could meanwhile shun infrastructure bond issues for green bonds when they are launched.
At present, the Central Bank of Kenya (CBK) occasionally issues the tax-exempt infrastructure bonds which it describes as a very "attractive investment".
The CBK’s last infrastructure bond issue came in February when it raised Sh240.9 billion against a target of Sh70 billion with the auction registering heavy interest from foreigners.
Bids for the IFB stood at Sh288.6 billion, representing an oversubscription of more than three times.
Buyers of the paper are earning a return of 18.4607 percent, with the issue representing one of the highest grossing instruments this year.
The interest seen in the paper’s primary market has followed through to the secondary market where the paper has a huge demand.
