The UK government has earned Sh13 billion (€110 million) in capital gains tax from Vodafone’s recent swap of Safaricom #ticker:SCOM shares with its African subdsidiary Vodacom, fresh regulatory filings show.
The transaction comes barely two years since Kenya scrapped capital gains tax on stock market trading, helping the UK multinational to legally sidestep local tax authorities.
The British telecommunications giant on August 7 transferred its 35 per cent stake in Safaricom, held in the investment vehicle Vodafone Kenya Limited, to its South African-listed subsidiary, Vodacom, in exchange for 233.5 million new shares in the Johannesburg-based firm.
This saw the multinational book major capital gains, part of which it realised on September 7 by selling 90 million of the new Vodacom shares for €962 million (Sh115 billion) on the Johannesburg Stock Exchange (JSE).
“Half year ended September 30 2017 includes a tax charge of €110 million (Sh13 billion) in respect of capital gains on the transfer of shares in Vodafone Kenya Limited to the Vodacom Group,” the UK multinational says in the regulatory disclosure made on Tuesday this week.
The tax paid to the UK government points to the windfall that the Kenya Revenue Authority (KRA) would have booked had the transactions been done locally, and if the capital gains tax on listed shares was still in force.
Kenya re-introduced the capital gains tax effective January 2016 but its application on publicly traded firms was abolished later in the year after challenges of its collection and fears of driving away stock market investors marred its implementation.
The partial scrapping of the tax marks the second time it has faced hurdles after it was suspended in 1985.
Going by the five per cent rate, the KRA would have collected more than Sh10 billion if Vodafone had traded its Safaricom shares in the local market, assuming it retained the same percentage charge.
The UK’s tax authority, HM Revenue & Customs, charges companies a capital gains tax of 20 per cent.
Vodafone booked a capital gain of more than 2,000 per cent on the transaction, benefiting from Safaricom’s profit growth over the years.
The Nairobi Securities Exchange-listed firm went public in 2008 with a book value of Sh36 billion, with the UK firm’s share of that standing at Sh14.4 billion.
Safaricom’s market value has rallied to hit Sh1 trillion, valuing the 35 per cent stake Vodafone transferred to its South African subsidiary at Sh350 billion. Vodafone retains a five per cent stake in Safaricom.
The multinational says tax planning plays a significant role in its commercial decisions across its operations.
“Vodafone believes its obligation is to pay the amount of tax legally due in any territory, in accordance with rules set by governments. In so doing it is not able to determine the ‘fair’ amount of tax to pay,” the company says in its tax policy.
“It is not appropriate for the details of the group’s tax affairs to appear in the public domain. Vodafone will, however, only enter into transactions which would be fully justifiable should they become public.”
Vodafone says it pays billions of shillings to the KRA through Safaricom and other related entities. The multinational said it paid direct taxes to the Kenyan government of £71 million (Sh9.6 billion) in the year ended March 2016, up from £61 million (Sh8.2 billion) the year before.
Its non-tax revenue contribution, however, declined to £10 million (Sh1.3 billion) from £11 million (Sh1.5 billion) over the same period.
Other Vodafone entities operating in Kenya are M-Pesa Holding Co. Limited and Vodacom Business (Kenya) Limited.
Kenya’s scrapping of capital gains tax means the country will continue to miss out on revenue collection from future mega transactions on the Nairobi bourse.
Billionaire entrepreneur Peter Munga, for instance, has made public plans to sell 452.5 million shares of insurance group Britam #ticker:BRIT by July next year.
Businessman Naushad Merali has also previously announced plans to sell a 14.9 per cent stake in tyre distributor Sameer Africa #ticker:FIRE to a strategic investor over an undefined period.
Lucrative deals on which the KRA did not collect capital gains tax include private equity firm’s Helios’ sale of Equity Group shares for Sh50 billion, booking a gain of more than 300 per cent.
Equity Group #ticker:EQTY also sold its 24.7 per cent stake in mortgage financier HF Group #ticker:HFCK to Britam for Sh2.7 billion, pocketing all the gain of more than 400 per cent.