President Uhuru signs into law 5 per cent capital gains tax

President Uhuru Kenyatta has signed into law a five per cent capital gains tax that investors say could affect investment in property, equities and the country's nascent oil and mining sectors.

The Finance Bill approved by Parliament in late August will take effect on January 1, changing how taxes are levied in the country, the presidency said in a statement on Sunday.

The Government is trying to raise funds for development projects to spur economic growth and create jobs, but analysts say such taxes could deter foreign investors.

The plans for a capital gains tax were first announced in the June 2013 budget, leading to a sharp decline in share prices as investors fretted the tax might sap the appeal of equities. The shilling also came under pressure, reflecting concerns about possible damage to the economy.

"It will have an effect, especially on equities and fixed income. Paying taxes is not something people enjoy doing. It complicates a lot of things. So I would say yes, it would really affect how foreign investors view the market," a senior fixed income analyst at one investment bank said yesterday.

Capital gains tax was dropped by the country in the mid-1980s to attract foreign and local investment. "I think given the fact that it is optically such a low number, and keeps Kenya at the bottom of capital gains tax... we'll look through this and move on," said Aly Khan Satchu, independent analyst.

"If... they are thinking of putting it higher, then I think we are in a little different situation."
Tanzania, the region's second-biggest economy charges a capital gains tax at 20 per cent for foreign-owned firms and 10 per cent for residents. Uganda has a capital gains tax of 30 per cent while nearby Mauritius does not tax capital gains.

National Treasury Cabinet Secretary Henry Rotich said he expects the economy to grow by 5.8 per cent this year from 4.7 per cent last year, driven by plans for new railways, roads and airports. Rotich set spending for the financial year starting on July 1 at Sh1.581 trillion in his budget speech in June, saying the capital gains tax would apply to mining, gas, oil exploration and extraction operations.

Under the new law, a firm acquiring a stake in mineral blocks or oil exploration blocks will pay a premium tax, or net gain tax, on the value of the transaction.

Rotich and other Treasury officials were not available to give details of how the tax would be applied or how much it could raise annually. Analysts estimate Kenya could rake in an additional $85 million (Sh7.6 billion) a year. -Reuters