Sunday, 22 December 2013

Resurrection of Capital Gains Tax (CGT) in Kenya

Government's position


In June 2013, Henry Rotich, cabinet secretary for Kenya’s National Treasury, informed the Budget and Appropriations Committee of the National Assembly that the government had initiated a review of the capital gains tax under the Income Tax Act as part of a plan to reintroduce the CGT, which had been suspended more than 25 years earlier.

The cabinet secretary recently disclosed that the government has firmly committed to the international financial institutions to reintroduce CGT, at least on real estate. 

CGT suspended in 1985


While the charging section for the CGT (section 3(2)(f) of the ITA) is still in force, the operation of the eighth schedule to the ITA, under which capital gains are computed, was suspended in 1985 to spur investment in the capital markets and the real estate sector.

The easiest way to reintroduce the CGT would be to lift the suspension on the eighth schedule to the ITA. Alternatively, the government might introduce new regulations that are in line with current policy but incorporate recent trends in taxation.

Following is an outline of the provisions of the suspended legislation.

Rates of CGT


CGT is levied at the rate of 10 percent of net gains. However, capital gains from marketable securities held by individuals and listed on the securities exchange are taxed at 7.5 percent.

Subsection 3(2)(f) (capital gains) of the ITA is a fallback provision. Income is taxed under subsection 3(2)(f) only if it is not taxable under any other provision of the ITA. 

For example, if a taxpayer is engaged in the trade of buying and selling property, the resulting gains are taxed as business profits under subsection 3(2)(a). Depreciable capital machinery subject to balancing charges or deductions is not subject to CGT.

Who pays CGT?


Corporate and non-corporate persons (individuals and partnerships) both are subject to CGT, as are membership clubs and trade associations. 

The scope for CGT is wider for corporate organizations than individuals, however. For corporate entities, the CGT applies to real property, movable property, goods, money, and rights to property, whether the property is part of the business assets or is held for investment purposes. 

Individuals pay the tax only on gains from real property and marketable securities.

If property is held by trustees, nominees, or liquidators, they have the obligation to account for tax on any gains arising from the transfer of the property.

Subject matter


Land is defined widely to include buildings, standing timber, trees, crops, and land covered by water.

Capital gains are taxed at source. Marketable securities issued by the government, a municipal authority, or government authority are deemed to be situated in the country in which the authority is situated. 

Other marketable securities are deemed to be situated in the country where they are registered or where the principal register is located.

The taxable value for CGT purposes is the transfer value less the adjusted cost. The gain or loss is deemed to be realized at the time of the transfer even if the consideration is paid in installments.

The adjusted cost includes acquisition and construction costs, the cost of enhancing or preserving the value of the property, incidental costs, and the cost of defending title to the property. Incidental costs include legal fees; stamp duty; mortgage costs; and sales, advertising, and valuation costs.

Bad debts incurred in connection with the transfer of property can be deducted against trading income. 

CGT trigger 


A transfer occurs when a property is sold, exchanged, lost, abandoned, surrendered, or given as a gift, whether for consideration or not. There is no transfer if property is used to secure a debt, a company issues its own shares/debentures, or property is transmitted to heirs or is vested by a trustee to the beneficiary.

The tax authority may adjust the transfer price if it is not at arm’s length, if no consideration was paid, or if the consideration cannot be valued. In those cases, the market value is deemed to be the transfer price.

Transfers involving the exchange of properties necessitated by corporate restructuring and reorganizations are exempt from CGT subject to government approval.

Implications


The reintroduction of the CGT will undoubtedly cause investors to look for tax planning alternatives, including the recently introduced real estate investment trust regime and succession planning.



by Starlings Muchiri



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