KRA now demands capital gains tax from stockbrokers

Kenya Revenue Authority has given stockbrokers 14 days to pay millions of shillings in capital gains tax accumulated since January.

In a letter dated April 30, 2015, the taxman ordered the stockbrokers to submit records and the money collected as capital gains tax (CGT) from the stock market trade since the beginning of the year. The letter was sent to all stockbrokers and investment banks.

“Please note that to date, we have not received any returns on capital gains tax on transfer of investments shares conducted by you with effect from January 1, 2015, as required in paragraph 18 of the eighth schedule to the Income Tax Act,”  read the letters signed by KRA commissioner of domestic taxes, Ms Alice Awour, and copied to the Kenya association of Stockbrokers and Investment Banks (Kasib).

“You are hereby given 14 days’ notice from the date of this letter to submit all outstanding taxes from January 2015 to April 2015 to avoid any enforcement action being taken without further reference to you.’’

The notice, which expired on Friday, last week, is likely to set up another round of war between the taxman and the stockbrokers.

Stockbrokers have insisted that the five per cent tax payable on capital gain on sale of shares and bonds is impractical and that if anything, it should be paid by the investors and not the agents.

PAID IN COMMISSION

Under their umbrella body, Kasib, the stockbrokers went to the High Court but lost round one of the case. The matter is now pending in the Court of Appeal. The court case followed a similar letter sent on February 25.

Talks brokered by Capital Market Authority (CMA) have since faltered. Stockbrokers are, however, of the opinion that the taxation is unworkable.

“How can we be asked to submit tax when half of the trading at NSE are done by custodians, who simply pay us commission? There are better ways the government can make money from the stock market, not this one,” Kasib chief executive Willie Njoroge said.

He noted that they are ready and willing to pay tax, but they find it impossible to implement the CGT because of logistical difficulties.

CGT was re-introduced by the Finance Act, 2014 and imposes a 5 per cent tax on gains made from the transfer of property including land, buildings and investment shares.

The taxman defines a capital gain as the excess of the transfer value over the adjusted cost of the property that has been transferred — “sold, exchanged, conveyed or disposed of in any manner; or on the occasion of loss, destruction or extinction of property; on the abandonment, surrender, cancellation or forfeiture of, or the expiration of rights to property”.

Last week, Ms Owuor said the taxman had made crucial gains contrary to earlier media reports that it would miss its target by a huge margin.

“KRA is glad to confirm that to date, the CGT collections stands at Sh381 million against the revised estimates figure of Sh200 million. This, means that KRA has exceeded the target of Sh200 million by 190 per cent,’’ Ms Owuor said.

The amount is largely from other property transfers and almost nothing has come from stockbrokers. This would put pressure on both KRA and the NSE players to effect the taxation on the success of the other markets.

Kasib says the calculation of the gains made in the 3,000 daily transactions at the NSE will require huge human capital and is bound to hamper trading and discourage investors.

Mr Njoroge said the proposal to have KRA collect levies just like Nairobi Stock Exchange and the Capital Markets Authority do is the most convenient option.

HUGE SETBACK

He said stock market traders still record lower profit than the mid-tier banks and would not survive the extra expenses associated with the paperwork, research, calculations and administration of the CGT.

A similar suggestion had been fronted to the taxman earlier this month with stockbrokers and investment bankers proposing a 0.12 per cent levy on all deals concluded at the NSE exceeding a value of Sh100,000, which would earn the exchequer at least Sh517 million each year.

“Some of our members have even tried doing the calculations with clients and it is just not possible. This is simply taking us back to the analogue era where papers are filled in triplicate. This is a world where business is fast moving and choices are wider and decisions are made faster,” he said.

“We have given KRA all the documents and if they can calculate the tax associated with the transactions, let them tell us how much we should tax from who.’’

The stock market traders’ umbrella body  also faults calculation of the adjusted cost in determining the capital gains. Kasib maintains that while some traders have bought shares using loans, the costs incurred in acquiring the loans, the interest incurred and other cost related factors are details held solely by the individual trader.

It is therefore hard to ascertain the  gain to be taxed since brokers cannot compel traders to disclose the details in the first place.

“If an individual borrows to buy shares, then sells them, how can I tell the costs incurred so as to determine the tax to collect from him/her? If they don’t disclose the truth, who is liable?

What about cases where they have bonus shares, inherited shares or shares given for free, shall we have a gain calculated from the zero cost of acquisition? We are stockbrokers, not tax experts,” Mr Njoroge added.

The adjusted cost, according to the taxman, is the “sum of the cost of acquisition or construction of the property, expenditure for enhancement and preservation of the property; cost of defending title or right over property, if any; and the incidental costs of acquiring the property”.

The stockbrokers view the move as a huge set back to the NSE, which traded an average of Sh36 billion worth of equities and Sh84.4 billion of bonds per month in 2014. This, they say, will not allow them to meet their objective of giving quick gains to investors.

TAXMAN'S ULTIMATUM

“We want to get to a point where you can buy and sell in a few hours then take your gains on the same day. This will even lengthen our three days turnaround to eight or 10. No country in the world tasks stockbrokers to calculate, collect and remit CGT on stock trading,” Kasib boss.

“We will be the second in the whole continent and Kenya is not likely to meet the aim of being a regional investment hub.’’

The brokers will this week expect  a ruling on its application filed in the High Court seeking a revision on an earlier judgment regarding their application to bar the taxman from demanding capital gains tax for some time.  A stay order issued earlier had expired even though another case is in the Court of Appeal to seek the extension of the stay orders. The Court of Appeal case is also scheduled for next week.

The ride to CGT implementation has been a rough one with stock market investors at one point threatening to suspend operations at the NSE for close to a month to protest KRA’s modalities of collecting the tax.

The potential loss in billions of shillings in revenue was stopped by CMA, which intervened leading to the formation of a taskforce comprising the stockbrokers, the NSE, Central Depository and Settlement Corporation, Kenya Bankers Association, CMA  and Kasib.

The taskforce has only met a few times. Kasib’s move to court is said to have made discussions difficult with KRA, with the taxman saying it cannot engage on a matter that is in court.

With Friday’s expiry of the taxman’s ultimatum, the week is likely to be an interesting one with many questions as to whether the taxation on stock market deals will finally take off.

The financial year also comes to an end in under two weeks and the tax agency could also be engaged in a race against time to beat revenue collection targets. The government’s increased expenditure has put KRA under pressure to collect revenue required to sustain its big budget and massive infrastructural plans.

In the region, Tanzania charges CGT at 20 per cent for foreign-owned firms and 10 per cent for residents; Uganda has a capital gains tax of 30 per cent. The two countries, however, do not tax gains made from the stock market trading.

African Securities Exchanges Association added its voice to the controversy last year when it termed taxation of proceeds from the sale of shares, debt instruments and properties as impediments to the growth of securities exchanges on the continent.

In Kenya, CGT, was introduced in 1975 but scrapped in 1985 for 30 years before being introduced this year amidst the controversy of who should collect it.

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GUIDELINES 

Taxman’s guide to collection of property levy

Kenya Revenue Authority gave guidelines on capital gains tax in January which  address issues surrounding its implementation:

How do you tell the buying price to calculate the gains if one bought shares at different times, different prices and then sold them at once?

KRA in its CGT guide says where a pool of securities acquired at different dates and at different prices are sold, the adjusted cost will be computed on a first in–first out (FIFO) basis. However, the commissioner may give further guidance on a case-by-case basis. This means the first price of purchase is applicable.

The records will have to be obtained from either the trader, the NSE or the Central Depository and Settlement Corporation. 

At what point do we say a property has been transferred and is subject to CGT?

When a property is sold, exchanged, conveyed or disposed of in any manner (including by way of gift); or where there is a loss, destruction or extinction of property whether or not compensation is received; or when one abandons, surrenders, cancels, forfeits or their rights to property expires.

When should this tax should be submitted?

CGT is a transaction-based tax and should therefore be paid upon transfer of property but not later than the 20th day of the month following that in which the transfer was made.  Where a transfer date is different from the settlement date, then the transfer date will be the tax point in line with International Accounting Standards. 

What if I transfer and end up with a loss?

Capital losses are deductible against Capital gains in the year of income the losses are made and if not exhausted may be carried forward and deducted from capital gains in subsequent years of income according to Section 15(3)(f) of the Income Tax Act.

The four-year limitation for carrying forward of losses is applicable. A taxpayer may apply for extension of the period for carrying forward losses upon expiry of the four years. The application will be considered by the commissioner and a recommendation made to the Cabinet Secretary. The traders can therefore file for a loss and expect no deduction just like any other tax.

What are some of the circumstances when one is exempted from CGT?

When one makes income that is taxed elsewhere in the case of property dealers; a company issuing its own shares and debentures or when one is disposing a property for purpose of administering the estate of a deceased person.

CGT is also not demanded in transfer of machinery including motor vehicles, transfer of individual residence occupied by the transferor for at least three years before the transfer, compensation by government for property acquired for infrastructure development, transfer of asset between spouses as part of divorce settlement, sale of land by an individual where the proceeds is less than Sh30,000 and sale of agricultural land by individuals outside gazetted townships where the property is less than 100 acres.

It is also not demanded in the exchange of property necessitated by incorporation, recapitalisation, acquisition, amalgamation, separation, dissolution or similar restructuring involving one or more companies which is certified by the Cabinet Secretary to have been done in the public interest will also be exempted.

Local retirement benefits scheme registered with Commissioner can also transfer investment shares without paying CGT.

THE NUMBERS 

Sh381m 

Capital gains tax the KRA says it has collected this year, surpassing the target of Sh200m by 190 per  cent.

3,000 

Number of daily transactions at the Nairobi Securities Exchange. Stockbrokers say the huge number of transactions make it difficult for them to collect capital gains tax.

5 

Percentage levy  on transfer of property including land, buildings and investment shares imposed as capital gains tax.