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Government Plans To Impose 15% Tax On Interest From Infrastructure Bonds

The Kenyan government plans to impose a tax of up to 15% on interest from infrastructure bonds, a move that could negatively affect foreign currency inflows for these popular securities.

According to the Finance Bill 2024, domestic investors will face a 5% withholding tax, while foreign investors, who typically bolster the local currency with their tax-exempt investments, will be taxed 15% if the bill passes, tax experts suggest.

Under pressure from an International Monetary Fund program to boost revenue, Kenya is implementing measures such as rolling back previous tax incentives and broadening the tax base.

These reforms have stirred public dissatisfaction, with many Kenyans fearing that the additional revenue will be wasted or embezzled by corrupt officials in President William Ruto’s administration.

While the tax rate for domestic investors is clearly specified in the proposals, the 15% rate for non-residents is inferred from the removal of the tax-exempt status, according to Mbiki Kamanjiri, a tax manager at Grant Thornton Kenya.

“With no reduced rate being provided for non-residents, the applicable withholding tax rate will be 15%,” Kamanjiri explained.

Daniel Ngumy, managing partner and head of tax at Anjarwalla & Khanna, a Nairobi-based law firm, suggests the proposal might be an error in the bill’s drafting, as it fails to specify a withholding tax rate for non-resident interest income. “We hope it will be clarified in due course,” he said.

Conversely, Andrew Oduor, tax partner at Bowmans, believes non-residents may continue to enjoy current exemptions.

Bonds issued before the proposed taxes take effect will remain exempt, according to the bill.

The disparity in tax rates might lead the government to favor more foreign bids, noted Churchill Ogutu, an economist at IC Asset Managers. This could provoke public backlash if foreign investments are prioritized over local funds, he warned.

Despite the new tax, demand from resident investors may remain strong, as the 5% withholding tax is still lower than the 10% or 15% charged on other bonds, Ogutu added. Local investors are likely to be indifferent to the 5% tax due to its relative attractiveness.

In its most recent offering, Kenya received bids exceeding four times the amount initially sought. The 8.5-year tax-free bonds carried a coupon of nearly 18.5%.

“Infrastructure bonds have always been attractive to Kenyan investors due to the tax-free nature they have enjoyed in the past,” said Kamanjiri. “The effect of this proposal will remain to be seen.”

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