Kenya’s 15% Infrastructure Bond Tax May Dent Foreign Demand
- Proposes 5% tax for domestic investors, 15% for foreigners
- Inflows often boost nation’s forex holdings and currency
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The Kenyan government plans to start taxing interest from infrastructure bonds by as much as 15%, a move that could hurt foreign-currency inflows for the popular securities.
Domestic investors will pay 5% withholding tax, according to the Finance Bill 2024, which contains a raft of proposed measures for financing the coming fiscal year’s budget. Foreigners, whose investment for the tax-exempt paper often boosts the local currency, will pay 15% if the bill passes, according to some tax experts.
Kenya is under pressure from an International Monetary Fund program to increase its revenue through several measures including rolling back past tax incentives and widening the net for taxpayers. The reforms have made the government of President William Rutodeeply unpopular, with many Kenyans arguing the additional income will be spent wastefully or siphoned by corrupt leaders.
While the rate for domestic investors is explicitly set in the proposals, the corresponding rate for non-residents is implied given the bonds will no longer be tax exempt, according to Mbiki Kamanjiri, a tax manager at Grant Thornton Kenya.
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“With no reduced rate being provided for non-residents, the applicable withholding tax rate will be 15%,” he said.
The proposal may be “an error in the drafting of the bill, whereby there has been a failure to provide a withholding tax rate for non-resident interest income,” according to Daniel Ngumy, managing partner and head of tax at Anjarwalla & Khanna, a Nairobi-based law firm. “We hope it will be clarified in due course.”
Another view is that non-residents will continue to enjoy current exemptions, according to Andrew Oduor, tax partner at Bowmans.
Foreigners Favored
Infrastructure bonds issued before the proposed levies become law will remain exempt, according to the bill.
The variance in tax could see the government accepting more foreign bids, according to Churchill Ogutu, an economist at IC Asset Managers. There could be public push-back if foreign investment is favored over local cash, he said.
Demand from resident investors could stay high as the new tax is still more attractive than what’s charged on regular bonds, according to Ogutu. Local investors will be agnostic toward the 5% withholding tax because it is lower than the 10% or 15% they pay on other notes, he said.
In its most recent offer, Kenya received bids that were more than four times what it initially sought. The 81/2-year tax-free bonds carried a coupon of almost 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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