Kenya: Can the increase of capital gain tax deter investors?

In a move to enhance the country's revenue, Kenya's Finance Act of 2022 recently amended the Income Tax Act by raising the rate of capital gains tax from 5% to 15%. This adjustment, set to be effective from January 1, 2023, has sparked discussions on its impact on the investment landscape in the country, with some questioning whether it will attract more investors or serve as a deterrent. Alex Kanyi, a Tax Partner at Cliffe Dekker Hofmeyr, sheds light on the implications of the tax hike. Kanyi notes that the increase in the capital gains tax rate was not entirely unexpected, as neighboring East African countries had already set higher rates for the tax. He explains that the amendment targets gains made from the transfer of properties, assets, and shares, with the added revenue serving as a means to broaden the tax base. Despite proposals to reconsider the 15% rate and lower it to 10%, Kanyi emphasizes that the law is already in place and unlikely to change. Comparing Kenya's capital gains tax rate to other African nations, Kanyi highlights that at 15%, Kenya still remains relatively competitive. Countries such as Uganda, Tanzania, and Rwanda have set their rates at around 30%, while nations like Botswana, Egypt, Ghana, and South Africa range from 20% to 25%. Additionally, Kenya's attractive business environment, currently ranked fourth in Africa for ease of doing business, continues to draw investors to the region. Amid the economic challenges posed by the COVID-19 pandemic and global oil price fluctuations, Kanyi believes that businesses are resilient and will continue to seek out favorable investment destinations. He argues that while the tax increase may present a hurdle, it is not substantial enough to deter investors, especially when compared to higher rates in other African nations. In essence, Kenya's investment landscape is expected to remain robust despite the changes in the capital gains tax. When asked about alternative approaches the Kenyan government could have adopted, Kanyi suggests a gradual increase aligned with inflationary adjustments. By incrementally raising the tax rate in line with inflation, businesses would have had time to adapt, and the rationale behind the hike would have been more straightforward to explain. This approach could have provided a smoother transition for taxpayers and potentially reduced the impact of the tax hike on investment decisions. In conclusion, Kenya's decision to raise the capital gains tax rate to 15% raises questions about its intended effect on revenue generation and investor sentiment. While concerns linger about the abrupt nature of the increase, the country's overall business-friendly environment and comparatively lower tax rate position it favorably in the eyes of investors. The coming months will reveal the true ramifications of the tax adjustment and whether it succeeds in balancing fiscal objectives with investor confidence.