A change in law on taxation of gains made from the sale of assets is turning into a nightmare for investors involved in multi-billion shilling deals, with a number of tycoons locked in a bruising legal battle with the Kenya Revenue Authority (KRA).
The Treasury in 2022 announced it was tripling the capital gains tax (CGT) to 15 percent from five percent, in line with international standards, with effect from January 2023.
CGT is normally paid on the profit or gains made by investors when they sell, give away, or dispose of an asset, such as unquoted shares or property like homes, land or buildings.
The early announcement by the Treasury prompted investors in the middle of deals to pay the five percent tax in 2022 -- ahead of its start date and before fully completing the transactions – to allegedly avoid paying the 15 percent in 2023.
But the KRA reckons that the tax is paid upon transfer of the assets, and is therefore demanding a higher duty that took effect in 2023.
Companies associated with the founder of Nice & Lovely, Paul Kinuthia, textile billionaire Jaswinder Bedi, politician Peter Kenneth and city lawyer Ambrose Rachier, are among those that paid CGT at the rate of five percent by December 2022, only for the taxman to surprise them with additional tax demand.
The KRA accused these companies of underpaying CGT as most of the deals were completed in 2023 when the changes in the Finance Act 2022 became effective.
Investors whose companies had been caught in the tripwire of this legal change include Nairobi tycoon Amos Gichuki Ngonjo and Nishil Kumar and two other shareholders of drugs distributor Harleys, which was sold to a subsidiary of Mauritian conglomerate IBL Group for Sh3.69 billion.
Mr Kinuthia, who had interests in SportPesa, is the latest to join the growing list of billionaires locked in a fight with the KRA at the tax tribunal over the timing of capital gains tax payments after selling prime land in Nairobi.
However, the KRA insists the transfer of the land by Mr Kinuthia’s Cellini Holdings to Gran Movimiento was completed in April 2023, and that a capital gains tax of 15 percent should be paid on the Sh150 million land deal.
Mr Kinuthia paid five percent tax in 2022 and is fighting the 15 percent claim at the Tax Appeals Tribunal.
He made a fortune in 2013 after selling Nice & Lovely to cosmetics giant L’Oreal for an estimated Sh1.5 billion.
On April 4, the tax appeals tribunal dismissed an application by a company associated with the textile billionaire Jaswinder Bedi that sought to reverse the 15 percent demand on a Sh862,252,800 property sale in Nairobi’s Industrial Area.
The KRA is demanding Sh55,336,006 in unpaid CGT and interest. Mr Bedi’s Spinners told the tribunal that it computed and remitted CGT of Sh26 million to the KRA, using a five percent rate.
It was a double blow for Mr Bedi asthe tribunal agreed with the KRA that Spinners had also under-declared the exchange rate for the deal and tax payments.
The textile firm used a lower conversion rate of Sh120 to the dollar that prevailed in December 2022 rather than a higher one of Sh140.37 in July 2023 when the transfer and payment were done.
In June last year, Rupen Mulchand Haria, one of the three shareholders of drugs distributor Harleys, appealed to the tax appeal tribunal against the KRA’s demand for an additional Sh416,966,484 in unpaid CGT on stake sale to a subsidiary of Mauritian conglomerate IBL Group, which also owns part of Naivas Supermarket.
Mr Mulchand told the tribunal that they paid a lower CGT of five percent before the transfer of the 5,910,000 shares to IBL’s Elgon Healthcare had been finalised because payment of taxes in Kenya, including CGT, is self-declaratory and not by registration.
Making payment of taxes self-declaratory is a way for sellers to avoid paying higher taxes, argued Mr Mulchand.
However, the tax appeal tribunal dismissed the argument, noting that the High Court had declared paragraph 11 of the Eighth Schedule of the Income Tax Act (ITA), which allows self-tax assessment, unconstitutional regarding capital gains tax.
Paragraph 11 A of the Eighth Schedule, which Mulchand relied upon, requires that CGT be paid upon an agreement between the buyer and seller on an asset as opposed to upon registration of the transfer.
Essentially, the provision allows for tax to be paid before the transfer.
However, the High Court on March 14, 2017, declared the provision unconstitutional because “it purports to impose an obligation on a taxpayer to pay capital gains tax on or before presenting the transfer instrument for registration, instead of, upon registration of the transfer instrument in favour of the transferee (buyer).”
“Consequently, and given the foregoing case law, it is clear that the Appellant (Haria) based its assessment of CGT made in December 2022 on a statutory provision which had since been declared unconstitutional by the Constitutional Court,” said the tribunal in a ruling rendered on June 28, 2024.
While upholding the KRA’s decision to demand an additional Sh416,966,484 in capital gains tax for the sale of Harleys’ shares to the Mauritian company, the tribunal noted that the point for payment of CGT is upon registration of the transfer.
The KRA had also demanded from 37 shareholders of Mayfair Bank, including former presidential candidate Peter Kenneth, additional tax for the sale of the final 49 percent stake in Mayfair CIB Bank to Egypt’s Commercial International Bank (CIB).
Shareholders who sold their remaining stakes in Mayfair to CIB, including lawyer Ambrose Rachier and city tycoon Amos Gichuki Ngonjo, the taxman noted, paid CGT amounting to Sh139.95 million instead of Sh419.9 million.
The KRA noted that its analysis of capital gains tax data had revealed that the Mayfair shareholders, who pocketed $40 million (Sh5.18 billion), paid CGT in December 2022 while the transaction was completed in 2023.
Mr Kenneth has since disclosed that they struck an agreement with the KRA for the payment of the CGT balance.
The KRA also demanded Sh339.4 million in unpaid CGT following the acquisition of IX Africa Data Centre Limited, a technology firm that offers data centre facilities. The shares were bought by Lion Investment Bidco Limited, a local investment firm.
IX Africa shareholders, the KRA noted, paid capital gains tax of Sh169.7 million instead of Sh509 million after backdating the transaction date.
Virtually all these sellers have accused government entities such as the Ministry of Land of dragging their feet in signing the transfer documents, occasioning the higher tax exposure.
Capital gains tax, which was dropped in the mid-1980s to attract investments, was reintroduced on January 1, 2015, through the Finance Act 2014 as the then Jubilee administration sought to mobilise more domestic revenue from the booming property market as well as a flurry of mergers and acquisitions.
