Monday, June 07, 2010

Kenya's capital gains giveaway

From Kenya's Business Daily:

"The recent sale of multi-billion shilling Kenyan businesses without any revenues accruing to the government has sparked pressure for the reintroduction of capital gains tax – 25 years after it was suspended."

How did Kenya get into this state? It's a familiar tale:

"The tax – usually charged on profits from the sale of assets held for at least 12 months – was suspended in 1985 as part of measures to make Kenya more attractive to foreign direct investment."

And guess what:

"Kenya has earned nothing from the multi-billion transactions involving multi-national companies that have taken place within its borders in recent months. The transactions span the telecommunication industry, property, land, petroleum and the financial sectors."

Fortunately, there are voices of sanity out there:

“We are losing a lot of revenue by simply not taxing wealth made from capital gains leaving the working class to carry the country’s financial burden,” said Martin Kisuu, a tax expert and partner at audit firm PFK.

To take an example:

"Critics of the capital gain tax suspension point to the change of ownership at the country’s second largest mobile phone service provider from KenCell to Celtel, Zain and ultimately Bharti Airtel as an example of deals that had the potential of earning the exchequer billions of shillings in revenue but from which the government got nothing.

KenCell, which was Kenya’s first mobile phone firm, was 60 per cent owned by Vivendi — a French conglomerate and 40 per cent by Sameer Group owned by local business magnate Naushad Merali. Celtel International, the Europe based phone firm owned by Sudan-born billionaire Mo Ibrahim, paid $250 million to acquire Vivendi’s stake in the firm in 2005.

Mr Kisuu reckons that the suspension of capital gains tax to encourage investment has outlived its purpose and needs to be reintroduced to enhance equity in tax payment. “We need to tax wealth such as capital gain to broaden the revenue base and nurture an equitable tax regime,” said Mr Kisuu. Tax experts say that deal alone was worth $75 million had it been subjected to a capital gain tax of 30 per cent."

Instead, we have foreign donors plugging the gap. It's bad for donors, of course, who are $75 million out of pocket, according to these calculations. And it's bad for Kenyans, because the aid makes their government accountable to donors. Former South African Finance Minister Trevor Manuel was one of those alert to the problem:

"It is a contradiction to support increased development assistance, yet turn a blind eye to actions by multinationals anothers that undermine the tax base of a developing country."

Along with Michael Waweru of the Kenya Revenue Authority:

"Pay your taxes, and set your country free."

For anyone wishing to know more about Kenya's tax system, see our in-depth Kenya report here.


Anonymous Anonymous said...

You're making a critical assumption that these deals would still have taken place, and all other factors equal, if capital gains taxes were in place (and at rate of 30% no less).

There's no way to know what revenues have been with a capital gains tax, because it is one of the most behavior-distorting taxes that exist.

1:09 am  
Anonymous TJN said...

No we're not. There's a critical difference between new investment - greenfield investment - and that which merely shuffles ownership. The deals we are looking at tend to be those that merely shuffle ownership. This is not new investment - no new phones are necessarily sold, for instance -- just that the owners are different. It's not clear that Kenya benefits from this kind of investment. Greenfield investment, by contrast, is driven by whether there are profitable opportunities. If there are profits to be made, the investors will generally come - and the fact that they will get taxed on some of their profits doesn't remove the opportunity.

8:46 am  

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