Paula Wanza was elated when she started paying for her upmarket apartment three years ago in Nairobi. Today, Wanza, who has paid the last installment for the house in Kilimani, has got a buyer but she is frowning over a new tax that would ‘eat’ into her profits.
“I was excited to have got a buyer until my lawyer told me that I have to pay a new tax levied at five per cent of my profit to the Kenya Revenue Authority ( KRA),” Wanza says. The new tax, the Capital Gains Tax, is an added burden to property investors like Wanza who also have to contend with higher legal fees. “It is not a laughing matter as lawyers also increased legal fees last year.
I may have to sell the apartment at a higher price to get profits after paying the taxman,” Wanza says. For Patrick Njoroge, the new tax ‘punishes’ him for inheriting from his parents a parcel of land in Kitengela.
“I found it interesting when transferring the land – gifted by my parents – when my lawyer told me that I have to pay a new tax,” says Njoroge. The business man says that the only tax he paid when purchasing another plot in Syokimau late last year was stamp duty:
“I honestly did not believe that KRA would surcharge property that a parent has bequeathed a child.The reality of the re-introduced Capital Gains Tax, whose implementation started on January 1, is beginning to sink in. Suspended by the Government in 1985 to encourage growth of real estate, the tax has now thrown the sector into confusion, with some pundits arguing that the re-introduced law is retrogressive and a bottleneck to real estate growth.
FIVE PER CENT The tax is paid to KRA by the person transferring property to another. It is calculated at five per cent of the gains (profits) made on a property. For instance, you buy a house and later sell at Sh1 million profit, you will be charged Sh50,000 capital gains tax. It is supposed to be paid at the same time with stamp duty at four per cent.
As investors in real estate warm up to the increased cost of property transaction, conveyancers (property lawyers) have raised the red flag over its legal technicalities. Peter Muhiu Mwangi, a lawyer, says that the implementation of the tax means that people who paid for property after January 1 are subjected to the tax.
“There are property transactions that commenced four years ago but were never completed as payments were being made in installments as per the sale agreement,” Mwangi says. He notes that some transactions drag because of transfer delays at land registries over misplaced records and other reasons.
“Some property transactions may also not materialise as they are supported by undertakings (either by lawyers or purchasers) that are eventually not honoured,” he says. Mwangi, who presented a paper at a recent seminar on Capital Gains Tax, says that a seller can only determine profits after a successful transactionMwangi, who presented a paper titled, Emerging Practice Tax Issues on Capital Gains Tax, said that the list of transactions exempted from the tax are not clear.
“The exemptions do not include transfers between parent and subsidiary companies under Section 96 of the Stamp Duty Act,” Mwangi saidKRA Commissioner of Domestic Taxes Alice Owuor says that capital gains tax must be paid at the same time with stamp duty on all transfers after January 1. Stamp duty is currently set at four per cent of the worth of a property in urban areas and two per cent in rural areas.
TRANSFER “CGT is a tax chargeable on the whole of a gain which accrues to a company or an individual on or after January 1, 2015 on the transfer of property, whether or not the property was acquired before January 1, 2015,” Owuor said. To ensure prompt payment, the authority has given an account number into which the tax will be paid at the Central Bank of Kenya. According to KRA’s acting Deputy Commissioner (Policy Unit-Technical) James Ojee, there are compelling reasons why the tax was re-introduced“The re-introduction ensures horizontal and vertical equity in taxation as the burden of taxation is shared fairly,” Ojee said. He refers to economic efficiency and warns of mis-allocation of investment resources when capital gains are not taxed.
“In the absence of CGT, taxpayers have an incentive to develop schemes to shift assets from income bearing to assets that produce capital gains,” Ojee said. Ojee, who presented a paper titled, The Re-introduction and Implementation of the Capital Gains Tax, says that all countries in the region levy the tax. Even as the national government has powers to impose taxes in line with Article 209 of the Constitution, some lawyers argue that CGT is unconstitutional.
Caroline Khasoa argues that there was no public participation before the tax was re-introduced after a 30-year suspension. “Counties have constitutional powers to levy property taxes. It is unfortunate that the grassroots governments were overlooked before introduction of the CGT,” Khasoa says. Khasoa argues that citizens have a constitutional right to property and it would be unfair to tax those who invested when the CGT was suspended and want to sell today.
LAND TAX “The CGT cannot revise a land property tax outside the boundaries of the constitution, which provides that functions of the National Land Commission (NLC) includes assessment of land tax,” Khasoa said, noting that since land tax assessment is provided for under Article 67(g) as a function of the NLC, such land tax can only be assessed and levied by the commission. PKF (Kenya) partner and director of taxation services Michael Mburugu says that accounting for CGT per transaction is a challenge to many. “There are preferences for self-assessment of the tax for ease of aggregation of gains and losses,” Mburugu says. He further proposed the introduction of regulations to guide on valuation of property that requires assigning of market value.
“It would be progressive to also define the period after which a gain is deemed to be a capital gain and not business income,” Mburugu said in a paper titled, The Challenges and Solutions of CGT to the Kenyan Taxpayer.As some financial experts argue that the reintroduction of the levy would broaden the tax base and increase revenue collection, questions abound as to whether its suspension fulfilled its purpose. For instance, it is debatable whether the 30-year suspension of the property tax engineered a robust growth in real estate as the country still suffers from an acute housing shortage.
According to the recently-released Kenya National Housing Survey, the annual housing shortage stands at 200,000 units. The survey found that 80 per cent of urban dwellers are tenants, implying that the substantial amount of income that goes into housing is the main driver of the thriving real estate sector.
“Nairobi residents are spending 40 per cent of their income on rent or nearly 10 percentage points above the United Nations recommended maximum of 30 per cent,” said the report. According to the survey, more than 75 per cent of the buildings under construction in urban areas are high-rise flats for rent, indicating high returns from the sector. Nationally, the proportion of housing-related costs are about 33.1 per cent of a household’s income.
Together with other utility costs, this comes to nearly half of a household’s income – 44.7 per cent. Suspended Housing Cabinet Secretary Charity Ngilu said during the report’s launch that counties should start providing cheaper rental housing to cool down the rents and cushion the more vulnerable urban dwellers. “Most urbanites commute long distances to their places of work as high cost of housing makes the cost of living in urban areas unbearable,” Ngilu said.
“I urge the county governments to put up social rental housing to cushion our people from the high rents.” High rental levels is linked to the growing demand for housing, which forces some tenants to move into houses that are incomplete
FRENCH VERSION
« J’ai été très heureux d’avoir obtenu un acheteur jusqu’à ce quemon avocat m’a dit que je dois payer une nouvelle taxe prélevéeà cinq pour cent de mon profit pour les recettes autoritékényane, » dit Wanza. La nouvelle taxe, la taxe sur les plus-values,est un fardeau supplémentaire pour les investisseurs de propriétécomme Wanza qui doivent aussi faire face à l’augmentation desfrais juridiques. “Il n’est pas rire comme avocats a égalementaugmenté des honoraires d’avocat l’an dernier.
J’ai peut-être de vendre l’appartement à un prix plus élevé pourobtenir des bénéfices après avoir payé au fisc,”dit Wanza. PourPatrick Njoroge, la nouvelle taxe « punit » lui pour hériter de sesparents une parcelle de terrain à Kitengela.
« J’ai trouvé intéressant lors du transfert de la terre – offerte parmes parents – quand mon avocat m’a dit que je dois payer unenouvelle taxe, » dit Njoroge. L’homme d’affaires dit que le seulimpôt qu’il a payé lors de l’achat d’une autre parcelle enSyokimau fin de l’année dernière était droit de timbre :
“J’ai honnêtement ne croyait pas que KRA aurait supplémentpropriété qu’un parent a légué un enfant.La réalité de l’impôt surles plus-values réintroduit, dont l’exécution a commencé le 1erjanvier, commence à couler. Suspendu par le gouvernement en1985 afin de favoriser le développement de biens immobiliers, lataxe a maintenant jeté le secteur dans la confusion, avec certainsexperts faisant valoir que la loi réintroduite est rétrograde et ungoulot d’étranglement pour la croissance de l’immobilier.
CINQ pour CENT de la taxe est payée à KRA par la personnetransférant la propriété à l’autre. Il est calculé à 5 % des gains(bénéfices) faites sur une propriété. Par exemple, vous achetezune maison et vendez plus tard à profit million Sh1, vous serezfacturé Sh50, impôt sur les plus-values 000. Elle est censée êtrepayée en même temps avec le droit de timbre à quatre pourcent.
En tant qu’investisseurs dans l’immobilier chaud au maximuml’augmentation du coût de la transaction immobilière, rédacteurs(avocats de la propriété) ont soulevé le drapeau rouge sur sessubtilités juridiques. Peter Muhiu Mwangi, un avocat, dit quel’application de l’impôt signifie que les gens qui ont payé pour lapropriété après le 1 janvier sont soumis à l’impôt.
“Il y a des transactions de propriété qui a commencé il y a quatreans, mais n’étaient jamais terminées que les paiements ont étéeffectués en plusieurs versements conformément à l’accord devente”, a dit Mwangi. Il fait remarquer que certaines transactionsfaites glisser en raison de retards de transfert aux cadastres surdossiers mal placées et d’autres raisons.
« Certaines transactions de propriété peuvent aussi se concrétisent pas car ils sont pris en charge par les entreprises(que ce soit par des avocats ou acheteurs) qui ne sont finalementpas honorés, » dit-il. Mwangi, qui a présenté une communicationlors d’un récent séminaire sur l’impôt sur les plus-values, ditqu’un vendeur peut déterminer uniquement bénéfices après qu’un succès transactionMwangi, qui a présenté unecommunication intitulée, émergent des questions pratiquefiscales sur l’impôt sur les plus-values, dit que la liste desopérations exonérées de la taxe ne sont pas clairs.
« Les exemptions ne comprennent pas les transferts entre lamère et des filiales en vertu de l’article 96 de mais le Stamp DutyAct, » Mwangi saidKRA, que commissaire des impôts nationaux,Alice Owuor dit qu’impôt sur les plus-values est versée en mêmetemps avec le droit de timbre sur les transferts après le 1erjanvier. Droit de timbre est actuellement fixé à quatre pour centde la valeur d’une propriété dans les zones urbaines et de deuxpour cent dans les zones rurales.
TRANSFERT « CGT est un impôt exigible sur l’ensemble d’un gainqui revient à une entreprise ou un particulier, l’ou après le 1er janvier 2015 sur le transfert de propriété, si le bien a été acquisavant le 1er janvier 2015, » Owuor a dit. Pour s’assurer que lepaiement soit effectué, l’autorité a donné un numéro de comptedans lequel la taxe est versée à la Banque centrale du Kenya.Selon KRA intérimaire de sous-commissaire (unité politiquetechnique) James Ojee, il y a des raisons impérieuses, pourquoi lataxe a été réintroduite “la réintroduction assure équitéhorizontale et verticale de taxation que le fardeau fiscal estpartagé équitablement,” a indiqué le Ojee. Il se réfère àl’efficacité économique et met en garde contre mauvaise allocation des ressources d’investissement lorsque les plus-valuesne sont pas imposables.
« En l’absence de la CGT, les contribuables ont incité à élaborerdes schémas de transférer les actifs de revenu portant aux actifsqui produisent des gains en capital, » Ojee dit. Ojee, qui a présenté une communication intitulée, la réintroduction etl’application de l’impôt sur les plus-values, dit que tous les paysde la région perçoivent la taxe. Alors même que lesgouvernements nationaux ont le pouvoir d’imposer des taxesconformément à l’Article 209 de la Constitution, certains juristessoutiennent que la CGT est inconstitutionnelle.
