Kenya proposes tax on infrastructure bonds

The Kenyan government plans to implement a tax on interest earned from infrastructure bonds, potentially reaching up to 15 per cent, Bloomberg reported.

This move could impact the influx of foreign currency into these popular securities.

According to the Finance Bill 2024, domestic investors would face a 5 per cent withholding tax, while foreigners, who often invest in these tax-exempt bonds, would be subject to a 15 per cent tax if the bill is passed, as indicated by some tax experts.

This initiative stems from pressure on Kenya to increase revenue under an International Monetary Fund programme, necessitating the roll-back of past tax incentives and broadening the taxpayer base. However, these reforms, championed by President William Ruto’s government, have garnered significant criticism from Kenyans who fear the additional income might be misused or siphoned off by corrupt officials.

Although the proposed tax rate for domestic investors is explicitly outlined, the rate for non-residents is implied, given that the bonds would no longer be tax-exempt.

This lack of clarity has raised concerns among tax professionals. Infrastructure bonds issued before the proposed levies take effect would remain exempt from taxation, according to the bill.

The disparity in tax rates could potentially lead to increased foreign bids for these bonds, according to some economists, raising concerns about favouritism toward foreign investors over local ones. However, others believe that demand from local investors could remain robust, as the new tax rate would still be more favourable than that imposed on regular bonds. Nonetheless, the full impact of these proposed changes remains to be seen.