Foreign investors will shun Kenya’s infrastructure bonds in favour of other markets, analysts have warned, terming the proposed 10 percent withholding tax on interest income as detrimental.
The Tax (Amendment) Bill 2020 is proposing introduction of withholding tax on income earned from infrastructure bonds and green bonds investments, a departure from tax exemption.
This is seen favouring other markets such as Uganda that in the 2019/2020 budget announced tax exemption on infrastructure bonds with a maturity period of at least 10 years.
Senior research analyst at Genghis Capital Churchill Ogutu said the move will blunt Kenya’s ability to attract foreign capital.
“That is quite retrogressive because that has been the main incentive especially for foreigners. Many foreign investors don’t even look at other fixed income bonds, so if the incentive is removed, there will be investor flight,” said Mr Ogutu.
The Kenya Association of Stockbrokers and Investment Banks (Kasib) reckons that many investors who bought infrastructure bonds did so on the promise that such bonds were tax-free.
The lobby says that introducing tax midway will be perceived by foreign investors as default on the side of government, making it difficult to meet future debt funding targets.
Nikhil Hira, a director at Bowmans law firm said applying withholding tax on previous infrastructure bonds will amount to changing prospectus midway.
“Taxing income from such bonds will amount to short-changing investors,” said Mr Hira. He said that if it must pass, the tax should apply to new issues.