Economy
KRA set to tax hedging profits under new rules
Friday February 10 2023
Times Tower in Nairobi, the headquarters of Kenya Revenue Authority. FILE PHOTO | DENNIS ONSONGO | NMG
Kenyans engaging in transactions with foreigners to cushion them from volatility in financial markets will now be required to account for any profit realised by non-resident parties and remit tax on the same to the Kenya Revenue Authority (KRA).
This follows the gazettement of the Income Tax (Financial Derivatives) Regulations of 2023 on January 27, effectively bringing to life amendments to the Income Tax Act, which were initiated by the Finance Act 2022.
This development now places under KRA’s radar entities such as national flag carrier, Kenya Airways, which engages in hedging to cushion itself against volatility in the price of fuel as well as commercial banks that have engaged in long-term foreign currency-denominated borrowing which requires them to hedge against interest rate risk.
Read: Taxman eyes billions earned by foreign traders on hedging
Interest rate risk materialises when such borrowing is adversely affected by fluctuations in the price (interest rate) attached to it.
Players in Kenya’s rapidly growing foreign exchange trading market are now also within KRA’s net.
Currently, Kenya has nine non-dealing foreign exchange traders licensed by the Capital Markets Authority.
In the April 7, 2022 budget former Treasury Cabinet Secretary, Ukur Yatani, said this tax was meant to help widen Kenya’s revenue base with a focus on non-resident transactions.
“Kenya has witnessed significant growth in the use of financial derivatives, including hedging, futures and options. However, there is no provision in the Income Tax Act to charge the gains accruing from financial derivatives to non-residents. To ensure equity and fairness, I propose to amend the Income Tax Act to provide for taxation of gains accruing to non-residents from transactions involving financial derivatives in Kenya,” said Yatani then.
The gazettement of the regulations now means in the event that a non-resident entity in such a transaction realises a gain, the Kenyan party will be required to account for the gain and remit tax on the same at a rate of 15 percent withholding tax.
Parties trading in derivative instruments at the Nairobi Securities Exchange have, however, been spared the tax in line with Section 3 of the Income Tax Act.
Read: KRA shake-up starts as puzzle of missing Sh432bn deepens
According to the Finance Act 2022, this provision of taxing gain on financial derivatives was meant to take effect on January 1, 2023, but there were no regulations to guide enforcement until January 27.
