Foreign investors face reduced dividend income on higher tax

Multi-nationals and other foreign investors in listed firms will earn reduced dividend income on a government proposal to raise withholding tax to 15 percent, cutting their take-home share of profits.

The Tax (Amendment) Bill 2020 wants withholding tax (WHT) on dividend income for non-residents raised from the current 10 percent to 15 percent as the State eyes increased tax revenue from dividends.

The proposed change will only spare foreign investors in companies from countries with whom Kenya has signed double tax agreements as they will continue to enjoy lower WHT rates.

A withholding tax is an income tax that is withheld or deducted from the income due to the recipient and paid to the government by the company from where the income was generated.

The proposal means that for instance, a foreign investor earning gross dividend income of Sh100,000 will pay Sh15,000 WHT and take home Sh85,000 as opposed to Sh90,000 at the current tax rate.

Kenya Association of Stockbrokers and Investment Banks reckons that the move will blunt Kenya’s attractiveness to foreign investors.

“The higher dividend withholding tax rates will make it harder for Kenya to attract foreign direct investments, especially in the era of the Africa Continental Free Trade Area where companies can set base in countries with advantageous corporation tax regime but still have access to the wider Africa market, including Kenya,” said Kasib.

Foreign investors’ holdings at the Nairobi Securities Exchange has risen from 10.1 percent in 2009 to a high of 22.53 percent in 2013, Capital Markets Authority data showed.

Their stake was at 20.91 percent last year, meaning at least a fifth of the billions of declared dividends are due to them.

Foreigners held at least 30 percent stake in 20 NSE firms by the end of December last year and are usually instrumental in the market, where they command up to 70 percent of trading activities.

“Many huge foreign investor funds prefer to put their money in emerging markets purely by looking at high returns and stability. A higher WHT tax will disadvantage Kenya since it widely viewed as a frontier market by investors.,” said an investment banker who sought anonymity.

Consistent dividend payers such as Standard Chartered Bank Kenya and Equity Group are 76.83 percent and 41.83 percent owned by foreign investors.

Foreigners hold 83.68 percent in Stanbic Bank while that in Bamburi, Total, Jubilee and BAT is at 64.04 percent, 94.53 percent, 67.07 percent and 85.61 percent respectively.

A raise in WHT will see top shareholder in StanChart kenya, StanChart Holdings (Africa) with a 73.89 percent stake pay Sh571.9 million WHT from a dividend payout of Sh3.83 billion. This in contrast with Sh381.3 million payable under current rate.

For Total kenya where Total Outre-Mer holds 92.26 percent stake, their WHT will be Sh113.3 million up from Sh75.51 million. The oil marketer recently declared Sh1.3 dividend per share.

The move comes at a time the state also wants to introduce 14 percent value added tax on stockbrokerage services, a cost that stockbrokers are likely to pass to investors. This will make buying of shares more expensive and therefore reduce returns.