The Privitisation Commission has approved the offloading by equity stake in 26 state owned entities, some which be sold of through initial public hearings. This is good news.
Privatization often brings into the market new industries, which increases investor’s diversification opportunities, and improves market liquidity.
In case where privatization is by cross-listing of stocks, that is, the floating of a company both in the domestic and international exchanges, such as dual listing planned for National Oil Corporation, it will enlarge the participation of foreign investors, hence capital inflows.
An historical analysis of privatizations in Kenya show it has always represented a boon for capital markets. Most of the IPOs done by state owned agencies, have in fact been oversubscribed IPOs, and had a multiplier effect of attracting a good number of private companies.
The first privitisation through capital markets was in 1988 by Kenya Commercial Bank. It was oversubscribed at 327%.
The euphoria that KCB raised was so much, Total Oil Company, Nation Printers (now Nation media) and Standard Chartered Bank got into the market, with subscription rates of 106%, 113%, and 233% respectively.
In 1992, the privatization of Housing Finance Corporation through an IPO immediately attracted Crown Berger, East African oxygen (BOC), NIC, Firestone, Rea Vipingo and East African Portland Cement to the stock market.
Without doubt, therefore, privatizations through the Nairobi Securities Exchange (NSE) is a catalyst for capital raising and listing by private enterprises. This trend has similarly been observed in several other jurisdictions notably India, China, New Zealand, South Africa and Egypt.
More recently in 2017, the Brazilian government announced its largest privatization package since the 1990s to bolster investment in order to revive the economy.
A total of 57 companies have been earmarked in the package, including the Brazilian Mint which prints the country’s currency and passports, 14 airports, 15 port terminals and energy firm Eletrobras. The Brazilian Government aims to raise 14 billion U.S.D.
Privatization is more likely to result in increased efficiency and improved equity outcomes of state owned entities. Incompetent managers will be able to be routinely routed out, and market dynamic will guide their operations.
Kenya has a well regulated capital markets and privatization will produce optimal outcomes. Furthermore, citizens will have a chance to venture into the market and have an investment opportunity.
The planned privatization is a good policy. Citizens have a right to be wary, but they need to vigilant to ensure the process is done properly. The days ahead are good for the capital markets
Kenya’s identity ecosystem is messy. There is very little linkage between foundational identities and functional identities. This has led to duplication of registrations and proliferation of cards, to a huge cost. The country is planning to issue a single unique identifier (NIIMS), a Kenyan version of Aadhaar. It would have been preferable if the country had adopted the foundational ID system. Nevertheless, for NIIMS to succeed, some things must be done properly. One is privacy and data protection, second is technology and cybersecurity, and third is to avoid exclusions and discrimination.
A national identity is a key product of modern nationalism. The ability to prove your identity is critical for access of public services and exercise of legal rights. Kenya has a well-established national identification (ID) system, where a national ID is a mainstay of daily life. However, the greatest weakness with Kenya’s identity ecosystem is the two identity modes, the foundational systems and functional systems have very little interoperability.
Foundational systems are civil registrations meant to provide general identification and for official purposes, such as a national ID, alien and refugee registrations. Functional systems are registrations for a particular service or transaction such as health cards, passports, driving licenses, each relating to a particular agency.
A wallet of a Kenyan is full of multiple functional cards. The problem has always been with the foundational systems registrations. The National ID card, despite having all the personal data details including biometrics, has very little utility in functional systems. Failure to have linkage between foundational and functional systems has led to duplications in registrations and wastage of resources.
It is therefore refreshing to learn the government has prioritised reforming the identity ecosystem by adopting foundational ID system through the proposed National Integrated Identity Management System (NIIMS). Recent pronouncements by government officials reveal certain decisions have been made to this effect.
These include issuing a single unique ID number form birth, a single national population register that includes citizens, aliens and refugees, and a smartcard for citizens. NIIMS will provide a foundational ID system, where other databases, such as registries of voters, will be built on top.
A World Bank research reveals many countries have realised considerable benefits by adopting efficient ID systems. In Argentina, integration between the tax databases, occupational and other registers through a unique ID improved tax audits, generating over USD 44M in additional revenue from a reduction in tax fraud.
The India’s Aadhaar has significantly facilitated access to and delivery of services. Visibly, rolling out an efficient identity system will present opportunities terms of fiscal savings, development of the digital economy and enhanced public and private sector service delivery.
A well-designed NIIMS is capable of acting as basis of vote registry and the government could save significant costs from need to carry out periodic voter registration drives. It would facilitate digital authentication that would open doors for e-government and new e-commerce markets.
While NIIMS opportunities abound, so are challenges and risks. There are some things that have to be got right in order to promote trust and confidence in the system. There is need to examine the regulatory enabling environment to on privacy and personal data protection, technology risks, and unintended risks of exclusions.
With electronic ID systems, need to secure data, prevent inappropriate sharing or use of data, including discriminatory use against certain individual or groups is paramount. Data collected for one purpose may be used for other purposes such as profiling and surveillance, including by government agencies, which may compromise trust and integrity of the system.
Equally, cyber security risks such as data theft, fraud, manipulation or hacking, or even destruction needs to be considered. Vulnerable infrastructure, systems and data will erode user confidence making use of the systems less attractive.
The roll out of the program should be inclusive. The Commission of Administrative Justice (Ombudsman), in a report titled ‘stateless in Kenya’, has documented the agony of acquiring identification documents in some regions. A further ill-designed registration approach, which is not facilitative in terms of cost, distance and time to register, or discriminatory, can lead to exclusion. Insights can be drawn from rush and hurdles that resulted from a recent policy requiring students to provide birth certificates in order to sit exams.
Lastly, technology risks, including being proactive in contract negotiations in procuring IT systems to prevent any vendor lock-in practices. The processing of the data needs to be localised through a data centre in the country. The vendors should be deprived controls to prevent hurdles that face the KRA i-Tax system or those purportedly faced by IEBC during presidential election petitions. Inappropriate design of IT system will result into substantial costs increases, reduced flexibility and sustainability.
To mitigate these risks, NIIMS program ought to be founded on clear rules, specifying the rights and obligations of issuers and users, and to avoid unintended consequences such as inadvertent exclusions. It would be appropriate to have a comprehensive legal framework to ensure a NIIMS that promotes trust in the design, implementation and use of ID.
Currently, the only legislative proposal is contained in Statute law (Miscellaneous) Amendment Bill. It is not fair that such a landmark project is initiated in through an omnibus bill, whose sole purpose is to make minor changes in statute book. There is need to adopt a consultative legislative approach that inspires confidence.
There is need to enact an inclusive legislation, focusing on inclusion, non-discrimination, individual privacy, data protection and IT systems. These are important to ensure public trust which is a critical factor for the success of the program, especially to promote the ‘demand side’ case for people registering.
Where individual privacy is not safeguarded, or the new ID system is seen as discriminatory or exclusionary, people may withhold information, supply inaccurate information, or simply avoid participating, reducing the economic and development impact of the program.
Equally, before investing in smartcards and centralising data from different sources into a single database, there is need to consider alternative options including latest technology trends such as distributed ledgers and mobile phone based IDs and experience from other countries. These could be leveraged and ensure the country adopts the best methods.
“Aye Africa Eh, eh Africa Oh Li panda: Aye Africa Eh, eh Africa Oh Liberté”. In Africa, land was held by community, by tribe or by family. Some of it was reserved for common uses: ceremonials and rituals. Then, there came land adjudications. Individuals become registered as proprietors of this communal land. Instead of being trustees, they looted it. Customary trust in land was dead. It was dead because courts ruled. That customary trust in land was extinguished by registration. The age for the tragedy of the commons, began.
By gatuyu t.j
The Tragedy of the Commons
There was this piece of land. It was owned by the tribe, communally. The community used it as a field to conduct rituals. It was a venue for circumcision of boys, for public meetings, and a court yard to deliberate and settle disputes.
Along the way, the people were told. They could not use that land. Because someone had registered it under their name. But it was tribe’s land? It does not matter. Somebody, registered it.
The great grand father, left a swathe of land for the use by the clan. It was to be carried down the generations, to be used by all in perpetuity. The grandfather owned it on behalf of all. But in tune of time, there was born in the clan a mischievous son.
This son will go. He will register this family land under his name, depriving all others ownership rights. They will eventually be kicked. But this is our family land? It does not matter. They will be informed. The land belongs to that who registered it first, that who holds the title.
These are some of dire inequities that have flowed from pooh-pooing the concept of customary trusts, where one would hold property for the benefit of all. It has resulted to the tragedy of the commons, piling misery and hue on the people, in view that land in African context was often held communally.
2. Obiero v Opiyo: Misery unchained
Onset of colonialism saw a supplanting of foreign legal regime and wanton disregard of African cultures and civilisation. The white judges who superintended the courts rooms made little efforts to appreciate the complexity of an African society before making their judicial pronouncements. There work was only to impose the will of her Majesty the queen into the people. It did not always augor seamlessly.
Of the most pitiable, and devastatingly woeful judgement ever in context of property law, was by a judge called Bennett, in case of Obiero v Opiyo.
In this case, it was decreed that rights to land under African customary law became extinguished upon registration of the land in question, under the statutory regimes.
The ruling was inspired by the Swynnerton plan, a colonial relic of 1954, that Kickstarted the process of consolidation of land as a colonial governement policy to promote growing of cash crops by Africans.
With that, members of the clan or community lost the rights they had to communially owned property. The commons, were officially opened for a tragedy, in form of grabbing and exploitation.
3. A bench of home-gourds; a bar of zombies
The words of Bennett J in Obiero case, that customary law was incapable of creating a trust, would pass in today’s world as having a racist overtones.
The colonial land tenure policy it was based on had a sole aim of consigning customary land law, and rights flowing from them, into the dustbins. It was an off shot of bankrupt ideology that African customary law, to be applicable had to first to be tested, to ensure it was not ‘repugnant to justice and morality.’ Whose morality?
Unfortunately, for many years, the courts used the Obiero case as a precedent, meaning all the cases with similar facts that were presented, a similar holding was made.
The judges and lawyers continued citing and paying homage to it, like some programed bots. This illustrates the danger of having a legal profession, like we have, chained by a bondage of colonial legacy, which has taken very minimal effort to liberate and Africanise the philosophy of law.
Even to this date, you will see lawyers in court, without an iota of shame, appearing clad in black undertaker gowns and extremely ridiculous looking wigs. These are symptoms of house niggers, a Stockholm syndrome.
This narrow mindedness of the legal fraternity has led to a dearth of liberative and emancipatory jurisprudence, which would incubate the legal developments into unique context and circumstances of African civilisation.
The unthinking application of concept of precedent has only led to creation of sheepfold of bar and the bench. It is common to see able submission being made, furthering an obnoxious holding, because it was so ruled by Buffoon J, in the case of Stupid v Silly (1447) Idiots bench, pg 47.
4. The Supreme Court overturning of Obiero
In arguably its most landmark case ever, this month, our supreme court has eventually overturned the ignoble Obiero case. This was in the case of Isack M’inanga Kiebia v Isaaya Theuri M’lintari & another 
In this case, the respondents (Isaaya Theuri and the rest) were members of a clan, which owned a large parcel of ancestral land. During the process of land adjudication, they agreed that the elder son, Isack Kiebia, may be registered to hold it in trust for them all.
The land in question had passed from generation to another in this family, and it was reserved for clan uses, on events such as burials and other traditional rites. Isack Kiebia, thought he was clever. He registered the land under his name. He kicked others out.
They went to magistrate court and he was told to return the land. He moved to high court and he lost. He appealed to the court of appeal, and again lost. He further moved to supreme court, where he also lost, settling the matter. “Oh! What A Tangled Web We Weave, When First We Practice To Deceive”
It is at the supreme court where he sought refuge in Obiero case. He argued, it did not matter what rights his clan members had in this land. What mattered, he was a registered proprietor of the land.
And by virtue of such registration, all rights flowing to others from customary trust in that land were extinguished. That moved the supreme court to delve deeper and overturn the doctrine in Obiero case.
5. The resurrection of the commons
The supreme court decision puts a temporary halt, in a small way, on the tragedy of the commons. This ruling comes late, when lands set aside for community events and rituals have been looted.
Other legislative initiatives have been attempted to reign on the issue, such as the enactment of the community land Act. But things are yet to be fine tuned. The customary trust in land, which formed a bedrock of land tenures in African cultures, is again, breathing.
The author is the Managing editor of the Gatuyuriana
The Strathmore Law School, with assistance from Microsoft, has erected a magnificent building and named it in honour of Sir Thomas Moore. Helen of Troy! Why, would they do that? It is not amusing. Because Sir Thomas Moore, was not a good man. He was a bad man. Nothing should be named after him.
It is Thomas Moore, in his heyday, who presided over the burning of alleged heretics. These were people who failed to swallow the dogma of a triune godhead, that Moore advocated, outlining that there are three gods in one, god the father, god the son, and god the holy ghost.
In those days, Arius of Alexandria, had managed to spread Arianism, which dismissed the concept of triune godhead and trinity. This was before the great convention of bishops at Nicaea, where the pragmatic emperor Constantine, the founder of modern Christianity, tried the stop the great schism in the universal church.
Emperor Constantine would try to bring consensus among the See of Rome, the see of Jerusalem, the see of Antioch, and the see of Constantinople, and bring an ecumenical unity. It is where the doctrine of trinity arose.
The trinity doctrine failed to sink by way of persuasion. It had to be enforced by way of coercion.
Thomas Moore came. He oversaw the burning of ancient manuscripts, and all writings that were deemed to have ungodly contents. He led in the grand scale destruction of knowledge, more than any other person in his days.
Thus, it is extremely disheartening, to see an institution that seeks to advance learning and accumulation of knowledge, has no remorse glorifying a knowledge villain, even to name a temple of knowledge in his honor. It is akin to resurrecting a Jezebel. Sir Thomas Moore, was an evil man.
Thomas Moore strode like a colossus, killing alleged heretics and burning manuscripts with purported blasphemy. Until his fall, came. His fall came when his boss, King Henry VIII, using King’s other evil stooge, Moore’s namesake, Thomas Cromwell, tried to coerce Thomas Moore to accept Anne Boleyn as the new queen of England.
Moore disagreed with King Henry’s on this aspect of getting a second wife. He was beheaded. The manner of his death was fair. He lived by the sword. He died by the sword. Fulfilling what was decreed. ‘Those who live by the sword, shall die by the sword.’
In the run up to Moore’s death, the wife of King Henry VIII, the charismatic Catherine of Aragon, had, unfortunately, failed to bear him a child, a heir. He wanted to divorce her and remarry. He sought the blessings and approval of Vatican. The pope declined.
Just the way, the current England, became wary of EU and incensed with taking orders from Brussels, culminating to Brexit, similar script played. For failing to get an approval to divorce his wife, King Henry was now tired of Rome, time was ripe for churchexit.
King Henry then disowned Vatican. He founded his own church. In that year of the lord 1534, the church of England, or the Anglican church, was founded, and King Henry VIII declared himself as the supreme head of the Church of England.
This resulted in a schism with the Papacy. But the mischievous King Henry, had to ensure he is the leader of this church, to ensure there would be no further hurdles, in his remarrying. So it became, and in remarrying, he did.
The first declaration by King Henry, now doubling as the Archbishop of Canterbury, was to allow his divorce and to remarry. He eventually divorced Catherine of Aragon and married Anne Boleyn. Things, men, do, for love (lust)!
He will into a marriage spree, including marrying one Anne of Cleves, who he married, but weirdly, forgot to consummate the marriage. Anne of Cleves, will be nicknamed the King’s beloved sister.
Thomas Moore opposed king’s separation from the Catholic Church. He refused to acknowledge Henry as Supreme Head of the Church of England. He refused to endorse annulment of King’s marriage to Catherine of Aragon.
He was playing naive games. His stand on this issues, was more political than theological. He did not see the games that were being played. Thomas Cromwell, had to deal with him.
It is why, after refusing to take the Oath of Supremacy, Thomas Moore was convicted of treason and beheaded. Of his execution, he was reported to have said: “I die the King’s good servant, and God’s first.” He had spent his life burning religious heretics. He was beheaded for being a political heretic.
Pope Pius XI canonised Moore in 1935 as a martyr. The declaration was shambolic, for Moore was a martyr of no shade. In 2000, Pope John Paul II declared him the “heavenly Patron of Statesmen and Politicians.” The Soviet Union honoured him for the purportedly communist attitude toward property rights expressed in Utopia. These were mere rhetorics.
History of catholic church is littered with villains being declared servants of god. In the past, the process of canonization did stink. Pope John II had to issue a public apology, including being sorry for other atrocities committed by Vatican. Sainthood of Thomas Moore was one of those bogus events.
As GR Martins, in his Game of Thrones fantasy would note, Thomas Moore refused to bend the knee, and paid with the price of death. There may be some honour in him being a man who stood by his convictions, however naive. He knew the price of refusal to bend the knee.
Moore’s Johnny come lately antics do not cleanse his murderous and inglorious reign. His evil nature and deeds, in presiding the massacre of heretics and destruction of knowledge, by burning manuscripts. His legacy is so rotten, no revisionist history can assuage, no detergent can cleanse.
Thomas Moore, was an evil man.
It is therefore extremely unfortunate, Strathmore law school would name their campus in honour of such a villain, who contributed towards destruction of knowledge. Even a remote association with Thomas Moore, is defamatory.
Had a law school in a public university (or a gangster law school), been the one that named a building in Moore’s honour, we would have called for the fall of such naming. But we cannot do so. For we are informed, this school, has well mannered lads and lasses of finer breed, who only want to excel and get recruited by white shoe firms, and live happily thereafter. Other things, are unmannerly and less rosy.
We will not impute anything that may be connoted as calling for a defilement of such cherished decorum. But it cannot be hidden. It cannot be disguised. Thomas Moore, was a bad. Nothing, should ever be named in his honour.
The scalability of Bitcoin has burst. The trust in Ether is toast. All other ‘shitcoins’, released in dodgy initial coin offerings, have hit the dust. It is the end of crypto mania. Why so?
Your blogger will have a unit in one of the cryptos. He will be given a key upon purchase, to secure the wallet. He will jot down the key in a piece of paper. He will misplace the paper. With that, all his crypto wealth, will vaporize.
The value was minimal, there was no mourning. But it shows the treadmill life of the crypto millionaires. Ensuring security of their wealth, is akin to a game of roulette.
Vatalik Buterin, the founder of Ether, a crypto, has recently formulated the ‘inconsistency trinity’ theory of cryptos. He avers that it is impossible, at the same time, to assure scalability, decentralisation, and security of cryptos. This admission, unfortunately, herald the eventual end of cryptos.
For cryptos have to be scalable, to create value and utility. They have to be decentralised, to be out of regulatory control. They have to assure security, to be trusted. None of these pillars can be sacrificed and have a tenable crypto ecosystem.
But this is not possible, as Vitalik admits. The crypto mania is deal. All cryptos, apart from the first mover Bitcoin, are just shitcoins, created by carnival backers and scammers, with price manipulated by criminal insiders, with lots of front running and insider dealings. They are useless heaps of sh*t. Even the so called tokenisations are just con schemes.
However, Bitcoin may remain for a while, not as a currency, but as a digital commodity. Bitcoin will survive because Satoshi Nakamoto, the inventor of Blockchain, seems to have been driven by good ideals, of removing financial transaction from controlled financial system.
Bitcoin is also not scalable, and has little value on life of humanity. Efforts to ensure that Bitcoin is used as a unit of measure have failed. There have been two hard forks, where they have created SegWit2 (Segregated Witness two), birthing Bitcoin Cash and Bitcoin Classic. This, too, has failed. Transaction costs with Bitcoin are just ridiculous. The mining is a an economic disaster, due to high energy consumption.
Patrick Njoroge, the governor of the Kenyan central bank, has hailed the technology behind Bitcoin, as having utility. Blockchain is overrated junk. Your blogger has attended workshops, where frenzied pretenders, are hailing blockchain as the solution to all problems facing humanity, from fighting poverty to financial inclusion. Like what a hell? Its just distributed ledgers. Just a fancied spreadsheets.
We come back to crytos. These scams have met the end of the road. Bitcoin may remain as a commodity, for the supply is capped to only 21 Million units. But all other scam coins, the shitcoins, rest in peace.
Presumptive Tax: The Finance Act has scrapped the turnover tax and replaced it with the presumptive tax.
The scrapped turnover tax, introduced in the year 2008, was charged on persons who did not meet the VAT threshold to register for Value Added Tax (turnover of below KES 5Million).
However, it was optional, to the extent that eligible taxpayer was at liberty to opt out by writing to the commissioner and pay taxes in ordinary manner on business income. It was charged at a gross rate of 3%, with no expenses allowed. Turnover tax failed, hence the replacement.
The new presumptive tax takes the fashion of turnover taxes. By way of a primer, presumptive taxation is the use of indirect methods to determine tax liability. The method is not based on taxpayer’s accounts and taxable amount is inferred. It targets those not covered under usual tax coverage and at the same time have taxable capacity, such as the Jua Kali sector.
The introduced presumptive tax in Kenya will apply to persons issued or liable to be issued with a business permit or trade license by a county government. It is payable by to a resident person whose turnover from business does not exceed five million shillings during a year of income.
Any person with a turnover exceeding 5 million on taxable supplies is expected to register and charge value added tax and compute business income tax. However, it does not apply to income derived from management and professional services; or rental business; or incorporated companies.
Issuance of business permits, on which this tax is pegged, is a function of the county as demarcated under Part II of Schedule Four to the Kenyan Constitution. Most of the county governments have already enacted county legislation on trade licensing which issue guide on issuance of trade permits.
The third schedule to the ITA has been amended to provide the rate chargeable on presumptive tax to be an amount equal to 15%of the amount payable for a business permit or trade licence issued by a County Government, and it is the final tax. This means the amount chargeable tax is gross and no expenses are allowed. The turnover tax failed when the rate was 3%; how will this new tax have compliance when the rate is 15%?
However, just like it was for turnover tax, and just like other taxes such as residential rental income tax, a taxpayer is at liberty to opt out by making a notice in writing to the commissioner. By opting out, they would be expected to compute their taxes from business income from the normal way.
The due date for payment of presumptive tax is at the time of payment for the business permit or trade license or renewal of the same. This is an odd provision, with unhealthy assumptions. As explained, issuance of trade permits is a mandate of the county governments.
There is nothing that compels county governments to issue permits that are in line with ordinary fiscal year, whereas a year of income for purpose of taxes is usually a period of 12 months. Some counties may elect to have business permits that lasts more than a year.
Further, tying the tax payable with amount equal to trade permit may lead to revenue leakages. A county may opt to forgo permit fees, and issue permits at peppercorn, for whatever reasons, including encouraging setting business activities.
Again, it presents a retrogressive and unequitable tax. Most of the business permits are issued at standard amount, but are incomes from business standard? A mama mboga with a turnover of KES 95K and a big shopkeeper with a turnover of KES 4 Million will pay tax on the same amount?
It is as simple as that. Presumptive tax will fail, in a big way, just like turnover tax.
News Round up on Income Tax provisions
One, A 30% of the electricity cost of electricity cost, incurred by manufacturers in addition to the normal electricity expense, will be an allowable deduction under Section 15 of the ITA, subject to conditions imposed by the ministry.
Second, In taxation of insurance companies, capital gains tax would be charged on any gains arising from the transfer of property by an insurance company. However, property connected to life insurance business is excluded.
Third, Demurrage charges and insurance premium (except insurance premium paid for insurance of aircraft) will be treated as incomes and will be subject to withholding tax.
A Demurrage charge has been defined as the penalty paid for exceeding the period allowed for taking delivery of goods, or returning of any equipment used for transportation of goods.
Visibly, it is targeted towards ship operators who delay before clearing goods from the warehouses or ports. The rate of withholding tax payable, in case of demurrage charges paid to ship operators, is 20% of the gross amount. In case of an insurance premium, it is five per cent of the gross amount payable.
Lastly, where a company is conducting business jointly with government, in a special operating framework arrangement, hear this; it will not pay taxes at the normal rate. Instead, tax will be payable at the rate provided in the agreement. This was a terrible, terrible, provision.
Companies such as Lake Turkana Wind Power, those engaged in private public partnership, will naturally negotiate to pay taxes at a lower or at zero taxes in those framework agreements. To follow will be the multiple Chinese companies doing all manner of constructions.
We assume the companies with arrangements with governments are paid at arm’s length, in accordance with the procurement laws. Then, why shouldn’t they pay taxes, like others? The provision does smell mischief, whose results will be revenue leakages.
The Dividend tax account, loathed by accountants and detested by revenue officers, has been scrapped. The Finance Act 2018 has repealed and replaced section 7A of the Income Tax Act which required resident companies that pay dividends to maintain a dividend tax account.
Section 7A was unnecessarily prescriptive. It went into overkill, providing details on how the dividend tax account should be maintained. The aim was to facilitate computation of Compensating tax, which would arise if a resident company distributed dividends from untaxed gains.
The new section introduced by the Finance Act simply requires that a company that distributes gains that have not been taxed should pay a compensating tax. The qualifier that the company has to be a resident company has been removed.
The new section reads;
“Where a dividend is distributed out of gains or profits on which no tax is paid, the company distributing the dividend shall be charged to tax in the year of income in which the dividends are distributed at the resident corporate rate of tax on the gains or profits from which such dividends are distributed.” However this section shall not apply to registered collective investment schemes.
Apart from removing onerous requirement of maintaining a dividend tax account, the new section has clarified the rate of compensating tax payable to be a normal corporate tax rate. Before, compensating tax was a punitive, with various tax consultants providing compensating tax rate to be 42.8%. We are not aware how they arrived at this figure but now it matters no more.
A company may distribute dividends from untaxed profits in instances where it has received generous capital allowances such as investment deduction. This may leave the company with an accounting profit, but when adjusted for tax purposes, would leave the company with no taxable income. The compensating tax is intended to act as a disincentive for distribution in such circumstances and compel such company to reinvest the gains.