Companies Push for Tax Incentives to Boost Bourse

Business Daily (Nairobi)

David Mugwe

13 July 2011

Holding companies are pushing for a review of tax benefits accorded to firms that sell their shares to the public at the Nairobi Stock Exchange (NSE) to encourage new listings at the bourse.

Under the current tax incentives, newly listed operating companies, which have at least 20 per cent of their issued capital listed are allowed to pay tax at a reduced rate of 27 per cent for three years, compared to the normal tax rate of 30 per cent.

The tax benefits also allow newly listed companies with at least 30 and 40 per cent of their issued capital listed to pay tax at lower rates of 25 and 20 per cent respectively for five years, a move that gives them increased after tax profits.

However, the benefit, is not extended to holding companies when they float their shares, forcing them to list shares of their subsidiaries or give the stock exchange a wide berth all together.

British American Investments Company chairman Nicholas Ashford-Hodges, yesterday disclosed that the firm had been pushing for a change in the tax law so that non-operating holding companies may also benefit from the tax incentives. “We have been actively lobbying for the minister for Finance to extend the incentive to holding companies such as ours that list on the NSE. At present the tax incentives only applies to operating companies,” said Mr Ashford-Hodges at the launch of British American’s initial public offer.

British American is a holding company of two subsidiaries in Kenya — British American Insurance Company (Kenya) Limited and British American Asset Managers Limited and Britam Insurance Company (Uganda) Limited.

Under the current tax incentive rules, British American Insurance and British American Asset Managers will continue to pay tax at the 30 per cent rate. Britam Insurance Company, the holding company’s Uganda subsidiary will also not benefit from the current listing benefits.

“What happens for newly listed companies, is that only the company that is getting listed gets the benefit and not the subsidiaries, which are not listed,” said Nikhil Hira, a tax partner at Deloitte Eastern Africa.

He added that dividends from the subsidiaries to the holding company will, however, be tax exempt if the subsidiary operates in the country and if the holding company owns at least 12.5 per cent of its shares.

“Quite often what you find is that operating companies list so that they can get the tax relief,” added Mr Hira.

Mike du Toit, managing director CfC Insurance Holdings (CfCIH) said that the tax incentive was of no value because it only applies to an operating company and that the holding company’s only source of income is dividends from the operating subsidiaries.

CfCIH, whose subsidiaries include Heritage Insurance Company, CfC Investments Limited and CfC Life Assurance Limited in Kenya became a public company in April this year by selling its shares to the public by way of introduction.

It is also the holding company for Azali Limited and Heritage Insurance Company Tanzania Limited in Tanzania.

“The issue is that a holding company invariably doesn’t have taxable income – hence the incentive being of no value,” said Mr du Toit. For purposes of the tax incentive, he said, it would be more beneficial to take into consideration a company’s consolidated income.

“Our suggestion would be to treat the group consolidated net income as a single taxable entity, compute the tax as if it were a single tax payer, provide for the listing incentive (on its reducing scale) and then apportion that reduced level of tax back to the relative operating subsidiaries so that the incentive is actually realised,” he said.

Mr du Toit added that this would make the tax incentive more effective and help it achieve its purpose of encouraging more companies to list at the NSE.

The NSE’s chief executive officer Peter Mwangi said for companies to be encouraged to list, a “clarification on the current situation” was needed.

“We think that the intention was to encourage listing and we would like to see the government extend that incentive,” said Mr Mwangi.

British American is seeking Sh5.58 billion through the issuance of 650 million new ordinary shares at Sh9 per share through the IPO that closes on August 5.

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