Thursday, 19 March 2015

CAPITAL GAINS TAX AND HOW IT AFFECT LAND TRANSFER TRANSACTIONS IN KENYA

The Finance Act CAP 16 of 2014 was assented by the president on September 2014; section 23 of the said Act has amended the Eighth Schedule of the Income Tax Act CAP 470 to require that the sale of property be subjected to Capital gains tax. The tax which was suspended in 1985 has now been re-introduced and was effective from 1st January 2015; the tax is 5% of the net gain from the transfer of property (Section 3(2)f of the Income Tax Act). Capital Gains Tax is a tax chargeable on the whole of a gain which accrues to a company or an individual on or after 1st January, 2015 on the transfer of property situated in Kenya, whether or not the property was acquired before 1st January, 2015 . The net gain is calculated as the excess of the transfer value over the adjusted cost of the property that is being transferred. The Transfer Value provided for in section 7(1) of the Income Tax Act is the amount or value of consideration or compensation for transfer of the property less incidental costs on such transfer. The Adjusted Cost as stated in the Income Tax act section 8(1) is the sum of the cost of acquisition or construction of the property; expenditure for enhancement of value and/or preservation of the property; cost of defending title or right over property, if any; and the incidental costs of acquiring the property . The adjusted cost shall be reduced by any amounts that have been previously allowed as deductions under Section 15(2) of the Income Tax Act. That is: Capital gains Tax= (Transfer Value – Adjusted Cost) x 5% The tax is paid by the person who transfers the property, the transferor. It can be a legal person or corporate body. A transfer takes place where a property is sold, exchanged, conveyed or disposed of in any manner (including by way of gift) or on the occasion of loss, destruction or extinction of property whether or not compensation is received or on the abandonment, surrender, cancellation or forfeiture of, or the expiration of rights to property . It is considered a final tax and cannot be offset against other income taxes. Where the transfer value cannot be ascertained, the market value is used. Incidental costs are deductible in determining the transfer value of property. These costs include: a) stamp duty; b) legal fees; c) advertising cost; and d) any costs of the acquisition or transfer of property which consist of expenditure wholly and exclusively incurred by the person acquiring the property or the transferor for the purposes of the transfer. Transfers of property as provided by the Eighth Schedule paragraph 6(2) of the Income Tax Act are not considered transfers for the purpose of CGT. These includes: a) transfer through inheritance; b) transfer of property as security for a debt; c) issuance by a company of its own shares or debentures; d) transfer of an asset between spouses or former spouses, as part of a divorce settlement or bona fide separation agreement . Effects if Reintroduction of the Capital Gains Tax 1. The reintroduction of the Capital Gains Tax will increase the cost of land transactions because most investors and land owners and developers will try to pass on the costs to buyers. The process of paying this additional tax will add up to the already strenuous work of transfer of land transaction. 2. The Finance Act does not specifically provide guidelines on how the CGT relating to the transfer of property shall be paid. It is expected that the CGT will be payable in the same manner as the stamp duty such that, evidence of payment of CGT may be required for the transfer of property to be registered . Although KRA has not outlined the procedure that will be applied the Capital gains it says that plans are underway to ease the process of payment of CGT by developing a module within the iTax system that will allow taxpayers to make electronic declarations. 3. Raising tax rates on high income individuals dissuades them from doing productive things – that is to say, it causes them to cut back on working and investing . 4. It may lower Kenya’s appeal as an investment destination but this is debatable since Kenya’s CGT rate is among the lowest in Africa compared to some countries like Tanzania which charges 20% Capital Gain Tax and Uganda which charges 30%. 5. Concerns have been raised that the new tax is likely to push up the cost of housing, and that it could be difficult to administer. “The net effect will be an increase in property prices as sellers look to pass on the tax to buyers. This may result in an adjustment in the sector, particularly for individuals or small developers,” said Timothy Kamau, the head of investor relations at Home Afrika, a NSE-listed real estate company . Recent debates have suggested that the Capital Gains Tax may encourage people to hold property for longer periods and to promote better capital allocation. However inventory is not taxed: after buying land or property for your business premises and selling it after one year, it will not be taxed . This is because inventory is not considered a capital asset. Those whose land is compulsorily acquired by the State will be exempt from the tax . Taxpayers will also have to review transactions involving the transfer of property where the transaction is expected to take place on or after 1 January 2015 . The effect it will have on the real estate sector will get clear when the modalities of how the tax will be administered are released and even clearer when the same is implemented. But generally speaking, this is one additional hurdle and complication in home ownership and everyone will be affected directly or indirectly. And since the government will now get more from the industry, the cost of the industry is more likely to increase than decrease, for the simple reason that someone has to bear the additional cost. Taxing the income from capital income has the potential to reduce savings and investment incentives as well as being a disincentive to entrepreneurship. This dampens the nation's entrepreneur spirit as well as long term prospects for increased productivity and economic growth . Banks and other financial institution may exercise more caution before taking land as security for loans because of the uncertainty and controversy surrounding the reintroduction of the capital gains tax. The Income Tax of 2010 section 72D states that where any amount of tax remains unpaid after the due date a penalty of twenty percent shall immediately become due and payable. On the other hand the Kenya Revenue Authority provides that non payment where no deduction is made could attract a penalty of up to 200% or a fine or imprisonment but where a declaration is made the penalties are 20% and 2% interest per month until the amount is paid in full. In conclusion the Capital Gain Tax is only 5% at the moment and has not been fully implemented. It is therefore difficult to measure the effect it will have on land transfer transactions in the country. However, it is clear that if this percentage is raised the government risk losing income whether as stamp duty or registration costs associated with property transactions because it has real prospects of making Kenya unattractive to investors. For further clarification on tax issues, please contact us. Christine GITONGA For: Taxlex Consulting Group – a participating consultancy firm in the SLS Group of consultancies

Friday, 10 October 2014

A BRIEF ON PLAGIARISM AND COPYRIGHT INFRINGEMENT

Plagiarism has been said to involve the use of another’s work without attribution, as if it were one’s own original work. A more detailed definition has been given as, ‘the deliberate or reckless representation of another’s words, thoughts or ideas as one’s own without attribution in connection with submission of academic work, whether graded or otherwise.’ What is key in both definitions is the use of another’s work and the lack of attribution. Plagiarism appears to raise an ethical issue as opposed to a legal one with educational institutions being so averse to it that it has resulted in harsh disciplinary measures being taken against those found to have engaged in it. Academic institutions in dealing with this have not spared even professors. For instance, Marks Chabedi, a professor, plagiarized Kimberly Lanegran’s work and submitted it as his own work. Upon discovery, he was fired from his professorship and his Ph.D. was revoked. This is just one example of the adverse impact plagiarism can have on a person’s reputation. Unfortunately it has become the norm rather than the exception. Noting that plagiarism involves the use of another’s work, it is important to distinguish it from copyright infringement. This is because copyright is the legal term used to describe the right that creators have over their literary and artistic works which include books, music, paintings among others. The Kenya Copyright Act provides for instances where copyright infringement is said to arise. It is important to note that ‘a copyright shall be infringed by a person who, without the licence of the owner of the copyright- (a) Does, or causes to be done, an act the doing of which is controlled by the copyright; or (b) Imports, or causes to be imported, otherwise than for his own private or domestic use, an article which he knows to be an infringing copy.’ When it comes to copyright infringement, since it is a right that is protected under statute, a copyright holder can sue for its breach. An example of this was in the Kenyan case of JOHN BONIFACE MAINA v SAFARICOM LIMITED [2013] eKLR in which the Court found that the plaintiff had copyright to his recording which the defendant was offering to the public for a profit. It therefore granted him an ANTON PILLER ORDERS to ensure that his statutory rights of copyright were salvaged at that point of trial since it must preserve vital evidence necessary during trial. In view of the above, we see that the type of works that are capable of being plagiarized are also capable of being protected by copyright and hence can be infringed. Despite this similarity some few differences may be noted between the two. Firstly, for there to be copyright infringement the plaintiff must illustrate that their work is protected by copyright. This requirement does not attach to plagiarism. Secondly, in respect of copyright, if a person has permission to use the work then he cannot be liable for copyright infringement. With plagiarism, the only consideration is whether or not there is an acknowledgement of the author. Therefore, a person may have permission to use another’s work but if they do not acknowledge the author are present it as their own idea then one is liable for plagiarism. Thirdly, with copyright infringement a person has recourse to legal remedies but this is not the case with plagiarism. Lastly, it has been said that whereas copyright infringement is a construct of the law, plagiarism is a construct of ethics. Feel free to contact us at intellectualpropertyeastafrica@gmail.com for more information or guidance on Copyright and other forms of intellectual property. FOR: INTELLECTUAL PROPERTY EAST AFRICA LLP

Tuesday, 7 October 2014

PATENTABILITY TEST IN KENYA

The World Intellectual Property Organization (WIPO) has defined a Patent as an exclusive right granted for an invention. A further explanation has been given that a Patent provides the Patent Owner with the right to decide how or whether the invention can be used by others and in exchange, the Patent Owner avails technical information about the invention to the public. The Industrial Property Act Chapter 509 of the Laws of Kenya grants this right for a period of TWENTY (20) YEARS from the filing date of the application. This then begs the question, what must one prove to attain these rights over their invention? The first issue that needs to be determined is what criteria are to be used for something to be considered to be an invention under our laws. This criterion is found under Section 21 (1) of the Industrial Property Act which defines it as a solution to a specific problem in the field of technology. Despite this definition, we find that there are things that fall within this definition but which the law does not consider to be inventions. These include discoveries, scientific theories, mathematical methods, schemes, rules or methods for doing for doing business, performing purely mental acts or playing games, methods for treatment of the human or animal body through surgery or therapy among others. Having established what may be considered to be an invention, we now then interrogate inventions that are patentable and those that are not. It is important to establish this from the onset as a guideline to anyone who wishes to patent their invention. Patentable inventions are: - inventions that are new; - involve an inventive step; and - are industrially applicable or are a new use. On the other hand the following inventions cannot be patented: - plant varieties as provided for in the Seeds and Plant Varieties Act; and - inventions that are contrary to public order, morality, public health among others. PATENTABILITY TEST This will be looked on the basis of the patentable inventions. The first to be considered is the NOVELTY TEST which is the consideration of whether or not an invention is new. An invention is thus considered to be new if it is not anticipated by prior art. What the law considers as PRIOR ART is everything that is made available to the public anywhere in the world by means written or oral disclosure, use, exhibition or any other non-written means. The next is the INVENTIVE STEP which involves attempting to determine whether a given invention is obvious to a person skilled in the art having regard to the state of the art at the filing of the relevant patent application. In this regard, a person skilled in the art is presumed to be a skilled practitioner in the relevant field of technology, who is possessed of average knowledge and ability and is aware of what was common knowledge in the art at the relevant date. The final step is that of INDUSTRIAL APPLICABILITY. The Act provides that an invention is considered industrially applicable if it can be used in any kind of industry, including agriculture, medicine, fishery and other services. It is therefore important for a person who wishes to patent their invention to ensure that it meets the laid out criteria. Signed: For: Intellectual Property East Africa LLP