Interest earned on future infrastructure bonds with a term of at least three years will for the first time attract a withholding tax at the rate of five per cent if proposals in the Finance Bill 2024 are passed through Parliament.
Infrastructure bonds (IFBs) have been tax-exempt since they were first issued in February 2009.
The National Treasury has now proposed a tax on income from bonds.
This means that interest accrued from already issued infrastructure bonds will remain exempt from withholding tax. “With respect to interest arising on bonds, securities or other similar securities that mature for at least three years and are used to raise funds for infrastructure and other social services, five percent,” the bill reads.
Other regular Treasury securities are subject to a withholding tax at a rate of 15 percent for notes maturing within five years and 10 percent for notes maturing more than five years.
Infrastructure bonds are used for specific infrastructure projects with their tax-exempt status helping to increase investor interest.
However, infrastructure bonds labeled as green bonds remain exempt if they have a term of at least three years.
The Kenya Green Bonds Project describes them as instruments whose proceeds are allocated to projects with environmental benefits, mostly related to climate change mitigation or adaptation.
However, the government is yet to issue sovereign green bonds as it finalizes a framework to guide the flotation of the instrument.
Imposing a withholding tax on interest from Islamic banks could reduce their attractiveness even as the tax rate remains at a relatively lower 5% compared to ordinary bonds.
At the same time, investors can avoid green bond infrastructure issues when they are launched.
At present, the Central Bank of Kenya occasionally issues tax-exempt infrastructure bonds which it describes as a very “attractive investment”.
The Central Bank of Kuwait's last infrastructure bond issuance came in February when it raised Sh240.9 billion against a target of Sh70 billion, with the auction recording huge interest from foreigners.
Bids for the IFB reached Sh288.6 billion, representing a more than three-fold oversubscription.
Buyers of the paper receive a return of 18.4607 percent, and the issue represents one of the highest paying instruments this year.
The interest seen in the primary market for the paper has moved to the secondary market where there is great demand for the paper.