Treasury Cabinet Secretary Njuguna Ndung'u on Wednesday, Febraury 8, gazetted Income Tax (Financial Derivatives) Regulations 2022.
The Financial Derivatives that are spelled out in the Finance Act 2022, which introduced a 15 per cent tax on gains made in by individuals or businesses.
According to Income Tax (Financial Derivatives) Regulations 2022, any gain realised from a financial derivative will be taxed at 15 per cent of the gain.
Economist Churchill Oguttu explained that the regulations provide that any gains from financial derivatives will be deemed to be a separate source of income.
"The Income Financial Derivatives Regulations is a withholding tax that is imposed on instruments that are linked to specific commodities in the marketplace,"
"In this case, the government is mainly targeting businesses or individuals who have not been paying taxes, but continue to trade, especially, on new economic dimensions like the cryptocurrency," Economist Churchill Oguttu explained.
Section 9 of the Income Tax Act allows the government to collect taxes on financial derivatives following amendments brought about by Finance Act 2022.
Some of the affected financial elements include call options, currency swaps, forward contracts, futures contracts, interest rate swaps, option contracts and option premiums.
"By ratification of this Income Financial Derivatives Regulations, it, therefore, means that their earning will be subjected to the deduction as outlined," Economist Churchill Oguttu explained.
However, Mohamed Wehliye, an Economist,raised concerns, noting that such a regulation may have ripple effects if left unchecked.
"Derivatives are a risk management tool. If you are going to tax both trading and banking book derivatives, then your financial system will be exposed to higher risks if it becomes expensive to hedge. Nairobi Financial Centre dead on arrival," Wehliye warned.
Finance Act 2022 provided January 1, 2023, as the effective date when the Income Tax (Financial Derivatives) Regulations 2022 would come into effect.
