Robin Hood Tax: Effects of a financial transaction tax in Kenya

​published on 24 August, 2018 

The recent introduced 0.05 percent tax on any amount of KShs 500,000 or more transferred through banks and other financial institutions (money transfer) has been met with opposition from the banking industry.The Kenya Bankers Association, representing the banking industry, moved to court expressing their frustration on implementing and interpreting the new tax provision and on 19th July, the High Court in Nairobi issued conservatory orders suspending the implementation of the excise duty.

 
According to the ruling by Justice Okwany, the new tax is suspended until a proper definition of money transfer is provided. With the next hearing schedule for 18th September, what could be the impact of the implementing Robin Hood tax?

 
A tiny 0.05 per cent tax on high value transactions, which could generate billions in added revenue, seems tempting but a closer examination of the tax reveals a grim reality.

  
Tax on transactions will not only affect the finance sector but it will have a ripple effect on other sectors affecting the whole economy as a whole. The primary purpose of any tax is to increase revenue for the national treasury but a tax that successfully increases tax revenue may alter the behavior of the market participants which could impact the overall tax revenue collected.

 
For example, a financial transaction tax will increase cost of transaction which will subsequently increase cost and prices of goods and services. Increase of product prices in the market will discourage consumption which will consequentially reduce value added tax (VAT) collection.

 
This brings the question, how much net revenue will be collected from the introduction of Robin Hood tax?
Financial transaction taxes have a cascading and multiplier effect. This means that the tax is compounded against every transaction. For example, if a million shillings was transferred ten times across different accounts, the total tax paid would increase to 0.628 per cent.

 
However, it is Wanjiku who bears the heaviest burden of this tax. The person initiating a transaction is charged the tax but he will most likely pass the burden to his customer. As a result, prices of goods and services will increase.

 
From a macroeconomics view point, this new tax will be a zero-sum game. This may sound strange but although Robin Hood tax will collect revenue, it will reduce revenue collected from other taxes because of the increase in the cost of transactions.

 
Several research and empirical evidence have cautioned that any kind of financial transaction tax could reduce the GDP growth of any economy. One of the research findings by Alternative Investment Management Association (AIMA) focusing on the European Union supports this viewpoint.

 
The AIMA reported that an estimated tax rate of only 0.1 per cent on securities, but excluding the derivatives markets, could possibly reduce EU’s future GDP growth by 1.76 per cent (€286bn) to 0.53 per cent (€86bn).

 
Although Kenya’s tax rate is lower, it potentially covers a wider scope including transactions such as direct debits and online transfers, supplier payments, loan transactions, interbank transactions, local and foreign currency transfers, which only exposes it to more severe consequences.

 
According to Central Bank 2017 statistics, Kenya’s economy reported over 24.1 million RTGS transactions and over 215.6 million card payments at a value of KShs 3.95 trillion and Kshs 1.4 trillion respectively. Considering that most commercial transactions are executed by the financial institutions, a Robin Hood tax will cause strong economic reactions in the market and subsequently affect GDP.

 
GDP growth is important to a revenue authority because 20–30 per cent usually ends up as tax revenue to the government. Considering the example of the EU, if the proposed financial transaction tax collects 0.1per cent of GDP, other tax collections would fall by 0.7–0.9 per cent of GDP. This raises the question - why does a financial transaction tax have such a huge impact?

 
The new tax will reduce liquidity of market capital creating a disincentive to foreign investment at a time when Nairobi has been listed among the top four cities in Africa that attract highest foreign capital inflows in the United Nations’ State of African Cities 2018 report.

 
Based on information from the Capital Market Authority (CMA), they have alerted the Treasury on the adverse impact of the new tax measures which includes a depressed market and a declining market capitalization.

 
This was witnessed in Sweden when an introduction of a 0.5 per cent financial transaction tax led to over 50 per cent of Swedish equities moving to London accompanied by over 60 per cent of Sweden’s most active trading shares.
By the time the dust settled, the Swedish Treasury only collected around 7 per cent of the revenue it had projected and the tax had caused irreversible consequences to the state.

 
Could the same happen to Kenya? What will cause foreign investors not to migrate to cost-effective markets? How damaging will this tax be in the long-run? History doesn’t offer any consoling answers.
Globally, Robin Hood tax has been a trending tropic in recent years, especially in America and in the West, where 11 out of 28 countries in the EU are at the forefront of fighting for its adoption. The tax gained much of its popularity after the 2008/09 financial crisis which forced governments to use taxpayers’ money to bail out the banks from the catastrophe.

 
As a result, the Robin Hood tax was proposed as a source of revenue for the EU to recoup the cost of bailing out the banks and as a tool to deter speculations in the financial sector. However, no conclusive decision has been reached by the EU as it continues to balance the pros and cons of such a tax.

 
In Africa, countries such as South Africa have campaigned for a Robin Hood tax since 2011 with support pouring in from health groups, environment movements and international development agencies. Former President Jacob Zuma even publicly endorsed it at the G20 Summit in Cannes 2011. In East Africa, the tax had always been fiction until its introduction on the 14th day of July during this year’s budget speech.
 
The world seems on tract to embrace this new tax but research and organizations such as the World Bank have already branded this tax a “disappointment” because it does not only fail to achieve its objectives but it also carries with it ill-effects on the economy.

 
The finance sector in Kenya has already strongly disapproved the levy. Even though banks have made claims of computer software challenges and uncertainty in legislation affecting implementation of the new excise duty, Robin Hood tax in comparison to other taxes is easier to execute, account and collect. In addition, banks and financial institutions are regulated by Central Bank of Kenya who happens to be the custodian of the Consolidated Fund.

 
The new levy will lead to fewer economic transactions which could generally lead to drop in business profits and unemployment in finance sector. Pensioners would also earn less on their returns since additional transaction costs would result in fewer investments on unit trusts.

 
For Kenya to cushion itself against the negative impact of such a financial transaction tax and to prevent it from losing investments to regional markets, a similar tax would have to be implemented globally or at least regionally though this is hardly probable.

 
It is also unclear whether the tax will apply to businesses that act as the government’s agents when collecting and remitting taxes such as VAT and PAYE of over KSh 500,000. Should a business be charged additional taxes by a government for collecting taxes on its behalf?

 
The intention of directing proceeds of this tax to universal healthcare is well intended. The KRA has already opposed suspension of the tax on grounds that the government will incur huge revenue losses but the revenue authority should be warned it is set to loss more than it will gain in the short and long run. Based on the above, this tax could reduce the national tax base and cripple sectors of the economy.

 
The hurry to enforce this tax into law will only add empirical evidence to the burgeoning literature on financial transaction tax and the Kenyan economy will bear consequences of such as a rushed decision. As parliament debates the Finance Bill 2018, more resource should be invested to understand the aggregate impact of such a tax in the Kenyan economy. This analysis will offer more clarity on direction to take forward as the country seeks economic growth and development.