THE ANNOUNCEMENT EFFECT OF CAPITAL GAINS TAX ON FOREIGN PORTFOLIO INVESTMENT FOR FIRMS LISTED AT THE NAIROBI SECURITIES EXCHANGE, KENYA
Abstract
Foreign investment is important for growth of any country since it enables flow of capital, resources and skills from one country to another. Foreign portfolio investment enables investors to invest in securities in a foreign country and this has various benefits to the host country. The government of Kenya re-introduced capital gains taxes in 2015 after a 30 year suspension in a bid to increase tax revenue to finance various projects. This tax was to be charged at a rate of 5 percent of the net capital gain. The reintroduction of the capital gains tax (CGT) had an effect on the foreign portfolio investment as some of the foreigners opted for other markets and form of investments. Eight months prior to reintroduction of CGT the average foreign portfolio investment was 53.08% of the overall Equity Market at the Nairobi Securities Exchange market. One month to the effective date of the CGT, the level of foreign portfolio investment dropped to 32.37% giving a percentage drop of 20.71% from the average participation. The changes in the percentage of foreign investors may or may not have been significant, based on the abnormality of the changes. The study used a longitudinal descriptive research design which looked at the percentage changes in foreign portfolio investment at the NSE as a result of the announcement of the capital gains tax reintroduction. The study used secondary data from the Nairobi Securities Exchange to answer the research question. The foreign shareholding was collected as at the end of each 6 months, before and after the announcement month. Another set of data was collected for 6 months before announcement of the tax suspension and 6 months after the suspension. This data was analysed using events study, where abnormal foreign shareholding changes were calculated and assessed to determine whether it was significant. This was done using SPSS v.21 software. From the analysis, the study findings indicated that capital gains tax had a significant effect on foreign portfolio investment with decrease in foreign participation in the announcement month. With the findings, the study recommended that the government should come up with favourable tax policies to attract foreign investors and also to involve all stakeholders.
JEL: G24, O16, D24
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DOI: http://dx.doi.org/10.46827/ejefr.v0i0.349
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