Barclays win over KRA saves banks hefty tax demand

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Justice George Odunga last week ruled that KRA’s classification of withholding tax on the royalty fees remitted to Visa, Mastercard and American Express for electronic money transfer services is vague and cannot be used to demand levies from the bank.
The court’s decision comes as a victory for banks, saving them hundreds of millions of shillings that would have been due in taxes following a steep rise in the use of “plastic money” in the past five years.

Barclays Kenya has won a protracted legal battle with the Kenya Revenue Authority, which was demanding tax payments on fees remitted to Visa, Mastercard and American Express for electronic money transfer services.

Justice George Odunga last week ruled that the taxman’s classification of withholding tax on the royalty fees is vague and cannot be used to demand levies from the bank.

The judge ruled that the payments cannot be considered as management fees as held by KRA, hence cannot be subjected to withholding tax.
KRA wrote to Barclays Bank in 2012 and 2013 demanding tax on the payments, which triggered the court battle.

KRA labelled the payments to Visa, Mastercard and American Express as managerial fees, which the bank disputed arguing that there was no clear law that the taxman had used in its demand.

“KRA ought to have clearly identified the category in which the tax sought by it fell without resorting to an omnibus definition of professional and managerial fee. I find that the respondent’s decision cannot be allowed to stand,” the judge said.

The court’s decision comes as a victory for banks, saving them hundreds of millions of shillings that would have been due in taxes following a steep rise in the use of “plastic money” in the past five years.

There are 12,552,312 debit cards in the country, according to statistics released by the Financial Sector Deepening in February, and the number is likely to continue increasing.

Currently, 27 per cent of retail transactions are done electronically.

KRA had argued that taxation laws intended to have fees paid by Barclays to card companies for electronic payment services were categorised under professional and managerial fees.

But Justice Odunga said the court can only interpret the law, but not its intention. Under Kenya taxation laws, where a clause is vague, the taxman must rule in favour of the taxpayer and grant them relief.

Barclays pays fees to card companies for use of their systems, facilitating transactions on behalf of the applicant, royalties and interchange fees. The payments it holds, however, have not been liable for the withholding tax demanded by KRA.

But the taxman held that since the payments Barclays paid to other banks for Visa services were classified as professional and management fees – which are liable to withholding tax – then the payments to the card companies should fall under the same category.

“In this case, KRA simply borrowed the phrase in the Income Tax Act and applied to Barclays’ circumstances. In tax matters, the practice of cut and paste will not do. KRA cannot exercise its duty like a trawler in the deep seas expecting to catch all the fish by casting its net wide,” the judge said.