Inside Coca-Cola Sh5.6bn tax call battle with KRA

Coca-Cola faces a Sh5.6 billion tax bill after ignoring a review of taxation laws that required soft drink makers to pay excise duty on costs incurred during washing and sanitising of returned bottles.

Former Finance minister David Mwiraria had in 2004 changed the laws and subjected the cost incurred in cleaning up returnable bottles together with soda production expenses to excise tax, which is based on the total cost of production.

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But four local Coca-Cola franchises moved to court in May last year and argued that the bottles belong to them and the cost of washing and sanitising returned containers cannot be subjected to tax since they are never sold to distributors.

The Mwiraria law was changed in 2010 in favour of beverage manufacturers who use returnable bottles, but the Kenya Revenue Authority (KRA) said that Coca-Cola never paid the tax on the cost that comes with maintaining the bottles between 2006 and 2009.

Justice Isaac Lenaola last Monday ruled in favour of KRA, directing Coca-Cola’s local franchises — Mount Kenya Bottlers, Rift Valley Bottlers, Nairobi Bottlers, and Kisii Bottlers — to pay the taxman Sh5.6 billion for tax arrears, penalties, and interest.

“It is obvious to me that the petitioners (Coca-Cola)… have made no case and I shall order that the petition dated May 13, 2011 is dismissed and costs thereof shall be paid to the respondents,” ruled Justice Lenaola.

The bottling firms plan to appeal the decision and have obtained orders from the court maintaining the status quo as its major shareholder Centum Investment warned that the tax bill could affect the bottler’s ability to meet long-term obligations.

The judgment dwelt largely on interpretation of the Customs and Excise Act, which has been severally amended between 1999 and 2010.

The Coca- Cola companies said they overlooked the 2004 Mwiraria law because they were entitled to legitimately expect that the cost of returnable containers would remain excluded from the computation of excise duty.

Before 2004, the costs of washing and bringing the bottles to a usable state were excluded from the duty.

The Custom and Excise Act has been amended four times, in 1999, 2002, 2004 and 2010 Coca- Cola argued that in the 2002 Amendment, returnable containers were excluded from duty.

“They have contended that the respondent’s (KRA) actions were in violation of their right to legitimate expectation,” read part of the judgment.

The bottlers accused KRA of coming late into the matter despite the authority having accepted their tax returns between 2006 and 2009 and that the opportunity to pass through the cost of tax to consumers has elapsed. The dispute stems from tax audits done in 2009.

The soda manufacturers maintained that the bottle is not subject to customs and excise tax because it belongs to Coca- Cola and is returned to Coca-Cola once the soda is consumed and refilled 18 times.

“The gist of the petitioner’s case is that the recyclable bottles and crates ought not to be subjected to tax as the property in them never passes to the distributors,” reads part of the judgment, adding that Coca-Cola was relying on the Sale of Goods Act.

The Act states: “Where there is contract for the sale of specific or ascertained goods, the property in them is transferred to buyer.” Coca-Cola argues that it sells the liquids in the bottle and not the containers.

But KRA argues that the deposit paid on the bottles amount to a transfer of ownership and that soda manufacturers cannot sell the liquid separately from the container.

The taxman also reckons that the expense of incurred washing and sanitizing returned soda bottles was being met by consumers and must attract tax since it’s a primary production cost.

“The price of the bottle cannot be divorced from that of the liquid in them,” said KRA.

”Each individual bottle was resold at a cost along with its contents to the distributor as evidenced by the petitioners’ invoices.”

Centum Investment warned on Friday that its earnings might be hit by the court case given its investments in the bottling firms.

Its shares in the four Coca- Cola bottling companies represented 28 per cent of its assets, contributed 20 per cent of its profit and two per cent of the cash flow in the year to March.

“Should the appeal process fail both at the Court of Appeal and the Supreme Court, the outcome is likely to adversely impact the solvency of the four bottling companies and as a result negatively impact on Centum’s performance,” said James Mworia, the CEO of Centum whose shares dropped 7.1 per cent to Sh12.90.

The alert comes at a moment when production of soft drinks in the half to June dropped for the first time in four years from 189.7 million litres to 187.9 in a similar half last year.

In June, the market regulator fined Centum for failing to issue a profit warning after its earnings slumped 40 per cent for the year ended March.
Firms are required to issue a warning if earnings are likely to fall by more than a quarter in a full financial year.