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Absa loses 8-year royalty tax battle against KRA

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Absa branch in Nairobi. FILE PHOTO | NMG

Absa Bank #ticker:ABSA has lost an eight-year battle with the Kenya Revenue Authority (KRA) over a share of billions of shillings paid to multinational credit card firms like Visa and MasterCard as royalties.

A bench of three Court of Appeal judges has ruled that the payments made by Absa to the credit card companies were royalty and subject to withholding tax.

The KRA and the bank were in dispute over whether the payments made to the multinationals were royalties, which meant that Absa was required to deduct 20 percent as tax.

“In this appeal we have come to the conclusion that there is no ambiguity in the law and that the appellant [KRA] sufficiently demonstrated that the payments made by the respondent [Absa] to the card companies are ‘royalty’ under the Act,” Justices Wanjiru Karanja, Kathurima M’Inoti and Fatuma Sichale said.

This means that the KRA could push for Absa to pay tax arrears for the eight years that could run into billions of shillings in a suit that will have repercussions for Kenya’s banking industry.

In 2012, the KRA demanded withholding tax on payments that Absa had made to Visa International Services Association, MasterCard Inc., and American Express Ltd as well as those made by Absa to other banks in what is known as interchange fee.

The fee is charged by banks for processing and accepting card-based transactions on behalf of their rivals. The taxman in its demand argued the payments to the card companies were royalties while the fees from rival local banks were for professional or management services.

Absa maintained the payments to the three card companies were not royalties and that the KRA had no basis for demanding withholding tax.

Absa challenged the KRA’s move in court, arguing that it was illegal and unreasonable.

High Court judge George Odunga in 2015 agreed with the bank and quashed the demand, saying it did not meet the level of clarity required in tax matters. The judge reckoned that the taxman did not clearly identify the category in which the demanded tax fell.

The KRA appealed the decision arguing that the bank was obliged to pay withholding tax arising from its relationship and dealings with the credit card companies.

The taxman held that the relationship between Absa and the card companies was reflected in the membership and trademark licence agreement, which granted the bank the permit to use the card companies’ marks.

And for that matter, Absa was obliged, as a withholding agent, to retain the 20 per cent tax due from payments made to the multinational card firms.

“We are persuaded that the evidence on record properly established that the payments paid by the respondent to the card companies were royalty as defined in the Act and further that the interchange fees it paid to issuer banks were for management and professional services as defined in the Act, and therefore both payments were subject to withholding tax under the Act,” the appellate judges said.

The judges agreed with the KRA that without the use of credit and debit cards bearing the trademarks Visa, MasterCard and American Express, Absa cannot access or use the networks.

“The appellant (KRA) was able to demonstrate that the transaction fee constituted, in the circumstances we have explained above, payment for the right to use the card companies’ trademarks and logos. The payment constituted royalty for trademark under Section 2(c) of the Act,” the judges said.

The multinational card firms led by MasterCard and top rival Visa Inc have aggressively grown their market in Africa over the past decade, striking partnerships with governments and banks to provide access to their payments systems.

They have been targeting Middle East and Africa where about 90 per cent of transactions are still done in cash.

Total cards in use in Kenya jumped from 3.8 million in 2009 to 11.6 million in September, according to the Central Bank of Kenya.