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Absa loses Supreme Court push in credit card royalties tax duel

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Absa head office in Westlands, Nairobi. FILE PHOTO | NMG

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Summary

  • Last year, the lender lost an appeal after a bench of three judges ruled that the payments made by the bank to the credit card companies were royalty and, therefore, subject to withholding tax.
  • Dissatisfied with the decision, Absa went back to the Appellate court to be allowed to challenge the decision before the Supreme Court.

Absa Bank #ticker:ABSA has lost a bid to challenge a decision of the Court of Appeal allowing the Kenya Revenue Authority (KRA) to collect a share of billions of shillings paid to multinational credit card firms such as Visa and MasterCard as royalties.

Last year, the lender lost an appeal after a bench of three judges ruled that the payments made by the bank to the credit card companies were royalty and, therefore, subject to withholding tax.

Dissatisfied with the decision, Absa went back to the Appellate court to be allowed to challenge the decision before the Supreme Court.

Justices Roselyn Nambuye, Patrick Kiage and Jamila Mohammed, however dismissed the plea, saying there was nothing in the second appeal by Absa, which is of great public interest or requires constitutional interpretation for Supreme Court address.

“In the circumstances, we find that the issues raised by the applicant in the intended appeal to the Supreme Court are no more than facts which were in contest between the parties and do not transcend the circumstances of the case,” the Judges said.

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

This means that the KRA could push for Absa to pay tax arrears for the nine 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 percent tax due from payments made to the multinational card firms.