Centum sucked into Coke, KRA Sh3.7bn tax war

Centum Investment Company #ticker: has agreed to compensate the buyer of its Coca-Cola beverage businesses to the tune of $34.4 million (Sh3.7 billion) representing tax demands by the Kenya Revenue Authority (KRA).

The Nairobi Securities Exchange-listed firm sold its stakes in Almasi Beverages and Nairobi Bottlers to Coca-Cola Beverages Africa (CCBA) last year for a total of Sh19.3 billion.

The transactions were completed despite the taxman seeking Sh3.7 billion excise taxes on returnable bottles, a claim that the bottlers are still fighting in court.

CCBA, owned 66.5 percent by soft drinks giant Coca-Cola and 33.5 percent by Gutsche Family Investments, required Centum to guarantee that it would settle the tax liability should the KRA win the legal battle.

The investment firm had booked gains of Sh12.3 billion on the two transactions and the pending tax demand risks eroding the profit by a substantial amount.

“Under the terms of the respective share purchase agreements … Centum is required to provide a guarantee of $34.4 million (Sh3.7 billion) to CCBA against general and contingent liabilities (including tax liabilities) that were unresolved as at the transaction date,” the company says in its latest annual report.

“Those liabilities largely relate to an ongoing court case in relation to a contested historical KRA demand for tax arrears, penalties and interest for the period 2006 to 2009 relating to excise tax on returnable containers.”

Centum says it has obtained a bank guarantee from Stanbic Bank Kenya Limited to cover the full amount. The guarantee is in turn secured by a charge on Centum’s portfolio of marketable securities which is mostly made up of fixed-income instruments including government bonds.

This means that should the bottlers, now owned by CCBA, be required to pay the tax, they will be compensated by Stanbic Bank. The lender will then seek compensation from Centum and will have a right to liquidate the investment firm’s portfolios that are held as security.

Such arrangements are common in mergers and acquisitions, with buyers hedging against liabilities such as taxes and contract disputes that may materialise in the near future.

Centum sold its 53.9 per cent stake in Almasi Beverages and 27.6 per cent stake in Nairobi Bottlers to CCBA on September 30, 2019.

It also disposed of its 100 per cent interest in King Beverage Limited to Danish Brewing Company EA Limited, a subsidiary of Bounty Global Management DWC LLC on August 19, 2019, receiving Sh147.5 million in the deal.

Centum received an aggregate of Sh19.5 billion from the three transactions and used the cash to pay back part of its loans and increase its investment in bonds.

“The directors’ assessment is that the matter will be resolved with minimal impact to the business of disposed bottling companies and consequently the likelihood of the liabilities crystallising is remote,” the company said of the potential tax liability.

The taxman and the bottling companies have fought a drawn-out legal battle that has now gone to the Supreme Court, with the case revolving on whether or not excise duty ought to be levied on returnable bottles.

The High Court in 2012 allowed the KRA to collect the taxes, a decision that was overturned in July last year by the Court of Appeal. The taxman subsequently appealed the ruling at the Supreme Court of Kenya which will make the final decision.

Before 2004, the Customs & Excise Act made exceptions in respect of determining the ex-factory selling price and expressly excluded the cost of returnable bottles.

There was therefore no excise duty charged on the cost of returnable containers.

A 2004 amendment to the law, however, deleted the entire subsection that dealt with the returnable containers, effectively going silent on how they should be treated.

The KRA interpreted this to mean that it could collect taxes on these goods, a move the bottlers said would amount to multiple taxation on the same items.

The soft drinks manufacturers argue that bottles are manufactured once and used many times, with distributors paying a refundable deposit on the goods.

The KRA on the other hand says that the bottles and drinks are sold as one package, saying this justifies the tax demand on the bottles.

In the Court of Appeal, the three-judge bench said the taxman cannot take advantage of ambiguity in the law to collect taxes.

“The norm is that a taxing legislation must be construed with perfect strictness whether or not such construction is against the State or against the person sought to be taxed,” the judges ruled.

“If however there is any real ambiguity in a taxing Act, such ambiguity may be resolved in favour of the taxpayer, or, as it is sometimes stated: contra fiscum.”

The judges agreed with the bottlers that the bottles are manufactured once and used multiple times, with distributors and all other parties along the supply chain paying refundable deposits to incentivise them to return the goods.

The judges said that this unique situation may perhaps explain why such returnable containers were excluded from the ex-factory selling price.

“Levying tax on returnable containers every time they are refilled would amount to multiple taxation which is, needless to say, unconscionable and unlawful,” the judges said.