Prime Bank has fended off a Sh87.6 million claim from the Kenya Revenue Authority (KRA) after the Tax Appeals Tribunal overturned the taxman’s claim on the lender’s income streams.
The claim followed the taxman’s audit of the bank’s books four years ago.
The ruling provides crucial clarity on the taxation of banks, particularly concerning excise duty and withholding tax on various income streams.
In its decision, the tribunal barred the imposition of excise duty on credit card interest, late payment interest and over-limit charges, ruling that these constitute interest income rather than taxable fees.
Additionally, it dismissed KRA’s attempt to tax cheque and bill discounting income, affirming that such earnings fall outside the scope of excise duty under the Excise Duty Act.
The tribunal also invalidated withholding tax assessments on payments made to non-resident service providers, operational expenses and procurement-related costs.
It found that KRA’s Commissioner of Legal Services and Board Coordination had acted unlawfully in levying these taxes, declaring the assessment internally inconsistent, legally flawed and unsupported by statute.
The dispute stemmed from a comprehensive audit conducted by KRA covering Prime Bank’s tax obligations between 2019 and 2022, including corporate income tax, withholding tax, PAYE, VAT, excise duty and reverse VAT.
In September 2024, KRA issued an additional assessment demanding Sh100 million in principal taxes. While Prime Bank settled Sh18.1 million, it contested the remaining balance, leading to the appeal.
A key issue in the case was withholding tax on interest paid to financial institutions. The tribunal ruled that such interest is explicitly exempt under Section 35(3)(b) of the Income Tax Act.
Despite KRA acknowledging this exemption during objections, it failed to adjust its final computations, prompting the tribunal to declare the decision unsustainable.
Furthermore, the tribunal criticised KRA for failing to credit withholding tax payments already made by Prime Bank.
The bank provided evidence of several payments, including Sh10.5 million in 2020 and Sh80,258 in 2021, both acknowledged by KRA yet not taken into account in the assessment. The tribunal deemed this an impermissible case of double taxation.
Regarding operational expenses, the tribunal found that withholding tax had been unlawfully applied to payments unrelated to statutory provisions.
These included purchases of goods, ATM relocation costs, repairs, maintenance and general procurement. Citing Sections 10 and 35 of the Income Tax Act, the tribunal emphasised that taxable payments are exhaustively defined, and any ambiguity must favour the taxpayer.
Prime Bank also successfully challenged withholding tax on payments to service providers in South Africa and the United Arab Emirates for management and software-related services.
The tribunal ruled that the applicable double taxation agreements (DTAs) did not provide for taxing such fees and that, absent a permanent establishment in Kenya, the income could not be subject to local taxation.
For the 2019 tax year, the tribunal ruled that KRA lacked legal authority to recover unwithheld tax before November 7, 2019, when Section 39A of the Tax Procedures Act took effect.
Consequently, any withholding tax demands for that period were declared invalid.
On excise duty, the tribunal reinforced that interest income—regardless of its structure—does not attract excise duty. It dismissed KRA’s classification of cheque and bill discounting income, card interest, late payment charges and over-limit fees as taxable “other fees”.
Additionally, excise duty on international card interchange fees was overturned, with the tribunal ruling that these services were consumed outside Kenya and thus qualified as tax-exempt exports.
The ruling represents a landmark decision for Kenya’s banking sector, reinforcing legal protections against arbitrary tax assessments and affirming the primacy of statutory provisions and international tax agreements.
