Reprieve for Equity Bank in Sh234m tax demand disputeTuesday February 22 2022
Equity Bank Kenya #ticker:EQTY has won a temporary reprieve after the appellate court barred the Kenya Revenue Authority (KRA) from demanding Sh234 million in taxes on the lender’s employee share ownership plan (Esop).
The Court of Appeal agreed with the bank that the demand by the KRA to enforce the award was real yet Equity had demonstrated that it had an arguable appeal.
Equity told the judges that KRA had written a letter in April last year, demanding the immediate payment of the money or face enforcement action.
The amount arises from pay as you earn (PAYE) taxes on Equity’s stock-based compensation scheme which the High Court last year found to be payable.
“No doubt, the amount involved is colossal as the same is to the tune of Sh234,138,308 and if the respondent is allowed to proceed with enforcement of the same, it is likely that the applicant will suffer unbearable hardship that may have the effect of stifling and crippling its operations,” said Justices Fatuma Sichale, Jamila Mohamed and Mbogholi Msagha.
In the case, the taxman had argued that the lender operates an Esop where employees are given an opportunity to acquire the bank’s shares at discounted prices.
KRA said eligible employees were invited to take up offers when they are opened and that the shares allocated and taken up are held for a certain period, after which the same are vested (transferred to qualifying staff).
And as per the Income Tax Act, if the employee opts to exercise that option, a taxable benefit is conferred as access to the benefit is only granted as a result of one’s employment and thus subject to payroll taxes.
The lender on its part said that it did not set up the Esop but only played a facilitative role to enable its employees acquire shares being sold by one of its main shareholders Africa Microfinance Fund (AMF) in 2005.
The employees bought the shares using loans obtained from insurance firm Britam and Equity did not provide them with any financial assistance, the lender added.
Equity said the ownership plan was not set up by the lender and as such, it was not a benefit or advantage granted and neither did it stand to make any direct gains or profits from it.
Last year, High Court judge David Majanja upheld a ruling of the Tax Appeals Tribunal stating that ESOP confers a benefit to an employee and the benefit to the employee arises from the fact that the value of shares, whether or not they are issued at a discount, would ordinarily appreciate at the time of vesting.