Stanbic Bank Kenya Ltd has suffered a blow, after a tribunal dismissed its appeal seeking to quash a demand of Sh88.4 million of withholding tax, arising from payments made to card companies as interchange fees.
A five-member tax appeals tribunal ruled that payments made by the lender to the card companies comprises royalty for use of their trademarks and logos and payments to access card payment systems to access clearing and settlement functions in the card.
The tribunal said the role of the bank in the arrangement constitutes management or professional services hence withholding tax ought to be levied on the interchange fees.
“The upshot to the foregoing is that the appeal is unmerited,” ruled the tribunal.
According to the tribunal, as much as the payments can be said to be for the clearing and settlement, it is not possible to exclude fees for use of the trademarks and logos from the payments.
Evidence tabled before the tribunal was that the Kenya Revenue Authority (KRA) conducted a tax audit on the lender for the period November 2021 to December 2022.
The commissioner of domestic taxes issued a notice, demanding withholding tax amounting to Sh88.4 million, in relation to payments made out to card companies as interchange fees and management and professional fees.
The lender challenged the demand saying it was erroneous, as interchange services do not qualify as management or professional services as defined in the Income Tax Act.
Stanbic explained that the acquiring bank enables merchants to accept cashless payments by acting as a link between the cardholder, issuing banks and payment networks.
The role of an acquiring bank is to enroll merchants who will accept payments made through the use of debit and credit cards, the lender said.
Stanbic said it entered into agreements with three card companies- Visa International Service Association, MasterCard International Incorporated and Union Pay International Co. Ltd.
The bank added that the payments made to the non-resident card companies do not qualify as royalty and as such the KRA was wrong to demand the tax as the payments by Stanbic to non-resident card companies do not qualify as royalty.
The lender maintained that the verification, authorisation, and settlement it provides as an issuing bank under the card network in any card transaction, do not constitute management or professional services.
On its part, KRA said the agreements provide for payment of a fee in exchange for accessing the card networks and the issuance of cards that bear the logos of the respective companies.
The taxman said the lender is obliged to pay withholding tax arising from its relationship and dealings with the credit card companies, as the contractual relationship in the card schemes involving the bank gave rise to contractual rights and obligations which attracted withholding tax.
The KRA submitted that the payments made by the bank to the card companies, were for royalty and therefore constituted income derived from Kenya for which income tax was chargeable under the Act.
