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Supreme Court agrees to hear Absa suit in tax row

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Absa bank along Muindi Mbingu Street in Nairobi on April 9, 2020. PHOTO | EVANS HABIL | NMG

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Summary

  • Absa had argued that allowing the KRA to collect withholding tax would discourage card transactions for payments.
  • Absa had lost the case before the Court of Appeal in 2020 after a bench of three judges ruled that the payments made by the bank to the credit card companies were royalty and subject to withholding tax.
  • The bank went back to the appellate court to be allowed to challenge the decision at the Supreme Court, but it rejected the application.

The Supreme Court has agreed to hear a case by Absa Bank Kenya challenging a move by the Kenya Revenue Authority (KRA) to collect a share of billions of shillings paid to multinational credit card firms such as Visa and MasterCard in royalties.

The apex court ruled that the case filed by the lender was not frivolous as it affects the banking industry.

Absa had argued that allowing the KRA to collect withholding tax would discourage card transactions for payments and in effect impose a pure cash economy, which is unfriendly to public health at the height of the Covid-19 pandemic.

“The question of whether such payments made by banks to card companies constitute royalties and whether interchange fees paid by banks are classified as management or professional fees liable to taxation and subject to withholding tax is an important one within the banking industry,” said the judges led by Deputy Chief Justice Philomena Mwilu.

Absa had lost the case before the Court of Appeal in 2020 after a bench of three judges ruled that the payments made by the bank to the credit card companies were royalty and subject to withholding tax.

The bank went back to the appellate court to be allowed to challenge the decision at the Supreme Court, but it rejected the application.

The Supreme Court, however, agreed to hear the dispute noting that the tax will allow the KRA to demand payments from all banks and might create an effect that will see a rise in charges to be borne by consumers of debit or credit cards, should banks be required to pay such taxes.

In 2015, High Court judge George Odunga agreed with the lender and quashed the demand saying it did not meet the level of clarity required in tax matters.

The Judge ruled that the taxman did not clearly identify the category in which the demanded tax fell.

KRA appealed against 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 said the contractual relationship in the card schemes involving Absa gave rise to contractual rights and obligations, which attracted tax. The decision was reversed by the Court of Appeal.

In the second appeal, Absa says that withholding tax is a matter of great public importance as it affects the entire banking industry since banks will have no incentive to issue debit and credit cards if the interchange fees are liable to withholding tax.

Further, the lender argues that card companies will also be discouraged to issue cards since the cost of card transactions will increase.

“The decision also negatively impacts the card companies who operate the networks that enable payments through the use of credit and debit cards as it increases the cost of card transactions thus discouraging the issuance of use of cards,” Absa said in the application.

Further, the court heard that debit and credit cards are cashless, safe, reliable, convenient and a secure way of making payments.

And in the event that banks in Kenya stop issuing cards, it will negatively impact the more than 11 million individual and institutional members of the Kenyan public who use credit and debit cards and Kenyans travelling abroad will not be able to undertake online purchases and will be forced to carry cash with them.

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