KRA U-turn on tax deals rattles firms

Times Tower in Nairobi, the Kenya Revenue Authority headquarters. FILE PHOTO | DENNIS ONSONGO | NMG

The Kenya Revenue Authority (KRA) has rattled firms over its move to pursue billions of shillings it had abandoned a few years ago in its push to meet tax collection targets.

The taxman is currently battling Kenya Breweries Ltd (KBL) and NBCA Bank in court after reneging on exemptions granted to the firms in 2021 and 2019, respectively.

The amount the KRA is demanding from the two firms is more than Sh9.1 billion.

And the brewer and the lender have separately challenged the move by the taxman, arguing that the move will create uncertainty as to whether decisions made by or on behalf of the government are binding.

“Investors will no longer be able to believe in or trust decisions, and policies made by the government,” senior counsel Kamau Karori, who represents both firms said in the petitions.

The KRA has since gone back to court to lift orders obtained separately by the two firms, blocking the tax demand, arguing that the suspension encroaches on its mandate and will negatively impact revenue collection.

KBL got the order blocking the demand of tax liabilities amounting to Sh8.2 billion last month, alleging that the taxman had reneged on a deal abandoning the tax demand after months of negotiations.

NCBA also filed a separate case saying Treasury Cabinet Secretary Njuguna Ndung’u did not have the power to revisit the exemption decision once he has given it.

The lender described the revocation order as “irrational, illegitimate and without any legal basis”.

The KRA is demanding Sh933 million from NCBA following the merger of NIC Group and CBA Group.

But the taxman argues that the beer maker misinterpreted section 37 of the Tax Procedures Act on tax relief, which is only applicable when it is impossible to recover the unpaid tax, and the process of recovering it is costly and burdensome.

“That the orders and directions of this court were issued further based on material non-disclosure by the petitioner that the tax relief sought had been recommended by the third respondent (KRA), while in fact, the third respondent had indicated that there was no legal basis for the grant of the tax relief by way of abandonment of taxes,” Weldon Ng’eno, a deputy commissioner at KRA, said in an affidavit.

Withdrew case

High Court judge Mugure Thande directed both cases to be mentioned on May 11 for directions.

Kenya Breweries on its part said the demand by KRA is prejudicial because the taxman made the company withdraw a case it had filed before the tax appeals tribunal, challenging the excise duty and value-added tax from June 2015 to March 2017 — as part of the deal.

The beer maker says in the agreement, which was reached after exploring alternative dispute resolution, the government abandoned Sh11.16 billion if KBL paid Sh3.5 billion and withdrew the case.

Court papers stated that KBL applied for abandonment of taxes and the request was approved by the Treasury on January 22, 2021.

The company then paid Sh3.5 billion on January 25.

“The withdrawal of the appeals was in the belief that the tax issues had been fully settled and that the appeals were spent upon payment of the Sh3.5 billion,” said the company through senior counsel Kamau Karori.

Mr Karori said the KRA was attempting to ‘steal a march’ on it by luring it to abandon the pursuit of its case at the tribunal, getting payment of Sh3.5 billion then “surreptitiously revive and make demands for payment of an amount it confirmed it had abandoned”.

The taxman now says the law is only applicable when the taxman is unable to recover the tax due.

The NCBA moved to court after Prof Ndung’u on March 24 revoked the capital gains tax exemption on the transfer of shares, assets and liabilities in the merger.

“That any orders issued or to be issued in the current petition relating to the revocation of the exemption to remit the capital gains tax will directly affect the mandate of the 3rd respondent in effectively assessing, collecting and accounting for all tax revenues which are subject of the petition,” said Mr Ng’eno.

The banks merged at the end of September 2019 through a share swap and obtained a capital gains tax exemption from the former Treasury Cabinet Secretary Henry Rotich, saving the bank hundreds of millions of shillings.

Japanese workers

In January, the High Court quashed income tax waivers granted to Japanese workers and companies by former Treasury Cabinet Secretary Ukur Yatani in 2021.

The court ruled that the decision was unconstitutional as the Treasury Cabinet secretary did not have such powers.

Mr Yatani had exempted income tax for businesses and workers earned from 15 projects valued at Sh328 billion.

But Justice Dennis Magare said exemption or waiver of tax income can only be granted by Parliament through legislation after passing a money Bill, as provided in the Constitution and after public participation.

The judge also quashed section 13(2) of the Income Tax Act, saying it is unconstitutional to the extent that it authorises income tax waivers through a notice in the gazette and for specified persons without regard to Article 210 of the Constitution.

“Such blanket exemptions of nationals of one state, reeks of economic apartheid and are not reasonable and justifiable in an open and democratic society based on human dignity, equality and freedom,” said the judge.

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