The State Bank of Mauritius (SBM) has been ordered to pay Sh400 million in taxes and penalties on a secret Sh9.6 billion interest-free loan it took from the Central Bank of Kenya (CBK) during the purchase of collapsed Chase Bank assets.
The tax tribunal quashed an appeal by SBM to stop the Kenya Revenue Authority (KRA) from claiming the payment after the lender refused to reveal its agreements with the banking sector regulator and the Kenya Deposit Insurance Corporation (KDIC) for the purchase of Chase Bank.
The tribunal said SBM also declined to give proof of payment for the acquisition, analysis, and valuations of the assets and liabilities taken over and supporting documents for the Sh9.6 billion CBK liquidity support.
“The tribunal finds that SBM failed to furnish KRA and this tribunal with crucial documentation which would have helped in determining whether the amount described in SBM’s financial statement as ‘other income- balances due to CBK’ could be interpreted as other fees to be charged excise duty,” the tribunal led by Patrick Lutta said.
“As such, the tribunal finds that SBM has failed to adequately challenge the assessment raised by KRA.”
Chase Bank collapsed in 2016, the third lender under a year following the collapse of Imperial Bank and Dubai Bank locking out depositors out of their hard-earned money and causing a banking crisis.
It took two years to resolve the Chase Bank crisis in closely guarded talks that resulted in the SBM taking over 75 percent of the failed lender’s assets and liabilities in what was Kenya’s first ‘carve out’ deal.
The deal sealed in August 2018 was touted as a huge success allowing about 3,100 former Chase Bank customers to touch their money, about Sh57 billion.
But the caveat was that they could only access Sh28.5 billion and had to wait over three years to get the rest in tranches of Sh9.5 billion, ending this year.
Chase Bank is now under liquidation to pay the rest of the liabilities since most creditors did not get their money, including investors who had put in Sh4.8 billion in the Chase Bank bond that remains suspended.
Details of the transactions have not been revealed and the taxman claim has shed light on some of the arrangements that facilitated the expansion of the Mauritius lender into the Kenyan market.
According to filings at the tribunal, SBM said that in January 2018 it sent the regulator its binding offer to buy Chase Bank abiding by certain conditions set by the regulator.
This included taking over a Sh9.6 billion liability owed to the CBK, granting non-moratorium depositors unrestricted success, taking over the majority of staff and branches and the 75 percent of the deposits.
It took assets including cash, loans, other financial receivables, investment securities, intangible assets, leases, property, and equipment.
SBM then agreed the Sh9.6 billion loan from CBK would be repaid within five years without charging interest.
“SBM averred that it had been agreed upon that post-acquisition, the loan due to CBK would transition to SBM on the same terms and conditions as it previously was under Chase Bank but should be repaid within five years. Among those conditions was that the loan was interest-free,” the tribunal noted.
SBM said accounting rules forced it to indicate the fair value of the loan at a discount of the 10 percent Central Bank Rate over five years resulting in a Sh3.6 billion negative goodwill amortised over the period.
It argued that the negative goodwill or a bargain in the purchase of the assets should not be subjected to excise duty as other fees.
The KRA argued that the bargain should be treated as a discount on the fair value of an asset released to the profit and loss account over time and taxed as other income.
“Negative goodwill indicates a distressed sale whereby unfavourable conditions leads to the depressed sale value. KRA thus argued that negative goodwill represents taxable credits,” the tribunal noted.
The taxman, however, held sway because the lender refused to provide evidence as required by the law. During the hearing, the KRA had agreed to settle the matter once the documents were supplied and the tribunal agreed adjourning three times but SBM said the documents supplied to the CBK were confidential.