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KRA hits banks with Sh4.6 billion tax bill after bad loans audit

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Kenya Revenue Authority Commissioner General John Njiraini. FILE PHOTO | DIANA NGILA | NMG

The taxman has hit eight commercial banks said to have evaded tax by over-providing for bad loans with a multi-billion shilling demand, setting shareholders up for possible erosion of earnings from their investment.

The Kenya Revenue Authority (KRA) announced last year that the banks had denied it some Sh4.6 billion in tax revenue by reporting excess loan loss provisions to reduce their tax burdens.

The KRA has vigorously pursued the banks, backing up its claim with a special tax audit that has confirmed part of the uncollected billions and identified a contested segment that is before the tax appeals tribunal.

KRA Commissioner for Domestic Taxes Department Benson Korongo said the banks have since disputed some Sh3.4 billion.

“We have since found Sh4.6 billion to have been at risk of being false. Of this, Sh1.2 billion has been confirmed as due and payable to KRA but the case is under appeal,” Mr Korongo said.

It remains unclear whether the amounts include penalties and interest payable on the tax revenues, but should they be exclusive of the two items then the lenders, who have been grappling with hard times, may be in for a bigger tax bill.

Kenyan banks have stood out as some of the biggest payers of dividends at the Nairobi bourse.

The top five listed lenders paid out Sh25.5 billion in dividends to their shareholders in 2015 led by Equity Bank, with a Sh7.5 billion payout.

Kenya’s biggest bank by assets KCB came in second with Sh6.2 billion while Standard Chartered paid its shareholders Sh5.8 billion. KCB shareholders opted to forego some Sh1.5 billion of the dividend payout in favour of the lender’s stock.

Barclays Bank of Kenya wrote its owners a dividend cheque of Sh5.4 billion while NIC Bank paid Sh620 million, closing the rank of the big five in dividends, according to the latest available industry data. 

READ: Jump in bad loans provision cuts Barclays profit 6pc

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The KRA’s new tax demand could also hit the companies’ free cash flows, ultimately limiting their future dividend payments.

Did not deserve loan loss provisions

Last year, the KRA said it was investigating local banks suspected of setting aside heavy provisions for bad loans and denying the government billions in tax revenues.

The taxman said there were reasons to believe that over Sh123 billion of the reported toxic loans did not deserve the loan loss provisions that qualify for tax deductions.

The record 10-year high of Sh176 billion in bad loans that the banks reported in March 2016 significantly cut their profit margins and reduced the amounts of income tax payable to the KRA.

“KRA is following up on the bad loans and is in the process of contacting eight out of the 12 main banks in Kenya. The volume of bad loans that should not enjoy tax deductions comprises 70 per cent of the bad loans held by banks,” the KRA said.

READ: KRA goes after big banks accused of falsifying bad loans

Banks, which account for close to 40 per cent of income tax collections, usually set aside funds to provide for the bad loans, effectively diminishing their profits and consequently leading to less tax obligations.

The renewed pressure form the taxman also puts the banks between a rock and a hard place as reducing provisions for bad debts is likely to put them at odds with the Central Bank of Kenya (CBK) — the financial services sector regulator (CBK) — which wants them and their auditors to be realistic with the provisions.

The demand led to higher provisions for the 2015 financial year, prompting the KRA to raise the alarm over the excessive loss provisions that artificially diminished the amount of tax payable.

“Banks need to be reminded that providing for non-performing loans for tax purposes is different from the accounting method.

Before you provide for purposes of tax, you must ensure that all has been done to ensure repayment of the debt,” said KRA Commissioner-General John Njiraini in May.

Lending outside banking guidelines

The KRA had also blamed banks for lending outside the prudential guidelines and ending up with the bad loans which they heavily provide for.

The taxman had suffered massive reduction in tax yields from the banking sector as the lenders moved to cover up for potential bad loans.

Between July 2014 and April 2015, banks remitted Sh32.8 billion in taxes. The figure dropped by Sh820 million between July 2015 and April 2016 when banks reported a record high volumes of toxic loans.

The latest revelations from the taxman mean the banks face tax demands amounting to an initial Sh1.2 billion and another possible bill of Sh3.4 billion depending on how the tribunal rules.

PWC tax consultant Osborne Wanyoike said the taxman will have an uphill task proving its demand as provisions generally regard perception by banks regarding the possibility of bad loans and don’t necessarily touch on absolute numbers.

“Provisions are generally as a result of judgment so each bank may have ways of justifying why they had in their own judgements set the provisions based on the risks they were facing in the facilities they had advanced. The provisions can also be reversed a year later in normal accounting practice,” Mr Wanyoike said.

The taxman, which is grappling with a higher Treasury target that hit Sh1.5 trillion from the current Sh1.3 trillion in the 2017/2018 budget, had earlier hinted at giving the lenders an adjustable payment plan to honour their tax obligations.

The CBK’s first quarter industry report showed a 15.8 per cent rise in non-performing loans to Sh170.6 billion in March 2016 compared to Sh147.3 billion in December 2016.

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