Barclays emerged the victor after the case was heard by KRA’s local committee. File
What you need to know:
The KRA’s Sh1 billion demand was linked to the Sh3.5 billion price that StanChart paid for Barclays’ custodial services business in Africa and which the taxman regarded as an income.
Barclays argued that the share sale should be treated as capital gains and not trading profits since the stocks were bought as a long-term investment.
The taxman has dropped a Sh1 billion tax claim he made against Barclays Bank of Kenya after the lender sold its custodial services business to Standard Chartered Bank two years ago.
The Kenya Revenue Authority’s Sh1 billion demand was linked to the Sh3.5 billion price that StanChart paid for Barclays’ custodial services business in Africa and which the taxman regarded as an income.
Kenya taxes income at the rate of 30 per cent, a fee that would have negatively affected the bank’s bottom line.
KRA said it had arrived at the decision, upon carrying out an audit of Barclays’ accounts early last year, insisting that the proceeds from a one-off sale should be classified as a taxable income.
But Barclays countered that money earned from the sale amounted to capital gains that do not qualify for taxation under the current tax laws.
Pancrasius Nyagah, the Commissioner for Domestic Tax Department in charge of the Large Tax Payers Office, told the Business Daily that lack of clarity in the classification of such transactions had resulted in a stalemate that forced the taxman to back down from its quest to get a share of the sale proceeds.
“Our argument was that Barclays sold a section of its business to another entity and such transfer of profits should be treated as a taxable event,” said Mr Nyagah.
“But there is a counter argument that the proceeds merely amounted to capital gains and cannot be taxed. The law is not very clear on this issue and has created a dilemma that forced us not to vigorously pursue the matter.”
In October 2010, BBK sold its pan-African securities and custodial services business in a transaction that gave its multi-national peer ownership of operations in eight countries including Botswana, Ghana, Mauritius, Tanzania, Uganda, Zambia and Zimbabwe.
The transaction completed Barclays’ exit from custodial business that had taken place in all parts of the world except Africa.
StanChart had estimated the gross value of the business at $3 million with $6.2 billion worth of customer assets by December 31, 2009. KRA moved into Barclays early last year and conducted an audit that culminated in the Sh1 billion tax demand.
A senior Barclays official told the Business Daily that KRA has written to the bank indicating it had dropped the demand.
“We received a letter from KRA last Thursday indicating that it had reviewed our defence and decided to drop its demand for a share of the transaction proceeds,” said the official who requested not to be named.
“Capital gains are never taxed in Kenya but KRA was trying to change the rules in its own favour,” said our source who added that Barclays prepared for a major battle in court.
KRA wrote the letter after a series of discussions with the bank.
Other than escaping the pain of a lengthy legal suit, the taxman’s change of heart has spared Barclays the risk of losing a significant proportion of its earnings to the taxman.
Barclays’ profit rose from Sh6.09 billion in 2009 to Sh10.59 billion a year later - a 73.8 per cent increase that was mainly linked to the one-off transaction.
The bank, which is to release its full year results on Wednesday, saw its net profit increase 2.2 per cent to Sh6.2 billion in the period to September shackled by a slower interest income growth compared to its peers StanChart, KCB and Equity Banks that reported double-digit earnings growth.
Nikhil Hira, a partner at Deloitte East Africa, said transactions in which firms are seeking to exit a certain line of business - but not with the primary reason of making a profit – should not be subjected to corporation tax.
“If a company decides to sell part of its business to another entity due to a change in its model, such a deal should be treated as a capital gain and therefore exempted from taxation,” said Mr Hira.
“It is assumed that the entity selling the business did not acquire or set it up with the primary intention of selling it off for a profit but as a long term investment.”
Mr Hira compared the case to another one in the late 90s in which Barclays fought off KRA’s attempt to tax the proceeds of the sale of NIC shares it held.
Barclays argued that the share sale should be treated as capital gains and not trading profits since the stocks were bought as a long-term investment and that the bank, after all, was not in the trading business.
Barclays once again emerged the victor after the case was heard by KRA’s local committee.
KRA is not new to battles with corporate Kenya in its quest for a fairer share of big business deals. Soft drinks giant Coca-Cola tops the list of the big corporations that have or are in the middle of a fight with KRA over tax demand.
The taxman has sent Sh5.6 billion demand note to Coca Cola accusing the soft drink giant of ignoring a review of taxation laws that required it to pay excise duty on costs incurred during washing and sanitising of returned bottles.
The battle is centred on interpretation of the Customs and Excise Act, which has been severally amended between 1999 and 2010 with the one in 2004 by former Finance minister David Mwiraria.
Mr Mwiraria changed the laws and subjected the costs incurred in cleaning returnable bottles together with soda production expenses to excise tax, a decision the bottler opposed.
Consumer goods manufacturer Bidco Oil is also fighting a mega tax battle with KRA over a Sh1.3 billion demand.
At the heart of the case is Bidco’s argument that KRA violated the law in assessing the firm’s tax liability for goods imported in 2008 and that the taxman adopted an interpretation of tax chargeable that is outside the wording of the relevant statute and is therefore not allowed in law.
