How Treasury gave KQ staff tax-free send-off package

Kenya Airways #ticker:KQ employees and managers who were declared redundant by the company between July 2016 and last year were exempted from paying taxes on their send-off packages as part of a sweetheart deal to ensure that they died not challenge their redundancy. The deal also ensured that they took home more money.

Official documents, including a Kenya Gazette notice signed by Treasury Secretary Ukur Yatani last October, show that the government gave the listed airline’s management leave from income tax laws from July 2016 during which time numerous employees, including top executives, left the struggling airline.

The exemptions given in 2016 were approved by the Ministry of Transport, Infrastructure, Housing and Urban Development and approved by the Head of the Civil Service.

Among those who left during the period were former chief executive Mbuvi Ngunze and former chairman Dennis Awori. During the financial year ended July 2019, 10 senior employees left the national carrier.

Those declared redundant were exempted from paying tax on their severance pay.

Part of the condition for the redundant workers and managers to enjoy the exemption was that they would not be re-employed by the airline over the next five years after their retrenchment.

“In exercise of the powers conferred by Section 13(2) of the Income Tax Act, the Cabinet Secretary for National Treasury and Planning directs that the severance pay, salary in lieu of notice and payment of accumulated leave days paid to the ten employees of Kenya Airways Limited who were retrenched and left service between May 2019 and July 2019 shall be exempt from the provisions of the Act,” the CS said in the Gazette notice dated October 22.

The Business Daily could not immediately obtain the full amount of the send-off packages for the period.

Apart from Mr Ngunze and Mr Awori, other senior who have left KQ were Alex Avedi, the safety, corporate quality, security and environment chief, human resource boss Alban Mwendar, former finance director Alex Mbugua, chief operating officer Yves Guibert, Rick Sine (fleet director) and Gerard Clarke (commercial director).

Kenya Airways confirmed the tax exempt sendoff packages without providing details.

“The objective was to provide those members of staff whose roles were declared redundant to get better packages at the end of their employment. One of the requirements was that KQ would continue to provide the required details to the National Treasury,” KQ’s Corporate Communications Department said in response to queries from the Business Daily.

As part of the concession, KQ had to reveal to the Commissioner of Income Tax, the number and identity of workers it had had laid off and the dates when they were laid off. It was also required to comply with any other condition imposed by the Commissioner of Income Tax.

The exemption could be an indication that other companies are also free seek similar exemptions when rendering their staff redundant.

Numerous companies, including those listed on the Nairobi Securities Exchange, laid off some of their workers in 2019 in the wake of a softening economy and difficult business environment.

Despite the sweetheart deal that KQ gave it staff who left the company, some employees still moved to court, seeking higher settlement terms.

One senior manager, Mr Mbugua went to court seeking Sh144 million after he was axed in 2016. The Court of Appeal, however, reduced the compensation for gross salary from 12 to nine months for the former director.

Kenya Airways has enjoyed other forms of exemptions from the State with records showing that it earned Sh30 million in tax credits last year. In 2017, the airline paid Sh5 million in taxes and in 2016 it paid Sh126 million to the Exchequer. The carrier claimed a Sh3.9 billion tax credit in 2015 compared to Sh1.4 billion in 2014 as it struggled to return to profitability. Kenya Airways has already cost taxpayers Sh24.7 billion after a shareholder loan was written off by the government. The government has also guaranteed it $750 million (Sh75 billion) that the airline borrowed from international creditors. KQ made a pre-tax loss of Sh7.59 billion in 2018. It also posted a loss of Sh8.56 billion for the first six months of 2019.

Kenya wants to emulate countries like Ethiopia and nationalise KQ in the hope of making it more competitive in a continent whose taxation regime favours national carriers. Ethiopian Airlines has proved to be a competitive business, which runs air transport assets - from airports to fuelling operations - under a single government-owned company, using funds from the more profitable parts to support others.

Proponents of the nationalisation of Kenya Airways have also pointed to countries like Tanzania and Rwanda which are investing heavily in their national carriers — posing a growing threat to Kenya Airways’ market share in the region. Currently, the government through the Treasury, owns 48.1 percent of the airline, with Dutch carrier KLM having a 7.8 percent stake. Kenyan banks control 38.1 percent while the rest is owned by the public through shares listed at the Nairobi Securities Exchange (NSE).

Parliament in July 2019 voted to have the State take back the airline. Kenya Airways was privatised more than 20 years ago but sank into debt and losses in 2014 after a failed expansion drive, a difficult operating environment and other challenges.

Kenya Airways named Allan Kilavuka its acting CEO in December following the resignation of his predecessor, Sebastian Mikosz, earlier in May. Mr Mikosz left the company in early December.