Betting company SportPesa is locked in a bitter legal dispute with the Kenya Revenue Authority (KRA), which is demanding Sh10.3 billion in taxes dating back three years ago.
The taxman in May last year sent a demand notice to Pevans East Africa, the entity behind SportPesa, asking it to remit disputed withholding tax from betting game winners for the period between 2015 and 2016.
SportPesa has, however, cited a court order issued in 2014 that stopped deduction of withholding tax from winners’ cash. KRA has, however, held its ground, noting that it was never party to the alleged suit and was never served any court order stopping the deduction of withholding tax.
“Records available to us indicate that you failed to deduct withholding tax on winnings paid to punters for the above period as per the Income Tax Act,” reads KRA’s letter to the Pevans East Africa CEO.
The demand letter is dated November 9, 2017 but SportPesa in documents filed in court claims to have received it in May last year.
The tax assessment covered 2015 and 2016 during which years SportPesa disbursed Sh80 billion to winners, an amount that attracted Sh7.6 billion in tax.
KRA, in addition, imposed Sh1.5 billion penalties and interest of Sh1.1 billion, bringing the total tax due to Sh10.3 billion.
SportPesa says it has nothing to pay to KRA, as it already disbursed the money to the winners without deducting any withholding tax as per the court order.
“That the applicant has now been put in the unenviable position where it must either disobey a court order with the risk of punishment for contempt of court or obey the order and risk being required to pay huge amounts representing the taxes covered by the court order together with debilitating interest and penalties,” says SportPesa CEO Ronald Karauri in documents filed in court.
The betting firm says the order issued by the Magistrate’s Court on May 22, 2014, restrained it from deducting withholding tax from winners’ cash prizes.
In 2014, Mr Benson Irungu Kariuki won some Sh2,400 after a successful bet on the SportPesa platform.
He then filed a suit at the Chief Magistrate’s court seeking to restrain Safaricom’s mobile money payments platform, M-Pesa, from deducting tax on his cash prize.
The Magistrate’s Court issued an order “restraining the defendant (SportPesa), its agents and/or servants from making any deductions on the plaintiff or on any person’s winnings in a bet or game of chance pending hearing and determination of the suit herein”.
Mr Karauri, in suit papers filed at the High Court says that his firm obeyed the court order, which he argues also bound the taxman.
But KRA argues that it was never served with the alleged court order and it was not party to the suit and, therefore, the court order issued against SportPesa cannot affect the betting firm’s tax liability.
Further, the taxman reckons that SportPesa had a statutory obligation to withhold tax and therefore cannot hide behind a court order to run away from tax obligations.
KRA argues that Mr Irungu’s suit was not filed as a public interest matter and therefore the order can only apply to his prize and not on all the winners.
Justice Mary Kasango in December restrained KRA from demanding the tax, pending the hearing and determination of the suit filed by SportPesa, giving the firm a temporary reprieve.
The company now says it is apprehensive that KRA might freeze its bank accounts, which could hit its business hard and also damage its reputation.
SportPesa says KRA has, during the years 2015 and 2016, audited the firm and issued it with tax compliance certificates after it explained the order against withholding tax deduction.
Mr Karauri says he was surprised when KRA turned around and slapped it with the withholding tax demand, years after it had paid out the cash prize to the winners.
Documents filed at the High Court show that KRA in September 2018 applied to be enjoined in the suit filed by Mr Irungu at the Magistrate’s Court.
In its application, KRA says that the order stopping SportPesa from withholding tax had disrupted collection of revenue and sought to be allowed to participate in the case.