KRA loses tax demand case against Barclays

The Kenya Revenue Authority has lost a tax demand battle against Barclays Bank of Kenya after the High Court ruled that its classification of royalties is vague.

The taxman will not demand withholding tax from the bank after a long drawn-out legal battle that emanated from a payment done to financial card companies Visa, Mastercard and American Express for electronic money transfer services.

The court ruled that KRA’s classification of withholding tax on royalties was unclear, and thus could not be used to demand dues from the financial institution.

“In this case, KRA simply borrowed a phrase in the Income Tax Act and applied it to Barclays’ circumstances. In tax matters, the practice of cut and paste will not do. KRA cannot exercise its duty like a trawler in the deep seas, expecting to catch all the fish by casting its net wide,” Justice George Odunga ruled.

On its part, Barclays had told the court that to access and use the networks operated by the card companies, it had to pay transaction fees, which fall into numerous sub-categories.

For instance, for Visa, the sub-categories include access fees, authorisation fees, switching fees, PIN verification fees, and clearing and settlement fees.

BAD ENOUGH

KRA had carried out an audit of the bank’s income between 2007 and 2011, and concluded that withholding tax was payable on the fees paid to the card firms for the use of their systems, facilitating transactions on behalf of Barclays, royalties and interchange fees.

It wrote to Barclays Bank in 2012 and 2013 to ask for tax on the payments, which it termed managerial fees.

The taxman was of the view that the money Barclays paid other banks for Visa services was liable to levies, therefore, payments to the card companies ought to fall under the same category. Payments made to other banks are classified as professional and management fees, and are liable to withholding tax.

However, Barclays told the court that KRA had incorrectly stated the payments were for services provided by the card companies, as well as that they were based on the volume of transactions.

Justice Odunga held that the payments cannot be considered management fees as defined by KRA, hence cannot be subjected to withholding tax.

“In my view, it is bad enough for the respondent [KRA] to communicate with the applicant [Barclays Bank] using such terms as ‘agency fees’ and ‘contractual fees’. It is worse for the respondent to resort to ‘professional or managerial fee’ when the said phrase encompasses a host of other services, such as managerial, technical, agency, contractual, professional or consultancy services,” the judge said.