Equity wins Sh800m tax dispute against KRA

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Equity Group's Chief Executive Officer James Mwangi [Reuters, Njeri Mwangi]

Equity Bank’s parent company, Equity Group Holdings Ltd (EGHL) has won an Sh800m tax dispute against Kenya Revenue Authority.

KRA was demanding the money as capital gains tax from asset transfers by the lender in 2014.

However, commercial Court judge John Mativo allowed Equity’s appeal after finding that the commissioner of domestic taxes failed to render his decision within the timelines set by the law.

The lender had lost its case before the Tax Appeals Tribunal. Justice Mativo ruled that Parliament set 60 days as the deadline for the commissioner to either allow or dismiss an objection. The judge was of the view that although the tribunal correctly tabulated the time, it erred by extending the time beyond 60 days.

“The TAT rightly computed time and pronounced that the objection decision was rendered out of time. This being the position, then by dint of the above provision, the objection decision is deemed to have been allowed,” he added.

In this case, EGHL asserted that it never benefited from transferring its assets to Equity Bank Kenya Ltd (EBKL), but KRA insisted the former gained Sh34b, which ought to be taxed.

In this case, the lender argued that KRA erroneously tabulated the capital gains tax and wrongly affixed January 14, 2015, as the day the transfer was completed.

“It is a common ground that the transaction involved the transfer of the banking business from the respondent (EGHL) to a new subsidiary Equity Bank Kenya Ltd so that the respondent becomes a non-operating holding company of the Equity Group of Companies,” argued Equity lawyers Iseme, Kamau, Maema Advocates.

Capital gains tax is levied on the transfer of properties or assets situated in Kenya. The tax was reintroduced after nearly 30 years following an amendment in the 2014 Finance Act. It took effect on January 1, 2015. Equity’s holding company faulted the Tax Tribunal, arguing that it erred in finding that it had profited from transferring its assets to EBKL.

“The respondent erred by failing to appreciate the distinction between what constitutes a transfer of property under the applicable laws and administrative procedures of effecting payment for the transfer,” said EGHL.

Following the National Assembly’s amendment of the Banking Act in 2013 and providing for non-operating holding companies, Equity hived down its Kenyan business, assets, and liabilities to a newly incorporated subsidiary - Equity Bank Kenya Ltd (EBKL).

This was approved by both the Central Bank of Kenya (CBK) and the Capital Markets Authority (CMA). CBK gazetted the restructuring transaction on December 30, 2014, which was to take effect the following day.

This would mark the beginning of Equity Group’s problems with the taxman. KRA assessed the capital gains tax it claimed Equity owed it from the transaction and slapped it with an Sh820m bill. The decision was communicated to Equity on October 10, 2016. But the lender objected to the move, saying the taxman was not entitled to the tax as the transaction occurred before January 1, 2015.

EBKL, the court heard, started serving walk-in customers on January 2, 2015, which could not have happened if the banking assets had not been transferred to it on the immediate preceding working day, which was on December 31, 2014.

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