Airtel Kenya to pay Sh531m after losing landmark suit against taxman

A KenCell telephone booth that was used to make calls before the introduction of mobile phones. [PHOTO: BEVERLYNE MUSILI/STANDARD]

Indian-owned Airtel has lost in a landmark ruling delivered last Thursday relating to a 16-year-old taxation dispute.

A result of the ruling delivered by Justice Francis Tuiyott means that Airtel, previously operating as Kencell, Celtel and Zain, will pay Sh531 million in back taxes relating to the acquisition of its operating licence in 2000.

Kenya Revenue Authority (KRA) successfully petitioned the High Court that the price paid by Kencell for its operating licence was a capital expenditure as it enabled the firm acquire an asset.

Court ruling

“The result is that I allow the appeal and set aside the decision of the Local Committee for Nairobi South made on March 10, 2005,” Justice Tuiyott ruled, but declined to award costs of the suit to either party.

Kencell, then co-owned by billionaire Naushad Merali and French-owned Vivendi, had won a temporary reprieve when it protested against KRA’s tax demand before the arbitration committee.

The local committee delivered its decision in March 2005 and agreed with Kencell’s contention that the licence fee was not a capital cost but a revenue expenditure – a cost that is incurred during the ordinary course of business.

But KRA moved to court arguing that the licence fee paid by the company was for the acquisition of an intangible asset that the firm would utilise over time to provide mobile telephony, among other services.

Top among KRA’s pleas was that the fee was a one-off expense that was paid to the Government of Kenya, and could not be viewed as a cost that could be spread over time.

Tuiyott’s ruling could have huge ramifications for other businesses as it effectively sets a precedent on how licensing fees are treated in the books of account. Having bought the business, the current operator is likely to be held accountable for the Sh531 million tax liability.

“The payment in acquisition of this licence is capital in nature, due to the fact that it was a one-off payment made to secure an advantage of an enduring nature in the form of the right to access the Kenyan Mobile market,” reads the KRA arguments in part.

Justice Tuiyott agreed with KRA that writing the fee off over the period of 15 years would therefore not be allowable and as a result this expense will be brought to charge.

“The local committee erred in law and fact in not examining all the material and evidence presented to it,” he said in overturning the March 2005 ruling. The Kencell lawyer in the matter before court submitted that another fee would be payable after the expiry of the tenure for renewal of the licence.

“The Communication Authority of Kenya has demanded Sh2 billion as fees for the renewal of the spectrum licence for a 10-year period,” Kencell averred in its petition as demonstration that the initial payment for the licence was not a one-off payment.

But the judge held that it was only the annual operating fee, equal to 0.5 per cent of the gross revenues, which could be treated as an operating expense.

“This court has not found any plausible reason that shakes the proposition that, on the fundamental test of purpose, the initial expenditure on the licence fee created a new asset or opened new field of business for Kencell in Kenya.”