Tax burden: Banks sue CS over law that will lead to 'double taxation'

Federation of Kenya Employers National President Dr Habil Olaka speaking at a press briefing on the state of the employment and labour market in Kenya. [Wilberforce Okwiri, Standard]

Banks have moved to the High Court in a new battle over tax hikes. Through their lobby, the Kenya Bankers Association (KBA) in its case against Treasury Cabinet Secretary Njuguna Ndung'u, argues that the law on financial derivative tax is unprocedural and illegal.

KBA told Justice John Chigiti that the new law will lead to massive losses as one will be required to calculate a 15 per cent withholding tax based on speculation. According to the bank's lobby, Parliament gave the CS the green light to roll out the new law without giving them a chance to explain its impact.

The most common financial derivative that banks deal with is currency swaps - a transaction in which two parties exchange an equivalent amount of money with each other but in different currencies.

They have a contract to re-pay the amounts at a specific date and exchange rate. The reason for the swap is for speculative purposes or to reduce the cost of borrowing foreign currency.

KBA explained that the contracts are such that any tax charges are passed on to the resident. The association asserts that Njuguna's move amounts to double taxation adding that financial derivatives cannot be treated as separate income.

"The regulations impose a further unfair tax burden on the resident person by characterising the gains from a financial derivative as a separate income. This characterisation imposes an onerous burden on the resident person particularly KBA's members whose core function is trading in financial derivatives. In such a case it will be unduly difficult to separate the source of the gain from the financial derivative," KBA argued in its case.

Financial derivatives trade is a relatively new concept. For example, Nairobi Securities Exchange launched the derivative market in 2019. The sole reason for this was to trade in futures contracts on the Kenyan market.

The new tax on the other hand was meant to ensure that both residents and non-residents who derive gains accrued in Kenya pay taxes. However, KBA argues that Prof Ndung'u is jumping the gun as he gazetted the regulations even before the legislative process was completed.

KBA Chief Executive Habil Olaka in his supporting affidavit told the court that on March 13, this year that the National Assembly's clerk called stakeholders to submit their views on the regulations.

He said KBA then wrote to Prof Ndung'u seeking to have him brief them. However, the CS informed KBA that the regulations had actually come into force on January 27 this year.

Olaka says the regulations are vague and do not provide how KBA members should compute the tax.