Banks win big in credit and debit card tax row with KRA

The Supreme Court has handed banks a major reprieve after overturning a Court of Appeal’s verdict that interchange fees and Visa card trademarks should be taxed.

In a unanimous judgment, the Supreme Court found that it would amount to double taxation for the taxman to subject fees paid to card companies to corporate tax while simultaneously requiring banks to pay withholding tax.

The apex court, in a ruling yesterday, said that fees paid by an acquiring bank to card companies are not royalties, adding that Absa Bank, which had appealed the matter, had convinced them that the transaction and interchange fees received by the acquiring and receiving bank are declared as part of the receipts for the year.

“We find this argument compelling, given the fact that any income earned by a bank from its banking business (including credit card transactions) must be declared. Once declared, such income is automatically subject to a 30 per cent corporate tax. The purpose of a withholding tax is to enable a taxing authority to keep track of any income that could escape taxation unless declared,” the three-judge bench headed by Chief Justice Martha Koome ruled.

“Furthermore, we note that subjecting these fees to withholding tax, in addition to corporate income tax, raises a concern of double taxation on the same stream of income, a result which the legislature is unlikely to have intended without clear statutory language to that effect.”

Other judges in the case were Justices Smokin Wanjala, Njoki Ndung’u, Isaac Lenaola, and William Ouko. Absa Bank moved to the Supreme Court after the Court of Appeal found that the payments paid by banks to the card companies are royalties, which ought to be subject to tax.

While overturning a judgment by High Court judge George Odunga, Justices Wanjiru Karanja, Kathurima M’Inoti, and Fatuma Sichale ruled that interchange fees paid by one bank to another are both for management and professional services and should attract withholding tax. The case pitted Barclays Bank, which later rebranded to Absa, against the Kenya Revenue Authority (KRA).

“Accordingly, we do not perceive any ambiguity in the statute that would require legislative intervention. Nor are we satisfied from the totality of the evidence on record that the respondent (Absa) did not understand the basis of the appellant’s demand for withholding tax as royalty for its use of the credit cards’ trademarks and logos,” the judges ruled.

Absa is a member of a network set up by various credit card companies such as Visa, Master Card and American Express.

It is through that network that the transaction, which brings about the interchange fee, comes about.

But Absa argues that these are its own duties, which it does not have to pay for.

On royalties, Absa argued that the tax law is vague.

In this case, the financial institution told the court that KRA could not claim withholding tax for payments that were made to the card companies.

It argued that the card companies’ primary purpose is to administer a worldwide consumer payment system for its members that would enable them to use credit cards, travellers’ cheques and debit cards, conveniently and securely.