Interchange fees and trademarks on Visa cards should be taxed, the Court of Appeal has declared.
In a verdict that may now reflect on your Visa card purchases, Appeals Court judges have agreed with Kenya Revenue Authority (KRA) that payments made by banks to card companies ought to be taxed.
This, they noted, are royalties and, therefore, ought to be taxed. Overturning a judgement by High Court Judge George Odunga, Justices Wanjiru Karanja, Kathurima M’Inoti and Fatuma Sichale ruled that an interchange fee paid by one bank to another should attract withholding tax because it is a management and professional service.
The case pit Absa's predecessor Barclays Bank against 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,” they ruled.
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Absa's predecessor is a member of a network set up by various credit card companies, such as Visa, Mastercard and American Express.
When a cardholder presents their card to a merchant or supermarket to make a purchase, the merchant swipes the card through a point-of-sale machines supplied by the acquiring bank, which is where KRA is seeking tax, arguing that this amounts to a service.
KRA argued that the fees Absa pays as the acquirer to the card issuer include a facilitation fee as a medium of communication between the issuers, acquirers and merchants.
Absa noted that these are its duties, which it does not have to pay for. On royalties, Absa argued that the tax law is vague. It argued that to access and use networks operated by the card firms, it had to pay transaction fees, which fall into numerous sub-categories.
KRA had carried out an audit on the lender between 2007 and 2011 and wrote to Barclays in 2012 and 2013, demanding tax for the payments.
KRA labelled the payments to the card firms as managerial fees. The taxman said the fees Barclays had paid to other banks for Visa services were liable for levies, thus payments to card firms ought to fall in the same category.