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KCB Bank loses bid to block State from collecting Sh57m tax dues

By Kamau Muthoni | August 29th 2016
Kenya Commercial Bank (KCB) has lost a long-drawn-out court battle against the taxman over Sh57 million withholding tax claims.PHOTO: COURTESY

.Kenya Commercial Bank (KCB) has lost a long-drawn-out court battle against the taxman over Sh57 million withholding tax claims

Eight years after the financial lender filed the case in the High Court and followed with an appeal to the Court of Appeal, the court has now ruled that KRA was justified in demanding its dues from the bank.

In its ruling, the court said the law dictated that payment for interest and incidental expenses on Nostro accounts (an account that a bank holds in a foreign currency in another bank) is a taxable income and must be settled by the bank.

"We agree with the finding of the High Court that the liability to pay, deduct withholding tax on Nostro accounts is based on the income tax law. For those reasons, the appeal is dismissed with costs to the respondent (KRA)," Court of Appeal judges Erastus Githinji, Hannah Okwengu and GBM Kariuki ruled. The bank had opposed the tax being charged on the Nostro accounts.

The judges noted that the bank did not produce documents showing how the accounts held outside Kenya were operated, adding that they could not tell how and when the charges accrued and if they were settled.

The court also noted that it had difficulties understanding the workings of the Nostro account, which was subjected to withholding tax by the taxman.

"We have encountered difficulties in determining the issue whether payment for interest and incidental charges levied on Nostro accounts held by the appellant outside Kenya is subject to withholding tax," the judges noted adding, "It is not clear whether the withholding tax relates to Nostro accounts operated in India in respect of Infosys payments or to Nostro accounts generally operated by the appellant in several countries."

The contention by the bank was that given the way Nostro accounts operate, there was no way it could comply with the requirement of deducting tax upon paying money to a non-resident.

But the court took into account a presentation by KRA's Police Unit Technical Think Tank that showed Nostro accounts attracted withholding tax 10 years ago.

The unit found that whatever is charged by foreign banks on the accounts, so long as it is withdrawn from the local bank's account, immediately attracts the tax. The Unit's findings were submitted after the financial institution raised administrative difficulties of operating withholding tax on Nostro accounts.

"From the provisions of the Act, we have come to the conclusion that payment for interest and incidental expenses on Nostro accounts to the correspondent bank is indeed taxable income to the correspondent bank for services rendered for foreign exchange transactions. The appellant does not oppose that it did not offer such services."

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