The Tax Appeals Tribunal has set aside a KSh 87.6 million tax demand against Prime Bank, ruling that the revenue authority misapplied tax law, ignored exemptions and payments, and issued a legally defective decision.
- •In its judgement, the Tribunal set aside KRA’s December 2024 objection decision, wiping out the remaining tax claims after Prime Bank had already settled uncontested amounts.
- •KRA audited Prime Bank’s accounts for the 2019 – 2022 period and issued an additional tax assessment of KSh 100.2 million covering several taxes.
- •Prime Bank paid KSh 18.1 million relating to PAYE, VAT-related taxes, and part of corporate income tax, and cleared the remaining corporate tax balance.
However, the tier II lender disputed the taxman’s assessment of withholding tax and excise duty, which together formed the bulk of the remaining claim. KRA had billed withholding tax on interest Prime Bank paid to other banks and financial institutions.
Prime Bank argued that the law clearly exempts such interest from withholding tax. KRA ultimately agreed that interest paid to financial institutions is exempt, but failed to remove the tax from its final computation. The Tribunal ruled that once the tax authority admits an exemption applies, it cannot legally retain the tax.
“The Tribunal notes that the said concession was not reflected in the final computations and reiterates that where the Commissioner acknowledges an error and undertakes to correct it, failure to do so renders the resulting decision internally inconsistent and legally unsustainable,” the ruling stated.
Prime Bank also argued that KRA failed to credit withholding tax it had already paid and proved through official records. The authority acknowledged the payments during the objection process but still did not reflect them in the final assessment. The Tribunal ruling held that maintaining a tax demand after accepting proof of payment amounts to double taxation and is unlawful.
KRA also imposed withholding tax on a wide range of ordinary business costs, including repairs, transport, ATM relocation, software subscriptions and procurement expenses.
Prime Bank argued that withholding tax only applies to specific types of income listed in the law such as professional fees and interest, not general operating expenses.
The Tribunal agreed with the lender, ruling that withholding tax cannot be extended beyond what the statute expressly allows. Routine business expenses that do not fall within the law’s listed categories are not taxable.
“The Tribunal notes that KRA did not demonstrate how the impugned expenses fell within any of the statutory charging provisions. As the High Court observed, the burden lies on the Commissioner to demonstrate that a payment squarely falls within the scope of withholding tax,” the tribunal held.
Prime Bank also made payments to service providers in South Africa and the United Arab Emirates for software and management-related services. KRA assessed withholding tax on those payments but the bank argued that Kenya’s tax treaties with both countries do not allow withholding tax on such services unless the foreign company has a permanent presence in Kenya. The Tribunal agreed, finding that where tax treaties apply, KRA must follow them. In the absence of a permanent establishment, the income could not be taxed in Kenya.
Prime Bank also challenged withholding tax assessed for part of 2019, arguing that at the time there was no law allowing KRA to recover unpaid withholding tax from the payer.
KRA conceded that it lacked legal authority before November 2019, but parts of the 2019 tax still appeared in its computation. The Tribunal ruled that any withholding tax claimed for that period was invalid and had no legal basis.
Apart from the withholding tax, KRA assessed excise duty on income from bill discounting, card interest, late payment charges and over-limit charges, treating them as service fees. Prime Bank argued that these were all forms of interest, which the excise law specifically excludes from tax.
The Tribunal sided with the bank, ruling that compensation for the use of money is interest regardless of how it is described, and interest cannot be subjected to excise duty. KRA also wrongfully imposed excise duty on interchange fees earned from international card transactions, arguing the services were consumed in Kenya.
Prime Bank contested by noting that the services were used outside the country and therefore qualified as exported services, which are exempt. The Tribunal agreed, ruling that tax depends on where a service is consumed, not where the bank is located.
