The Supreme Court of Kenya has overturned a contentious 2020 Court of Appeal judgment that had imposed withholding tax on certain fees generated from card transactions.
The ruling, which resolves the matter of Petition No.12 (E014)/2022: Absa Bank Kenya Plc vs the Commissioner for Domestic Taxes, effectively eliminates a form of double taxation that had been levied on banks and card companies.
The case centered on the tax classification of two distinct types of fees:
- Fees Earned by Card Companies: The Court of Appeal had previously classified fees earned by international card companies (such as Mastercard, an interested party) as “royalties” under Section 2 of the Income Tax Act. This classification made them subject to withholding tax under Section 35.
- Interchange Fees: The previous ruling had also determined that the interchange fee earned by an issuing bank in a card transaction was considered “professional and management fees”, thereby also attracting a separate withholding tax.
The Supreme Court’s decision rejects both of these classifications, agreeing with the banking fraternity’s fundamental argument that the imposition of withholding tax in this context amounted to an unlawful double taxation.
Central to the judgment was the appellant’s (Absa Bank) compelling argument: “The appellant (Absa Bank) concedes to the fact that interchange fees are an income, but such income is already subject to corporate tax at a rate of 30%. To subject it to withholding tax would amount to double taxation. 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 30.0% corporate tax.”
The court emphasized the core purpose of withholding tax, which is to enable the Kenya Revenue Authority (KRA) to “keep track of any income that could escape taxation unless declared.” Since a bank’s income from its regulated activities is mandatorily declared and is already fully subject to the 30% corporate tax, applying a separate withholding tax was deemed redundant and unfair.
The ruling has immediate and positive implications for Kenya’s banking and card payment ecosystem:
- Financial Relief: Banks and card companies will no longer incur the cost of withholding tax on these specific income streams.
- Clarity on Tax Policy: The decision provides crucial clarity on the distinction between income fully captured under corporate tax and income targeted by withholding tax, reminding policymakers that “tax policy formulation flirts a lot with double taxation.”
- Focus on Corporate Tax: The income derived from card transactions and interchange fees remains fully taxable, but will now be processed solely under the standard 30% corporate tax regime.
The Supreme Court’s verdict reinforces basic principles of taxation and is a definitive step in creating a more predictable and equitable tax environment for Kenya’s financial sector.