On 16 March 2018, Kenya's Tax Appeals Tribunal (TAT) ruled that value added tax (VAT) is due on transactions between banks and international credit companies, as well as on interchange fees payable by a merchant bank (Acquirer) to a card holder's bank (Issuer). The TAT had received submissions from a global banking entity (the Appellant) against the Commissioner of Domestic Taxes (the Respondent) on behalf of Kenya Revenue Authority.

The TAT ruling relates to the tax treatment of fees paid by banks to international credit card companies as well as related local and international remittances paid by banks to issuers.

Until the ruling, banks generally considered usage fees paid to international credit companies as service charges incurred in the provision of financial services and therefore within the scope of exempt supplies as provided for under the First Schedule to the Value Added Tax Act, 2013 (the VAT Act). For the same reasons, banks generally did not account for reverse charge VAT on interchange fees due to issuers.

The TAT held that interchange fees were not expressly classified as exempt under the VAT Act and that payments to international credit companies constitute royalties.

The TAT ruled that:

• Dues and assessment fees, returned item fees, risk monitoring non-compliant fees and clearing and settlement costs paid by banks to international credit card companies for a right to use their network constitute royalties
• The transactions therefore attract VAT and reverse charge VAT where applicable

The Appellant had also requested the TAT to rule that payments made by banks to Acquirers do not constitute management or professional fees as had earlier been assessed by the Respondent. The TAT however did not rule on the matter.

Next steps

While it is expected that the ruling will be challenged in the High Court, the applicable taxes should be accounted for under reverse charge mechanism to minimize the level of exposure.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

Ernst & Young (Kenya), Nairobi

• Catherine Mbogo
  catherine.mbogo@ke.ey.com
• Francis Kamau
  francis.kamau@ke.ey.com
• Christopher Kirathe
  christopher.kirathe@ke.ey.com
• John Gikima
  john.gikima@ke.ey.com

Ernst & Young Advisory Services (Pty) Ltd., Africa ITS Leader, Johannesburg

• Marius Leivestad
  marius.leivestad@za.ey.com

Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London

• Rendani Neluvhalani
  rendani.mabel.neluvhalani@uk.ey.com
• Byron Thomas
  bthomas4@uk.ey.com

Ernst & Young LLP, Pan African Tax Desk, New York

• Silke Mattern
  silke.mattern@ey.com
• Dele A. Olaogun
  dele.olaogun@ey.com
• Jacob Shipalane
  jacob.shipalane1@ey.com

Ernst & Young LLP, Pan African Tax Desk, Houston

• Elvis Ngwa
  elvis.ngwa@ey.com

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ATTACHMENT

PDF version of this Tax Alert