globaltaxnews.ey.comSign up for tax alert emailsPrintDownload

06 April 2020

Kenya’s Tax Appeals Tribunal holds interchange fees received by issuing banks are exempt from VAT

Executive summary

Kenya’s Tax Appeals Tribunal (TAT) on 31 March 2020, following an appeal filed by NIC Group PLC and NIC Bank PLC against the Commissioner of Domestic Taxes, made a determination that interchange fees received by issuing banks are not subject to value-added tax (VAT).

Detailed discussion

NIC Group PLC and NIC Bank PLC appealed to the TAT based on an objection decision received on 5 October 2018 demanding KSh84,837,281 relating to VAT on interchange fees. The key issue for determination by the Tribunal was whether interchange fees are subject to VAT as per the Value Added Tax Act, 2013 (VAT Act, 2013).

The Appellant argued that the interchange fees received are not consideration for a service provided by the Appellant to either the acquiring bank or the merchant. To resolve this dispute, the Tribunal had to determine three main questions:

1. What is an interchange fee?

2. For what service was this fee received?

3. Is it a taxable service?

1. What is an interchange fee?

The Tribunal relied on the case of Barclays Bank of Kenya Limited v Commissioner of Domestic Taxes TAT Appeal No 114 of 2014 where the Tribunal determined that an interchange fee is a fee paid by a merchant’s bank (acquirer) to a card holders’ bank (issuer) to compensate the issuer for value and benefit that merchants receive when they accept electronic payments.

2. For what service was this fee received?

This service provided by the Appellant is a service to its customers and not the acquiring bank. The card holder verification process performed by the Appellant is to confirm if the customer’s account has sufficient funds to make the purchase. The role played by the Appellant in verifying the cardholder’s information is a normal process related to the money transfer.

3. Is it a taxable service?

Receipt of interchange fees by the Appellant falls outside the scope of a royalty payment. There is no justification for the Appellant to receive a royalty from acquiring banks since it does not own the Visa platform. Therefore, the service provided is a money transfer-related service undertaken for the Appellant’s customer, which is an exempt service under the First Schedule of the VAT Act, 2013.

Based on the findings above, the Tribunal granted the appeal and made the following orders:

  1. Interchange fees received are not subject to VAT as they are exempt under the VAT Act 2013.
  2. The cardholder verification process is not distinct from the supply of money by the Appellant.
  3. The interchange fees received by the Appellant is not a royalty payment.

 

Next Steps

This determination is a positive development for many issuing banks that receive interchange fees for card transactions. It is a precedential decision that should be considered in the future treatment of interchange.

______________________________________________________________________________________

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

Ernst & Young (Kenya), Nairobi
Ernst & Young Advisory Services (Pty) Ltd., Africa ITTS Leader, Johannesburg
Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London
Ernst & Young LLP (United States), Pan African Tax Desk, New York

ATTACHMENT

Document ID: 2020-5536

 
 

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

 

Copyright © 2025, Ernst & Young LLP.

 

All rights reserved. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP.

 

Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

 

"EY" refers to the global organisation, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

 

Privacy  |  Cookies  |  BCR  |  Legal  |  Global Code of Conduct Opt out of all email from EY Global Limited.

 


Cookie Settings

This site uses cookies to provide you with a personalized browsing experience and allows us to understand more about you. More information on the cookies we use can be found here. By clicking 'Yes, I accept' you agree and consent to our use of cookies. More information on what these cookies are and how we use them, including how you can manage them, is outlined in our Privacy Notice. Please note that your decision to decline the use of cookies is limited to this site only, and not in relation to other EY sites or ey.com. Please refer to the privacy notice/policy on these sites for more information.


Yes, I accept         Find out more