Tribunal orders Stanbic Bank to pay KRA Sh234m in tax claim

A tax tribunal has ordered Stanbic Bank to pay the Kenya Revenue Authority (KRA) Sh234 million in taxes on payments made to foreign card companies.

The bank appealed to the tribunal after the taxman reviewed their assessment and demanded a further Sh87 million from the initial Sh137 million tax claim.

KRA had demanded withholding and value-added taxes between November 2021 and December 2022, which amounted to Sh137 million, including interest and penalties.

The bank wrote to the taxman, who replied with a notice of assessment demanding a further Sh87 million in what it claimed to be withholding tax.

In their appeal, the bank contested the assessment, saying that KRA erred in holding the payments to the card companies qualified as royalties. It argued that the taxman was wrong to demand withholding tax since the interchange services do not qualify as management or professional services.

Acquiring bank

On their part, KRA said that their assessment showed that Stanbic’s customers are issued with credit or debit cards, which are either Visa or Mastercard enabled, which makes it the issuing bank.

According to the taxman, the acquiring bank enables merchants to accept cashless payments and acts as a link between the cardholder, issuing bank, and payment networks. “The role of an acquiring bank is to enrol merchants who will accept payments made through the use of debit and credit cards,” it said.

In their rejoinder, Stanbic argued that during payment, the customer inserts the card into the point of sale machine, which then asks for their personal identification number (PIN), and the network then seeks authorisation from the issuing bank.

They said their role is to check the customer’s account and who the cardholder is to verify whether it is the correct customer and if the PIN inserted is correct.

Lastly, they check whether the account has sufficient funds to complete the transaction as requested, and in the case of a debit card, they check whether the transaction is within the customer’s limit. They likened the process to over-the-counter services offered at banking halls, where to complete a transaction, one needs to have their identity confirmed through their documents and their account details checked if they’re correct.

KRA said that cited contracts between Stanbic and MasterCard, Visa and UPI provide payment of a fee in exchange for accessing the card networks and issuing cards that bear logos of the respective companies.

According to the taxman, the money Stanbic paid to the card companies was for royalty and was therefore, taxable income from Kenya.

The tribunal chaired by Grace Mukuha found that it was impossible to exclude fees for using the trademarks and logos from the payments.

“The Tribunal finds therefore that the payments made by the Appellant to the card companies consist of royalty for use of their trademarks and logos and further, it also consists of payments to access card payment systems and to access clearing and settlement functions in the card. The royalty(s) in issue is subject to withholding tax.”

Stanbic Bank Kenya and South Sudan Chief Executive, Joshua Oigara. [File, Standard

The tribunal noted that the services that the bank offered as per the agreement with the card companies amounted to management or professional services; hence, they ought to be levied on the interchange fees.

Stanbic however said that during such transactions, a customer’s account is checked to see whether it has sufficient funds to complete the requested transaction.

The bank noted that during card payments, once a customer’s details are confirmed, the same is shared with the Visa-Mastercard network, which then relays the message to the acquiring bank. According to Stanbic, the taxman sought to withhold taxes on payments to non-resident card companies amounting to Sh64 million saying that the payments constituted a royalty or right of use.

Also, they said that KRA sought withholding tax on interchange fees made to issuing banks amounting to Sh5.8 million because the fees constituted professional or management fees.

The bank stated that they agreed with Visa International Association (VISA), MasterCard International Incorporated (MasterCard), and Union Pay International Company Ltd (UPI).

The agreement said that they are granted a non-exclusive and royalty fee license to emboss the names of the card companies and marks on the credit-debit cards they issue.

These payments Stanbic were for clearing and settlement functions and the reason why their customer cards carry the names of the card companies is for identification purposes.

Stanbic said their customers do not care what company they use to make payments so long as it is smooth, efficient and seamless.

Stanbic argued that if it was paying for the use of the brand as asserted by KRA then their customers would have been selective on which card payment system they wanted to use.

They added that their revenues would have been influenced greatly by the card the customers picked.

According to Stanbic, KRA did not recognise that as an acquiring bank, they had to make payments to the card companies to access their networks, facilitating acceptance of payments made through debit or credit cards.

Stanbic faulted KRA, saying they failed to demonstrate how the role of the issuer bank providing verification, authorisation, and settlement services to customers to effect payments through debit/credit cards falls under managerial, technical, or consultancy services.

The bank further argued that no humans are involved in authorisation, clearing, and settlements since the process is fully automated.