Equity takes on KRA in Sh800m tax on gains row

Times Tower Building in Nairobi which hosts Kenya Revenue Offices. [File, Standard]

Equity Bank’s parent company, Equity Group Holdings Ltd (EGHL), is embroiled in a Sh800 million tax dispute with the taxman.

The Kenya Revenue Authority (KRA) is demanding the money as capital gains tax from asset transfers by the lender in 2014.

In the tax row now before the High Court, EGHL asserts that it never benefited from transferring its assets to Equity Bank Kenya Ltd (EBKL), but KRA insists the former gained Sh34 billion, which ought to be taxed.

In the case, the James Mwangi-led lender argues that KRA erroneously tabulated the capital gains tax and wrongly affixed January 14, 2015 as the day the transfer was completed.

“It is a common ground that the transaction involved the transfer of the banking business from the respondent (EGHL) to a new subsidiary Equity Bank Kenya Ltd so that the respondent becomes a non-operating holding company of the Equity Group of Companies,” argued Equity lawyers Iseme, Kamau, Maema Advocates.

Capital gains tax is levied on the transfer of properties or assets situated in Kenya. The tax was reintroduced after nearly 30 years following an amendment in the 2014 Finance Act. It took effect from January 1, 2015.

Equity’s holding company has faulted the Tax Tribunal, arguing that it erred in finding that it had profited from transferring its assets to EBKL.

“The respondent erred by failing to appreciate the distinction between what constitutes a transfer of property under the applicable laws and administrative procedures of effecting payment for the transfer,” said EGHL.

“It erred by misreading and misapprehending a clause of the applicant’s annual report on the basis of which he arrived at an absurd conclusion.”  

Following National Assembly’s amendment of the Banking Act in 2013 and providing for non-operating holding companies, Equity hived down its Kenyan business, assets and liabilities to a newly incorporated subsidiary - Equity Bank Kenya Ltd (EBKL).

This was approved by both the Central Bank of Kenya (CBK) and the Capital Markets Authority (CMA).

CBK gazetted the restructuring transaction on December 30, 2014, which was to take effect the following day.

This would mark the beginning of Equity Group’s problems with the taxman.  

KRA assessed the capital gains tax it claimed Equity owed it from the transaction and slapped it with an Sh820 million bill. The decision was communicated to Equity on October 10, 2016.

But the lender objected the move, saying the taxman was not entitled to CGT as the transaction occurred before January 1, 2015.

EBKL, the court heard, started serving walk-in customers on January 2, 2015, which could not have happened if the banking assets had not been transferred to it on the immediate preceding working day, which was on December 31, 2014.