Tribunal faults KRA for demanding taxes from M-Kopa's Sh1.4bn bad debts

A tax tribunal has found that the Kenya Revenue Authority erred in seeking to have taxes paid by M-Kopa from their Sh1.4 billion bad debts.

The tax man wanted the tribunal to compel the company to pay taxes from the money that they said they had been unable to recover due to Kenyans failing to pay for the products that they offer on loan.

M-Kopa retails in solar-powered home lighting solutions, phones, radios, and other related products.

The debts were written off from projected revenue for the years between 2017 and 2020, but the failure to pay for products and difficulties in recovering the money saw them categorized as bad debts.

A bad debt is money that cannot be recovered from a debtor.

M-Kopa sells its products through Direct Sales Representatives (DSR) and field technicians do the installation and repairs in case of malfunctions.

They sell their products on credit on a pay-as-you-go basis where the customers pay a small deposit averaging Sh3,500.

They make daily payments of an average Sh50 to use the product and they complete the payments in a year or two.

Customers with a good payment record are offered other products that may be of appeal to them after they are done with payments.

According to M-Kopa, the pay-to-use model ensures that there is no accumulation of arrears like other financial institutions which explains their debt write-offs.

The write-offs occur when a customer has defaulted payments for more than 120 days.

They said that they do offer incentives to the defaulting customers by asking them to return the products for a refund of the full deposit.

According to the company were they to use the DSRs to follow up on debts then it would be an added cost to pay them.

They said that they would need to hire more staff or agents and this move could potentially lead to low sales due to the added responsibilities for the sales agents.

The company is a subsidiary of M-Kopa LLC which is incorporated in the United States of America and the parent company M-Kopa Holdings Limited is incorporated in the United Kingdom.

They faulted the taxman saying that the Withholding tax assessment of Sh17 million was erroneous.

Tracing the defaulters

The company said that even though their solar kits are fitted with Safaricom SIM cards with Global System for Mobile (GSM) communications, it can only get a rough location of the customer devices between 10-30 kilometres from the tower location.

They said that devices do not have a full Global Positioning System (GPS) and that the SIM cards in the devices are for connectivity and to deliver credit to devices and not for locating the customers.

In line with Data Privacy law in Kenya, M-Kopa said that they could not use GPS to locate defaulters without the consent of the customers.

The company said that it made two types of calls to its customers, one to explain the terms of the loan and get their consent and the second was an education call.

A month after granting the loan, the company would then follow up with calls based on zero credits.

Defaulters would get payment reminder messages within four days, and if between five to 30 days they went without credit they would be encouraged to purchase at least one credit which is equivalent to their daily payments.

This move would reset their days on zero credit, meaning the days owed would not accumulate.

Customers who did not remit any payment within 31 days and below 90 days would get blocked and they would be allocated to collection agents on a rotation basis of 10 days.

The agents would then make contact either via calls or SMS to encourage payments.

Customers who would get to 91 days without any payment would get an SMS every alternate day within 30 days to communicate about the loan repayment of returning the product before being placed on the Credit Reference Bureau (CRB).

The customers who would get to 120 days would have their loan written off since the company had exhausted all efforts to get paid.

The customers who were struggling with payment would be allowed to return the product for their deposit if it was in good condition and in cases of damage the deposit would be used to do the repairs.

The company complained that some of its customers were highly uncooperative by not responding to calls or messages.

M-Kopa said they only list customers on CRB after a lengthy notification process where they relay the negative effects of listing and would only be delisted if they resumed making payments.

They decried that CRB listing was the only remedy they had since taking the defaulters to court would be costly.

According to their estimates, most debts range from Sh6,630 to Sh37,000, and for an investigator to trace one customer they would need Sh20,000 and recovery costs would require Sh146,900.

The tribunal heard that the solar panels have modems with a Safaricom SIM card that is normally one for two minutes only to relay payment data to calculate the number of days the device will be working.

The modem conducts check-ins every 25 hours but would need sufficient battery charge and a good Safaricom network but will only be active for less than two minutes.

For the defaulters, their SIM cards never check in because their devices are normally off.

They maintained that the modem is not equipped with location information that would help the telco triangulate the location of the defaulters on behalf of M-Kopa.

They added that they use the parts of returned products for refurbishment purposes saying that there was no significant recovery of debt through repossession.

In terms of income generated between 2017 and 2020, M-Kopa told the tribunal that they made a total adjustment of Sh172.2 million.

They said that the services offered by some of their directors to other M-Kopa group entities had greatly reduced over the years since they had invested in their in-house management teams.

They faulted KRA for charging them with the costs for the directors involved in other entities saying that their fees are determined by the performance of the company.

They accused the taxman of demanding Sh97 million in deemed dividends for 2018, 2019, and 2020 and withholding tax of Sh17 million as a result of transfer price adjustment of low-value services by M-Kopa to its non-residents.

KRAs case

On their part, KRA accused the company of not having any form of security or collateral when giving out their products.

They said that M-Kopa had failed to table documents to prove their claims that the cost of recovering the debt exceeds the debt itself.

According to the taxman M-Kopa’s claim that they abandoned efforts to collect the debts for another reasonable cause had not been proven.

He added that the company was unable to give contracts between them and the customer with revenue recognition for the period.

The taxman stated there were no detailed customer statements and evidence of payment or correspondences with customers and auctioneers on distress for default in payments.

According to KRA, the products sold by M-Kopa are connected to a control unit with inbuilt software enabling them to remotely monitor and deactivate the system in case of a default.

They added that the control unit is designed in a way that it cannot discharge power in the event of default rendering it redundant.

It said that the company wrote off debts totalling Sh2 billion for the years between 2017 and 2020 for an expected credit loss provision of Sh1.5 billion for provision for bad and doubtful debts of Sh65 million.

The reason that M-Kopa gave was that it was hard to go after the defaulters.

KRA cited 2020 where it said M-Kopa added back Sh788 million in the computation as a non-deductible expense, yet amounts for other years were not added back.

KRA said that they had not been satisfied with M-Kopa’s explanation that the debts were irrecoverable since they had failed to demonstrate all the steps taken to collect them.

They added that DSRs and installation technicians employed by the company were closer to customers and could therefore act as a link in case a customer needed to be traced.

KRA cited an agreement between M-Kopa and Safaricom where they said that the telco was to provide them with location information as to which base transceiver station is serving the M-Kopa system.

The taxman said that base transceiver stations give the location of a GSM device based on the location of the cell tower that is closest to the GSM device emitting the radio signal.

Owing to this, KRA said that the company had not demonstrated efforts to recover the bad debts nor recover the products save for the alleged phone calls and CRB listing.

It said that from the leadership structure provided by the company, most of its directors were based in Kenya and oversaw operations of other companies under M-Kopa Holdings.

KRA said that the company had not demonstrated an arm’s length approach it claimed was being employed by its directors.

In the end, the tribunal ruled against KRA, allowing the company not to be taxed for the bad debts written off.