How taxman lost Sh1.4b in taxes from solar power firm, M-Kopa

Dustin Kahler-Director of Mobility at M-Kopa during a past interview in Nairobi. [File, Standard]

A tax battle has exposed how failure by Kenyans to pay M-Kopa items taken on loans cost the Kenya Revenue Authority, Sh1.4 billion in taxes.

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

M-Kopa Kenya Limited is a subsidiary of M-Kopa LLC which is incorporated in the US and the parent company M-Kopa Holdings Limited is incorporated in the UK.

Responding to assessments by KRA on taxes they owe, M-Kopa revealed that between 2017 and 2020 they had Sh1.4 billion written off as bad debt. A bad debt is money that cannot be recovered from a debtor.

They faulted the taxman saying the withholding tax assessment of Sh17 million was erroneous. M-Kopa told the tax tribunal they sell their products on credit on a pay-as-you-go basis where customers pay a small deposit averaging Sh3,500.

They make daily payments of an average Sh50 to use the product and 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 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 alleged that they offer incentives to defaulting customers where they ask them to return the products for a refund of the full deposit.

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

According to the company were it to use them to follow up on debts then it would be an added cost to pay them. They added 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 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 kilometers 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 they could not use GPS to locate defaulters without the consent of customers.

The company said it made two types of calls to customers, one to explain terms of the loan and get their consent and the second, 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.

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 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 location of the defaulters on behalf of M-Kopa.

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 faulted KRA for charging them with the costs for 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.

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

They said 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.

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