KENYA : Members of Parliament have lost their appeal against a Kenya Revenue Authority (KRA) tax demand of Sh1 billion on car grants, with the tax tribunal ruling that the Sh2.5 million tax per lawmaker on their Sh7.5 million car grants is legitimate.
The tribunal, chaired by Eric Nyongesa Wafula, rejected the Parliamentary Service Commission's (PSC) argument that the grants were tax-exempt, ruling instead that the "motor vehicle reimbursements" qualify as taxable employment benefits under Section 3(2) of the Income Tax Act, particularly since MPs retain ownership of the vehicles after their terms end.
The dispute, which affects all 416 lawmakers (349 in the National Assembly and 67 in the Senate), originated from KRA's December 2022 letters demanding Sh168.4 million from senators and Sh877.4 million from National Assembly members, including penalties and interest.
While the MPs argued that the grants were solely for official duties and constituency work, the tribunal sided with KRA's position that any payment received in the course of employment is taxable income, though the PSC retains the option to appeal the ruling at the High Court.
Historically, car allowances or grants have often occupied a grey area, with their taxability depending on specific usage and ownership conditions.
This ruling sets a fascinating precedent towards a stricter interpretation of "taxable benefits", potentially influencing future tax policies on employee benefits across various sectors.
In related news, the Tax Appeals Tribunal has ruled that Stanbic Bank must pay the Kenya Revenue Authority (KRA) Sh234 million in taxes related to payments made to foreign card companies like Visa, Mastercard, and Union Pay International.
The case originated from KRA's initial demand of Sh137 million in withholding and value added taxes between November 2021 and December 2022, which was later increased by an additional Sh87 million assessment.
At the core of the dispute was the interpretation of payments made by Stanbic to card companies, with KRA arguing these constituted royalties for trademarks and logos. At the same time, Stanbic maintained they were operational payments for accessing card payment networks and clearing services.
The bank contended that their agreements granted non-exclusive, royalty-free licenses to use the card companies' marks and that customer card choice was based on functionality rather than branding.
The Tribunal, chaired by Grace Mukuha, sided with KRA's interpretation, finding it impossible to separate trademark and logo usage fees from the payments made to card companies.
The ruling established that these payments constituted both royalties for trademark use and fees for accessing card payment systems and settlement functions, making them subject to withholding tax.
Additionally, the Tribunal determined that the services provided under the agreements with card companies qualified as management or professional services.
Finally, Kenya's National Treasury has announced plans to reinstate a five percent withholding tax on interest earned from infrastructure bonds (IFBs) with maturities of at least three years, marking the first time since their launch in February 2009 that IFBs will be taxed.
This proposal, outlined in the Tax Laws (Amendment) Bill, 2024, awaits approval from Parliament and reverses the previously tax-free status that has made IFBs a popular investment vehicle for financing government infrastructure projects.
Currently, IFBs represent over 35 percent of net domestic debt, with significant holdings by commercial banks, nonbank investors, and a modest portion held by non-residents.