Selective Tax Wars By KRA Bad For Business, Pushing Investors Away

In a bid to spur investments, the Kenyan government extended a blanket tax waiver so that businesses merge and increase their operating capacities. Among the beneficiaries of the blanket waivers was NCBA.

The sum total of the revocation of the tax exemption meant that NCBA bank was to pay KRA in excess of Sh900 million including interest.

The value of the CBA shares was not quoted during the sealing of the merger deal but market players estimated the value of 53 per cent stake at Sh35 billion.

This was based on the book value of Sh65 billion at the time the deal was closed, translating to a stamp duty charge of over Sh350 million.

The Sh900 million KRA is now laying claim to includes interest accrued over the five-year period since the merger was sealed on June 19, 2019.

During that time, former Treasury CS Ukur Yatani in a letter dated June 21, 2019 said approval had been granted to exempt from Capital Gains Tax the instruments executed in the transfer of shares and the transfer of assets and liabilities relating to the merger of NCI Group PLC and Commercial Bank of Africa Limited.

This was based on provisions of the Eight Schedule of the Income Tax Act which allowed the merger to be exempted from CGT.

“By a copy of this letter, the Group Managing Director of NCBA is advised that the approval for exemption of the Capital Gains Tax that was payable on the transfer of shares and the transfer of assets and liabilities relating to the merger of NIC Group and CBA Group has been revoked,” the CS wrote to the acting Commissioner General at the Kenya Revenue Authority.

“… as well as the letter communicating the approval dated June 21, 2019, and should liaise with Kenya Revenue Authority on this matter.”

The tax waiver followed legal channels and is legally binding for NIC Bank and CBA bank that merged to form NCBA Bank. Other businesses also benefitted from this merger tax relief.

True to the plan, the mergers have seen increased businesses, more employment opportunities and more taxes paid to KRA.

At the time of the merger, the financial institutions that formed NCBA had a total of 26,000 shareholders. According to Bank’s CEO Mr. John Gachora, the same year that the 350 million shillings waiver was awarded, the lender paid 4.4 billion shillings in taxes to the Kenya Revenue Authority.

In 2021, NCBA paid 6.7 billion shillings in taxes and for the 2022 financial year, the lender will be paying at least 14.3 billion shillings to the taxman.

However, the government, driven by personal agenda, has now backtracked on its own undertaking. The Treasury last month walked back on its June 19, 2019, decision that approved exemption from Capital Gains Tax (CGT) in the transaction that merged the two lenders through a transfer of shares and assets, forming the current NCBA Bank one of Kenya’s biggest lenders.

Alarmingly, only NCBA is being targeted in this game of selective witch-hunt. Safaricom also had a tax waiver in the Huawei-CCTV deal.

It must be remembered that the government is an institution and not the elected leaders of the day who come and go. A government stands for continuity and stability.

The High Court has meanwhile temporarily protected NCBA from paying taxes on the transaction as the matter goes through hearings and eventually to a determination.

“That I am satisfied that the application has met the test for grant of conservatory orders at this ex parte stage. Accordingly, prayer 2 of the application is hereby granted,” Lady Justice Mugure Thande ordered in a ruling issued on Thursday.

If KRA punishes businesses, who will pay taxes to it? How will it collect taxes?

In 2021 Justice Weldon Korir warned Kenya Revenue Authority to stop killing local companies in the guise of collecting taxes.

The judge ruled that the taxman has become a monster in itself by killing local businesses over alleged failure to pay taxes which in turn affect thousands of families whose bread winners are rendered jobless once the companies are shut down.

According to the judge, KRA itself will soon run bankrupt and fail to meet its tax collection targets if it continues with the trend of closing businesses which are supposed to remit the tax.

“When KRA proceeds to kill businesses in the guise of collecting taxes, it becomes an undertaker and will itself eventually die since its survival depends on the existence of income generating businesses from which it can collect taxes,” ruled Korir.

The vindictive action by the new regime and KRA is sending a dangerous message to investors on Kenya’s business environment and raising questions whether government policies and agreements are binding or not.

Such a decision is not only seeing more investors flee the country but is locking out new investors from coming in because they are unsure if government approvals and agreements will stand the test of time going by the precedence being set in the NCBA case

As a result of the precedence being set, businesses and investors are in constant fear of legally binding decisions by the government being rescinded overnight when office holders in positions such as KRA, Treasury, and Trade are replaced.

CMC Motors Group announced the sacking of 169 employees after three vehicle brands; Ford, Suzuki, and Mazda, terminated their distribution contracts with the firm.

The global franchises cited a slowdown in the passenger vehicle segment.

“As a result of the termination of these distributorship contracts, CMC Group is re-organizing its business to place great focus on the agricultural sector. This will result in a reduction in the number of roles and the resources required to execute the remaining functions. This means that it will become necessary to declare 169 employees redundant,” said CMC.

Following the termination of the distributorship contracts with the three-vehicle brands, CMC will no longer represent them in Kenya.

In January British currency printing firm De La Rue announced its exit from the Kenyan market due to economic climate. They had a tax impasse with KRA and opted out.

The examples of multinationals having issues with unfavorable tax conditions are many.

This attack on NCBA will not stop at that, it is paving the way for many other businesses to witness increased cases of selective policy shifts and default in business agreements. The end result will be endless court cases, business shutdowns and job losses.

We’ve seen such vindictive behavior elsewhere and ended badly. Idi Amin used such selective strategies in Uganda and we all know how Uganda’s economy crumbled. Amin summarily decreed the expulsion of Uganda’s “Asian” (that is, Indian and Pakistani) community.

The Economic War was fought by government officials who overhauled, all at once, whole sections of public life. It was a regulatory war, pursued by authorities who sought to control prices and supervise the conduct of business. It was a war in which a great many Ugandans were unwittingly made into enemies of state.

The inhumanity of the Economic War was much more widely experienced than anniversary events marking the “Asian expulsion” can acknowledge.

Robert Mugabe used the same selective methods and we all know how Zimbabwe’s economy crumbled. Government should facilitate and support businesses. Not frustrate and apply selective laws as is being seen in the NCBA case.

It beats logic why the government would launch an attack on business at a time when Kenya dearly needs and requires investors from locals as well as foreigners.

If GOK will revoke the tax exemption for CBA & NIC, then all exemptions should be revoked for that entire period. All firms that got the exemptions must be under that same hammer. You shouldn’t revoke an exemption that was done within the law selectively. If it’s a review, review for all companies, and if it is about revoking tax waivers, revoke for all.

It’s not a matter of paying. It’s the principle. The protection of this principle is KEY because it has the potential for a really negative domino effect if done otherwise to our investment sector. The amount in question is Sh900M. In context, the bank paid Sh14B in taxes and Sh7B to shareholders last year.

Business success equals manageable risk appetite, whereas we can’t woo investors only to find a retrogressive and vindictive regime akin to Idi Amin which led to the capital flight in UG and paralyzed the economy.

If investors aren’t confident of trading in a country, the consequence is failure. Ask yourself; Why have the Government bonds failed superbly? Why are investors wary? Why has CMC closed shop and some 150 odd direct employees purged? Why has Delarue closed if not because on unfavorable business environment?

EABL Woes

At the same time, High Court in Nairobi has barred Kenya Revenue Authority from pursuing Kenya Breweries Limited (KBL) in an Sh 8.2 billion tax battle triggered by Treasury Cabinet Secretary Ndungu’s revisit of tax waivers by the former administration.

Justice Mugure Thande temporarily froze the implementation of the Ndung’u directive until the case is heard and determined.

KBL sued Ndung’u in a battle over Sh 8.2 billion tax abandoned by the previous government on Senator Keg beer.

KBL, a subsidiary of East Africa Breweries Limited (EABL) states in its case filed before the High Court that Ndung’u has illegally revisited the waiver that happened 19 years ago.

In 2004, the then Finance Minister David Mwiraria reached out to KBL, with a request that the firm develops a low-cost clean alternative to illicit brew.

The headache was that men and women were dying in hideouts while consuming killer brews.

According to Kamau, KBL procured a manufacturing plant worth Sh 1 billion and introduced Senator Keg in 2004.

In order to ensure that the product was available to low-income earners, the government opted to give an excise duty remission for alcohol manufacturers who used local raw materials for the production of affordable and safe alcohol.

However, between 2015 and 2016 the government changed the remission rate from 50 percent to 90 percent.  It again changed in 2017 to 80 percent.

Following the changes, the court heard that KRA demanded Sh 22 billion from KBL. This resulted in a battle before the Tax Appeals Tribunal.

The government must ensure a conducive business environment unless it is comfortable losing all major business players to neighbouring countries like Rwanda. Tanzania is already poised to takeover as the regional’s economic powerhouse. A number of companies have also been opting for Ethiopia to Kenya.