Governance

KRA Gets Approval To Collect Royalty Tax on Card Transactions

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KRA debit cards
Image courtesy Nation

Update on 11th November 2020:

*We apologise for the misleading title and story sent prior to this update. We have made changes with all the right information regarding this story to better reflect on what exactly is being taxed. 

The Kenya Revenue Authority (KRA) was given a go-ahead to add a service tax on payments made by banks to card companies as the government looks to expand its streams of revenue collection.

The green light was given by the Court of Appeal on Monday 9th November saying that the payments made by banks to credit card companies were royalty and therefore subject to withholding tax.

The ruling was given in a case that had the KRA appealing against a ruling made earlier in a case that involved the KRA and Absa. Both parties were in dispute over whether the payments made to the international card firms were royalties. According to KRA, the payments definitely were which meant that Absa was required to deduct 20% as tax.

A three-judge bench overturned a ruling made by High Court Judge George Odunga who quashed the demand from KRA, saying it did not meet the level of clarity required in tax matters.

According to the judges, the tax should be executed owing to the fact a transaction between the bank and payment company is a professional service.

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It might not be entirely clear, but there is still a possibility that this withholding tax might impact the customer soon by having transaction charges increased by the banks themselves.

“In this appeal, we have come to the conclusion that there is no ambiguity in the law and that the appellant [KRA] sufficiently demonstrated that the payments made by the respondent [Absa] to the card companies are ‘royalty’ under the Act,” Justices Wanjiru Karanja, Kathurima M’Inoti and Fatuma Sichale said.

“We are persuaded that the evidence on record properly established that the payments paid by the respondent to the card companies were royalty as defined in the Act and further that the interchange fees it paid to issuer banks were for management and professional services as defined in the Act, and therefore both payments were subject to withholding tax under the Act.”

This development comes briefly after KRA revealed a new tax on all digital businesses. Taxable supplies made through a digital platform shall include electronic services and downloadable digital content such as mobile apps, e-books and movies. This will also include subscription-based media like news, magazines, journals, music, podcasts and online gaming.

This means popular digital content and service providers such as Google, Apple, Amazon, Jumia, Netflix and Showmax will be affected.

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