Home Landmark Case on VAT & Withholding Tax

Landmark Case on VAT & Withholding Tax

Procedural History

The Appellant challenged the Respondent’s assessments for VAT and withholding tax, arguing that the disposal of seized assets and interchange fees paid to card companies were not taxable. Following Alternative Dispute Resolution (ADR), two issues were referred back to the Tribunal for determination.

Background

The Appellant, a financial institution, disputed VAT assessments on the auction of repossessed vehicles and withholding tax on interchange fees paid to local banks and card companies. The Respondent maintained that both transactions were taxable under Kenyan tax laws.

Key Facts

The Appellant argued that auctioning repossessed vehicles is an extension of providing credit services, which are exempt from VAT under the VAT Act. The Respondent countered that such auctions are taxable supplies as no explicit exemption applies under the VAT Act. The Appellant claimed interchange fees paid to local banks and card companies are not management or professional fees or royalties subject to withholding tax but payments for automated services or network access. The Respondent relied on legal precedents to classify interchange fees as taxable management/professional fees and royalties.

Grounds of Appeal

  • VAT should not apply to the auctioning of repossessed vehicles as it is part of credit provision, a VAT-exempt service.
  • Interchange fees paid to local banks and card companies do not qualify as management/professional fees or royalties subject to withholding tax.

The Appellants’ Case

The Appellant argued that repossession and auctioning of vehicles are part of loan recovery processes tied to credit issuance, which is exempt from VAT under Paragraph 1(h) of Part 2 of the First Schedule to the VAT Act. It asserted that auctions aim to recover loan amounts, not generate profit. Also, the Appellant claimed interchange fees are payments for automated services or access to card networks like Visa, which do not involve managerial, professional, or technical services nor grant rights over intellectual property.

The Respondent’s Case

The Respondent argued that auctions are taxable supplies under Section 2(1) of the VAT Act since they involve transferring ownership rights. It emphasized that no exemption exists for auction sales in loan recovery processes. The Respondent classified interchange fees as management/professional fees and royalties subject to withholding tax under Section 35(1) of the Income Tax Act (ITA), relying on binding Court of Appeal rulings.

Issues for Determination

  • Whether VAT assessments for auction sales totaling Kshs. 67,539,788.03 (2018–2021) were erroneous.
  • Whether withholding tax assessments on interchange fees totaling Kshs. 369,023,956 (2019–2021) were justified.

Determination

The Tribunal held that auctions constitute taxable supplies under the VAT Act since no exemption explicitly covers recovery processes like vehicle auctions. The Appellant failed to provide evidence that its auctions complied with statutory requirements under the Auctioneers Act. Further, the Tribunal upheld the Court of Appeal’s binding decision in Commissioner of Domestic Taxes v Barclays Bank of Kenya Ltd [2009], classifying interchange fees as taxable management/professional fees or royalties until overturned by the Supreme Court.

The Verdict

The Tribunal dismissed the appeal, upheld the Respondent’s assessments for both VAT and withholding tax, and ordered each party to bear its own costs.

Conclusion

This case underscores the critical importance of strict compliance with tax laws and statutory requirements when disputing assessments. The Tribunal’s reliance on established legal precedents highlights how taxpayers must provide compelling evidence and arguments when challenging binding interpretations of law. For financial institutions, this ruling reinforces the need for comprehensive documentation in transactions involving repossessions and payments to third parties like card companies.

This material is intended solely for informational purposes and should not be relied upon as professional advice. Should you have any questions regarding this topic, please feel free to contact our team at info@ke.andersen.com or +254 20 5100263.

 

Contributors & Contact Persons

Filden Oroni

Legal & Tax Associate

filden.oroni@ke.andersen.com

 

Mark Njoroge

Legal & Tax Associate

mark.njoroge@ke.andersen.com

 

Marco Manyenze

Associate Director

marco.manyenze@ke.andersen.com

    News & Updates

  • Andersen Global Expands to Kenya

    Andersen has found a home in Kenya and provides a wide range of tax, valuation, financial advisory and related consulting services to individual and commercial clients.

  • Andersen Kenya

    Andersen has found a home in Kenya and provides a wide range of tax, valuation, financial advisory and related consulting services to individual and commercial clients.

  • Return Filling

    A tax return is a form or forms filed with a tax authority that reports income, expenses, and other pertinent tax information. Tax returns allow taxpayers to calculate their tax liability, schedule tax payments, or request refunds for the overpayment of taxes.