Implications of the Tax Dispute Resolution for Banks

Prime Bank has scored a decisive legal victory in a high-profile tax dispute resolution with the Kenya Revenue Authority (KRA), after the Tax Appeals Tribunal quashed an Sh87.6 million claim by the taxman. The ruling clarifies how key banking income streams should be treated under Kenyan tax law, providing critical precedent for the banking sector and potentially reshaping how financial institutions are assessed on excise duty and withholding tax, according to the tribunal’s judgment.

How tax dispute resolution unfolded in the Prime Bank case

The dispute originated from a comprehensive KRA audit of Prime Bank’s tax obligations between 2019 and 2022, covering corporate income tax, excise duty, withholding tax, VAT, reverse VAT, and PAYE. In September 2024, KRA issued an additional tax assessment seeking Sh100 million in principal taxes against the bank. Prime Bank paid Sh18.1 million but contested the balance, taking the matter to the Tax Appeals Tribunal.

In its ruling, the tribunal overturned several aspects of KRA’s assessments, concluding that the tax authority had incorrectly characterized certain items as taxable. Most notably, it held that credit card interest, late payment interest, and over-limit charges constitute interest income rather than taxable fees under the Excise Duty Act, and therefore do not attract excise duty. The tribunal clarified that excise duty applies to specific transactional fees defined by law and cannot be expansively interpreted.

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The tribunal also dismissed KRA’s attempt to impose withholding tax on income relating to cheque and bill discounting, ruling that such earnings fall outside the scope of excise duty. Beyond this, Prime Bank successfully challenged withholding taxes levied on payments made to non-resident service providers for management and software services in South Africa and the United Arab Emirates, finding that applicable double taxation agreements did not support local taxation in the absence of a permanent establishment.

Key implications for banking sector tax norms

A central issue in the case was whether withholding tax should be applied to interest paid to financial institutions, an area explicitly exempt under Section 35(3)(b) of the Income Tax Act. The tribunal noted that although KRA acknowledged the exemption during objections, it failed to reflect this in its final computations — a procedural flaw that led the tribunal to deem the assessment unsustainable.

The ruling also found that KRA did not properly account for withholding tax payments already made by Prime Bank in earlier years, constituting what the tribunal described as impermissible double taxation. Withholding tax had been applied to operational expenses such as ATM relocation costs, maintenance, and general procurement, which the tribunal held were not subject to such taxes under statutory provisions.

Furthermore, for the 2019 tax year, the tribunal ruled that KRA lacked authority to recover unwithheld tax before November 7, 2019, when Section 39A of the Tax Procedures Act took effect, invalidating related demands for that period. These findings collectively reinforce the principle that statutory tax obligations must be clearly defined and supported by explicit legal authority before enforcement.

Broader impact of the tax dispute resolution on compliance and certainty

The outcome represents a significant tax dispute resolution precedent for the banking sector and other corporate taxpayers. It underscores the importance of statutory clarity and procedural consistency in tax assessments, particularly regarding excise duty and withholding tax. Legal experts say the decision may prompt financial institutions to challenge similar assessments more confidently, knowing that tribunals will scrutinize the legal basis of KRA’s claims.

For KRA, the ruling highlights the need to align audit practices and tax computations with statutory provisions and to correct recognized errors during objection stages. Tax practitioners argue that such litigation outcomes can improve mutual understanding between authorities and taxpayers, ultimately contributing to a more predictable tax environment.

The Prime Bank victory arrives amid broader discussions on tax compliance and collection in Kenya. While KRA continues to meet and exceed revenue targets — collecting over Sh2.5 trillion in recent fiscal years as part of sustained growth — disputes over tax interpretation persist across sectors. Clarifying tax liabilities, particularly for complex revenue streams in financial services, remains an ongoing policy and compliance priority.

For corporate players, the case reinforces the value of rigorous tax planning and professional dispute resolution mechanisms. As businesses navigate evolving tax frameworks, decisions like this contribute to jurisprudence that shapes how revenue authorities and taxpayers engage on contested assessments.