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Mastercard, KBA in Absa credit card royalty tax war – Business Daily

Absa head office in Westlands, Nairobi. FILE PHOTO | NMG
The Supreme Court has allowed Mastercard and Kenya Bankers Association to join an appeal filed by Absa Bank Kenya as it fights to stop the Kenya Revenue Authority (KRA) from demanding withholding tax for royalties paid to credit card firms.
A bench of five judges led by Deputy Chief Justice Philomena Mwilu said MasterCard Asia Pacific PTE and the bank lobby have an identifiable stake in the matter, as they will be directly affected by the outcome of the case.
Absa moved to the apex court arguing that the payments made to Visa International Services Association, Mastercard Inc, and American Express Ltd did not constitute royalty and KRA had no basis for demanding withholding tax.
Mastercard argues that the imposition of withholding taxes on the interchange and transaction fees as management and the professional fee will impact the use of its payment solutions in Kenya. “The applicant, therefore, stands to be prejudiced and its joinder is thus necessary,” the court said. Mastercard says it has a direct interest in the case as the orders to be issued by the court will affect its engagement with Absa and all the other banks in its network.
The firm’s executive vice president in charge of customer delivery in the Asia Pacific region Shafi Shaikh said it will provide the court with an understanding of the nature of the MasterCard service and interchange fees.
He said the petition is a matter of public interest as it will impact the uptake and popularity of the use of debit and credit cards as modes of payment in Kenya. The court heard that the firm is a leading global payment solution provider through the MasterCard network that facilitates the processing of card payments throughout the world.
He said the interchange fees earned by Absa and other banks within its network act as an incentive to utilise the global payment system for transactions on debit and credit cards issued to cardholders and for customers to join the network. KRA demanded withholding tax on payments in 2012 from Absa, saying the interchange fees were royalty and those to the other banks were for professional or management services.
The arrangement with the card companies enables Absa to issue its customers with credit, debit, and pre-paid cards, which the customers use to pay for services and goods purchased from contracted retail outlets. In turn, the lender has entered into agreements with the outlets to accept payments through the cards.
The demand prompted Absa to challenge the KRA’s move, arguing that it was illegal and unreasonable. It was quashed by the courts in 2015 but KRA appealed and the decision was overturned.
KRA says the bank was obliged to pay withholding tax arising from its relationship and dealings with the credit card companies.
KBA said it has a direct interest in the petition being the body bringing together banking institutions licensed and regulated by the Central Bank of Kenya.
The association said the matter is important within the banking industry that would affect all its members.
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Financial.co.kewas founded by Mr. Jospeh Muongi Kamau. He holds a Master of Science in Finance, Bachelors of Science in Actuarial Science and a Certificate of proficiencty in insurance.