(Nairobi) – Stanbic Bank Kenya has lost an appeal against a withholding tax demand of KSh 88.4 million (approximately USD 620,000), which relates to payments the bank made to card companies for interchange fees.
The five-member tax appeals tribunal dismissed the bank’s appeal, confirming that the payments made to the card companies should be subject to withholding tax. The tribunal ruled that the payments to companies like Visa, MasterCard, and UnionPay were related to royalties for the use of their trademarks and logos, as well as for access to their card payment systems. This, the tribunal determined, qualified as payments for management or professional services, and as such, withholding tax should be applied.
The tax dispute arose following an audit conducted by the Kenya Revenue Authority (KRA) for the period between November 2021 and December 2022. The KRA had issued a notice demanding KSh 88.4 million in withholding tax on payments made by Stanbic to the card companies for services rendered, including access to card payment systems and the use of the companies’ logos.
Stanbic Bank disagreed with the KRA’s assessment, arguing that interchange fees do not qualify as management or professional services under the Income Tax Act. The bank maintained that its role as an acquiring bank was to facilitate cashless payments by acting as an intermediary between merchants, cardholders, issuing banks, and payment networks. It further argued that payments made to non-resident card companies such as Visa, MasterCard, and UnionPay were not royalties and, therefore, should not be subject to withholding tax.
The bank’s defense centered on the notion that the fees it paid to the card companies were primarily for transaction clearance and settlement, not for any managerial or professional services. However, the tribunal rejected this argument, stating that the payments were more than just transaction fees, as they included compensation for the use of trademarks and access to the card companies’ networks.
In its ruling, the tribunal concluded that, although the payments involved clearing and settlement functions, they could not be separated from the royalty fees tied to the use of the card companies’ logos. Therefore, the tribunal found the KRA’s demand for withholding tax to be justified.
KRA’s position was supported by the fact that the agreements between Stanbic and the card companies stipulated that the bank would pay fees in exchange for access to the card networks and for issuing cards bearing the logos of the respective companies. According to KRA, this constituted income derived from Kenya, which is subject to income tax.
This ruling means that Stanbic Bank will have to pay the withholding tax as demanded by KRA, marking a significant development in the ongoing dispute.