Kenya Court of Appeal Authorises Taxation on Card Interchange Fees

Nov 11 2020

Consumers using a debit or credit card to make purchases may have to pay higher charges as the Court of Appeal gave leeway for taxation on interchange fees. A three-judge bench at the Court of Appeal ruled that payments made by Absa to credit card companies were royalties thus subject to a 20 per cent withholding tax.

The Kenya Revenue Authority (KRA) and Absa have been embroiled in an eight-year legal tussle over taxation of royalties remitted from interchange fees. The interchange fees are charged by a bank to facilitate the transfer of money from a cardholder to a merchant say a supermarket.

The High Court in Nairobi ruled in August that interchange fees should not be taxed saying that it does not constitute a service. Justice Kasango said that in this case, the interchange fee by the issuing bank is not for any service rendered by the issuing bank to the acquiring bank. The cardholder verification process performed by the issuing bank is to confirm if the customer’s account has sufficient funds to make the purchase.

Dissatisfied with the ruling, KRA moved to the appellate court that overturned the decision.

Justice Wanjiru Karanja, Kathurima M’Inoti, and Fatuma Sichale ruled that the payments Absa made to the card companies were royalties as defined in the Act. The bench opined that the interchange fees Absa paid to the issuer banks were for management and professional services as defines in the act, and therefore both payments were subject to withholding tax.

In this case, the judges said that KRA was able to demonstrate that the transaction fee constituted payment for the right to use the card companies’ trademarks and logos. This concurred with KRA argument that without the use of credit and debit cards bearing the trademarks American Express, MasterCard, and Visa, ABSA cannot access nor use the networks. Therefore, the payment constituted royalty for trademark.

According to local media, the ruling will have widespread ramifications across the Kenyan banking industry seeing that card usage has grown in the last decade. Card Purchases may get Expensive as Court Gives Leeway for Kenya Revenue Authority (KRA) to charge interchange fees.

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