BY SAM ALFAN.
The High Court has quashed regulations requiring banks to remit 15 percent withholding tax on trading gains made by foreign entities, dealing a blow to efforts by Kenya Revenue Authority (KRA) to collect more money.
High court judge John Chigiti quashed the Income Tax (Financial Derivatives) Regulations, 2023 which required foreign investors who gain from hedges made by local entities such as banks and airlines to pay 15 percent of the gain.
Kenya Bankers Association (KBA) challenged the Regulations as illegal, unreasonable, impracticable, and unclear and also create uncertainty.
“The Regulations do not provide at all on how gains will be computed for non-residents. It is practically impossible for a resident person to calculate the gains of a non-resident person,” said the judge.The regulations require Kenyan entities engaging in transactions with foreigners to cushion them from volatility in financial markets, to account for any profit made by foreign parties and remit the tax to the KRA.
The KBA submitted that the Regulations are inaccurate as they assume that one party’s gain is equal to another party’s loss and there was no basis or methodology to determine the realised gains of the non-resident person.
Justice Chigiti said in the absence of a deeming provision under Section 10 of the ITA, the entire premise of the Regulations fails as the “gains from financial derivatives” of a non-resident person cannot be deemed to be income which accrued in or was derived from Kenya, for tax purposes.
“An order of Prohibition is hereby issued directed at the Kenya Revenue Authority (KBA) either by itself, its agents or employees restraining it from taking any steps, actions, or measures to impose or collect any taxes from the members of the ex-parte Applicant engaged in transactions involving financial derivatives or enforcement or implementation of the Income Tax (Financial Derivatives) Regulations, 2023,” said the judge.
KRA opposed the petition arguing that the Regulations are to aid in the collection of taxes and the application was prejudicial and to the detriment of the government, having included the collections into its fiscal budget for the current and the next financial year.
The taxman added that the amount of taxes to be collected runs into the hundreds of millions, and used to finance the government’s projects.
