Judgment summary
The Tribunal considered an appeal by Citibank N.A Kenya Branch against a Kenya Revenue Authority additional income tax assessment for the 2019 year of income, amounting to Kshs. 46,857,816 comprising principal tax, penalties and interest (paragraph 4).
The parties reached a partial consent covering corporation tax assessments relating to staff benefit and interest expense, leaving only the disallowance of an excise duty expense of Kshs. 6,554,014 for determination by the Tribunal (paragraphs 8, 72).
The sole issue determined was whether the Appellant had discharged its burden of proof under Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act in relation to the excise duty expense (paragraph 92). The Tribunal found in favour of the Appellant, set aside the Objection Decision, and allowed the Appeal with no order as to costs (paragraphs 118 to 120).
Background
Citibank N.A Kenya Branch is a branch of a banking corporation incorporated in the United States of America, domiciled in Kenya and licensed as a bank under the Banking Act, Chapter 488 (paragraph 1). The Respondent is the Kenya Revenue Authority, a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, mandated under Section 5 to collect and administer tax revenue (paragraph 2).
The Appellant was subjected to a tax audit for the 2019 year of income in respect of Income Tax (paragraph 3). On 26 May 2025, the Respondent issued an additional assessment of Kshs. 46,857,816 comprising principal tax, penalties and interest (paragraph 4). The Appellant objected by a notice of objection dated 24 June 2025 (paragraph 5), and the Respondent issued an Objection Decision dated 21 August 2025 confirming the assessment (paragraph 6).
The Appellant filed a Notice of Appeal dated 2 October 2025 (paragraph 7). The parties later reached a partial consent dated 17 March 2026 in relation to Corporation Tax assessments concerning staff benefit and interest expense (paragraph 8), leaving only the excise duty issue for the Tribunal's determination (paragraph 72).
Core dispute
The Appellant's Memorandum of Appeal dated 16 October 2025 raised four grounds: that the Respondent erred in disallowing excise duty and reverse VAT expenses, in disallowing payroll taxes comprising employment expenses, in disallowing interest expenses, and that the Respondent violated the Appellant's right to fair administrative action by disregarding explanations and information provided (paragraph 9).
Following the partial consent on staff benefit and interest expense issues, the live dispute before the Tribunal concerned only the disallowance of excise duty expenses of Kshs. 6,554,014, said to arise from excise duty paid on interchange fees earned from card transactions (paragraphs 15 to 16, 72).
The Appellant contended that interchange fees were booked gross of excise duty, and that the excise duty expensed thereon reflected the actual net income earned, so that disallowing the deduction would amount to taxing an amount the Appellant never earned, effectively taxing a tax (paragraphs 26, 30, 33). The Appellant argued excise duty is not income tax or a tax of a similar nature within Section 16(2)(c) of the Income Tax Act and is therefore not barred from deduction (paragraphs 27 to 29).
The Respondent maintained that the Appellant had not sufficiently provided documents to establish whether the interchange fees were booked gross or net of excise duty, and that the Appellant had therefore failed to discharge its burden of proof under Section 56(1) of the Tax Procedures Act (paragraphs 76 to 86). The Respondent characterised the excise duty as simply a tax due on income actually declared, not a business cost (paragraph 82).
Court findings
The Tribunal identified the sole issue for determination as whether the Appellant discharged its burden of proof under Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act (paragraph 92).
The Tribunal reviewed the nature of card transactions and interchange fees, referring to Sidian Bank Kenya Limited v Commissioner of Domestic Taxes (TAT No. 368 of 2020), Commissioner of Domestic Taxes v Bank of Africa Limited [2023] KEHC 1036 (KLR), and Commissioner of Domestic Taxes (Large Taxpayer Office) v Barclays Bank of Kenya Ltd [2020] KECA 214 (KLR), confirming that interchange fees are subject to excise duty at 20% under paragraph 4 of Part II of the First Schedule to the Excise Duty Act, 2015 (paragraphs 99 to 101). The Tribunal noted the parties were not in dispute on the definition of interchange fees (paragraph 102).
On deductibility, the Tribunal referred again to Sidian Bank Kenya Limited, noting that where a bank earns fees on a gross basis and pays excise duty as an expense to arrive at net income, the deduction is proper (paragraphs 104 to 105). The Tribunal also cited the Supreme Court decision in Barclays Bank of Kenya Limited (Now Absa Bank Kenya Plc) v Commissioner For Domestic Taxes, noting that interchange fees are already taxed as income within corporate tax (paragraph 106).
The Tribunal found that the Appellant presented a clear and consistent explanation of the card transaction flow, supported by the testimony of Mr Evans Toroitich and supporting ledgers, demonstrating that interchange fees allocated by Visa and Mastercard were gross amounts, with excise duty expensed to arrive at actual income (paragraph 107). The Tribunal accepted that taxing the excise duty would amount to taxing a tax, since excise duty is not a profit or gain but a tax the Appellant is required to remit (paragraph 108).
The Tribunal examined the documents presented by the Appellant, including excise duty expense ledgers, a card transaction flowchart, sample Visa and Mastercard settlement reports, general ledger extracts, and a reconciliation of excise duty computation (paragraph 110). It found no evidence of further document exchange after the Respondent's request of 13 August 2025 (paragraph 111), and that the Appellant had presented comprehensive evidence at the hearing (paragraph 112).
Applying the principle from Frikah Investments Limited v Commissioner of Domestic Taxes [2024] KETAT 757 (KLR) that a taxpayer must discharge the burden of proof, the Tribunal found the Appellant had done so on a balance of probabilities, and that the burden shifted to the Respondent, per Branch International Limited & another v Commissioner of Domestic Taxes & another [2026] KEHC 5381 (KLR), to show why the evidence failed the statutory test (paragraphs 113 to 114). The Respondent's blanket assertion that documents were not provided was found insufficient rebuttal (paragraph 115).
The Tribunal concluded that the Appellant's treatment of the excise duty expense accorded with the law and the economic substance of the transactions, that the excise duty did not constitute income to the Appellant, and that disallowing the deduction would result in taxing an amount never earned, contrary to Section 3 of the Income Tax Act (paragraphs 116 to 117).
Outcome
The Tribunal found the Appeal meritorious and made the following orders: the Appeal is allowed; the partial consent dated and filed on 17 March 2026 is confirmed as an order of the Tribunal; the Respondent's Objection Decision dated 21 August 2025 is set aside; and there is no order as to costs (paragraph 119).
Major issues / areas of contention
- Whether the excise duty expensed by the Appellant on interchange fees earned from card transactions was deductible for income tax purposes.
- Whether the Appellant discharged its burden of proof under Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act in respect of the excise duty deduction.
- Whether interchange fees were booked gross or net of excise duty, and the accounting treatment of the excise duty expense.
- Whether disallowing the excise duty deduction would amount to taxing the Appellant on income it did not earn, contrary to Section 3 of the Income Tax Act.
- The application of Section 16(2)(c) of the Income Tax Act regarding deductions for taxes on income.