KRA loses bid to tax capitalised reserves

Companies

KRA loses bid to tax capitalised reserves

Wednesday, April 22, 2020 21:55

By PATRICK ALUSHULA

The Kenya Revenue Authority (KRA) has lost a bid to collect Sh32.4 million from Kenindia Insurance arising from the insurer’s decision to transfer part of its reserves into capital.

The High Court ruled that the KRA had already taxed Sh111.34 million at the point the insurer was putting the sum in a statutory fund and demanding more would amount to double taxation.

The dispute arose from the 2010 transaction in which the insurer transferred Sh111.34 million from its reserve to boost the capital base. The amount had initially been moved from the statutory fund and therefore taxed.

The taxman was in 2013 seeking Sh32.4 million from the transaction but Kenindia objected to the assessment through its auditors Ernst & Young.

Kenindia told the court that the capitalised amount of Sh111.34 million had been subjected to taxation and did not exceed 30 percent of the reserve balance required by the regulator that year.

The High Court has agreed with the insurer, ruling that the tribunal had overlooked the fact that funds transferred from the retained earnings were from already-taxed income.

“I am satisfied that the appellant (Kenindia) has proved that the tax decision made by the commissioner and tribunal was incorrect. The commissioner and the tribunal failed to consider and appreciate the distinct nature of the Life Fund,” ruled Justice David Majanja.

“A transfer from the statutory reserve, as a distinct and separate fund, could not be taxed under the aforesaid provision.”

He said the transfer of Sh111.34 million, which the KRA subjected to taxation under section 19(5) (b) of the Income Tax Act was from statutory reserve and not the Life Fund.

Justice Majanja said taxation only applies to a transfer from the Life Fund for the benefit of shareholders.

Insurance Act requires an insurer to have a statutory fund to back up any long-term business including ordinary life assurance business. An insurer is also allowed to establish separate statutory funds for each class of long-term business.

The purpose of such a statutory fund is to protect policyholders by ring-fencing their funds from the fluctuations of ordinary business. Insurers are prohibited from using such money to pay dividends.