Navigating Tax Refunds In Kenya: Insights From Standard Chartered Bank's Appeal

Standard Chartered Bank Kenya Limited v Commissioner of Domestic Taxes

The utilisation of overpaid tax or tax credit to offset any outstanding tax liability constitutes a refund of the overpaid tax. To do so, the procedure outlined under Section 47 of the Tax Procedures Act (the formal refund process) must be followed.

Facts of the Case

Standard Chartered Bank Kenya Limited (StanChart) claimed an overpayment of Corporate Income Tax (CIT) amounting to Kshs. 832,944,755.00, as reflected in its 2019 self-assessment return filed on 19th June 2020.

On 22nd June 2020, StanChart informed the Kenya Revenue Authority (KRA) of its intention to offset this overpayment against its second installment tax liability for 2020. The dispute arose when on 26th June 2020 the KRA issued a demand notice to StanChart, requiring payment of Kshs. 848,000,000.00. The KRA contended that tax overpayments could only be recovered through the formal refund process outlined in Section 47 of the Tax Procedures Act (TPA). According to the KRA, any set-off of taxes would only be valid upon approval of a refund application under Section 47 of the TPA.

StanChart objected to the demand on 29th June 2020, asserting that it was not obligated under Section 47 of the TPA to apply for a refund in order to offset the overpayment.

Stanchart’s Submissions

According to StanChart, the KRA, in its demand notice dated 26th June 2020, contended that it could not utilise the 2019 overpayment unless and until a refund application was submitted and validated by the KRA pursuant to Section 47 of the TPA.

StanChart submitted that it responded to this demand notice in a letter dated 29th June 2020, expressing disagreement with the KRA’s advice regarding the treatment of the 2019 overpayment. StanChart argued that the KRA had misunderstood Section 47 of the TPA and reiterated its right to utilise the overpayment to offset its 2020 second installment tax liability. Additionally, StanChart requested that the KRA set aside the demand notice and update its tax records to reflect the intention to apply the overpayment toward the second installment liability for 2020.

However, StanChart noted that the KRA failed to respond to its letter and ceased engaging further on the matter. As a result of the KRA’s failure to respond, StanChart believed its position had prevailed and that the KRA had implicitly agreed with the arguments raised in the letter.

KRA’s Submissions

While the KRA did not submit on this matter before the Tax Appeals Tribunal, in its letter dated 26th June 2020, the KRA contended that tax overpayments can only be recovered through the refund process outlined in Section 47 of the TPA. It further asserted that any offset of taxes could only occur upon the approval of a refund application under that section.

Issue for Determination

Whether the Appeal before the Tribunal was competent.

Tribunal’s Analysis and Findings

The central issue in this case was the interpretation and application of Section 47 of the TPA, which governs the process for tax refunds in Kenya. Section 47 allows a taxpayer to apply for a refund of any overpaid taxes within five years of payment. Once a refund application is submitted, the KRA is obligated to process the request, which may involve an audit, and to notify the taxpayer of the decision within 90 days. The law provides that where the refund is approved, the KRA can offset the overpayment against any outstanding tax liabilities and refund any remaining balance to the taxpayer no later than two years from the date of application. The law unequivocally states that failure by the KRA to refund the remainder of the tax within two years attracts interest at 1% per month or part thereof.

The Tribunal’s analysis centered on the fact that StanChart, sought to utilise its overpaid tax as a set-off against its current tax liability without formally applying for a refund.

In its review, the Tribunal emphasized that while StanChart had objected to the KRA's demand for payment, it had failed to submit a valid refund application in the required format. Instead of complying with the procedural requirements of Section 47, StanChart merely raised an objection to the KRA’s demand for taxes. The Tribunal noted that StanChart should have filed a formal refund application, as this was the proper procedural step to trigger the KRA’s obligation to review and respond to the overpayment.

The Tribunal in its review of StanChart’s pleadings and the letter dated 29th June 2020, it noted that StanChart was reluctant to acknowledge that the utilisation of overpaid tax or tax credit is, in effect, a refund of overpaid tax. The Tribunal further observed that in order to utilise overpaid tax or tax credit, the provisions of Section 47 must be complied with. Without a formal application, the Tribunal concluded that the appeal was incompetent for several reasons:

1. No valid refund application had been submitted by StanChart.

2. The issue of refund under Section 47 of the TPA could not be appealed until a formal refund application was made.

3. Prior to 2022 a refund decision was not an appealable decision

The Tribunal held that it had no jurisdiction to hear the appeal, as it was incompetent. Consequently, the Tribunal "downed its tools" and did not address the other issues raised in the appeal.

Conclusion

In the past, many taxpayers in Kenya would automatically apply income tax overpayments to offset their tax liabilities, a practice rooted in the self-assessment tax system, where taxpayers are presumed compliant unless the Kenya Revenue Authority (KRA) intervenes. However, this case has clarified that using overpaid tax or tax credit to settle any outstanding tax liability is effectively a refund of the overpaid tax. To properly utilise such overpayments, the process outlined in Section 47 of the Tax Procedures Act, which governs the formal refund procedure, must be followed.

HOW WE CAN ASSIST

If you have made excess tax payments, have overpaid due to errors, or are eligible for a refund based on your business activities, our team of professionals is here to help. We specialize in managing the timely submission of refund applications and working closely with the KRA to ensure your refunds are processed accurately and swiftly. For any tax related queries please contact us at law@cmadvocates.com.