NAIROBI, Kenya- The M-Pesa Foundation finds itself facing a hefty tax bill, following a tribunal ruling in favor of the Kenya Revenue Authority (KRA).
The foundation will now have to settle Ksh 6.5 million in tax arrears, stemming from a dispute over withholding tax payments.
The ruling came after the M-Pesa Foundation contested KRA’s demand for the arrears.
But according to KRA, the foundation’s agreement with Safaricom PLC had triggered an obligation to deduct and remit withholding tax—an argument the tribunal upheld.
At the heart of the issue is an arrangement between M-Pesa Foundation and Safaricom PLC.
Under this agreement, Safaricom seconded employees to the foundation, billing it for the associated employment costs.
While this might sound like a simple partnership, KRA saw it differently, classifying the arrangement as a “service provider” and “service recipient” relationship.
From KRA’s perspective, the payments M-Pesa Foundation made to Safaricom amounted to management and professional fees, which are subject to withholding tax.
KRA argued that, legally, the foundation should have deducted and remitted this tax when making payments to Safaricom.
The Tax Appeals Tribunal sided with KRA, emphasizing that a contract existed between M-Pesa Foundation and Safaricom for employment services.
The payments made by the foundation were treated as income for Safaricom, and the tribunal agreed with KRA’s assessment that the arrangement was subject to withholding tax.
In its ruling, the tribunal stated, “The payment was correctly treated as income to Safaricom since it was a payment made in exchange for providing a service. Withholding Tax was therefore deductible on the payment.”
Under Kenyan law, payments for contractual services—whether managerial, technical, professional, or consultancy—are subject to a 5pc withholding tax, which should be remitted to KRA.
This ruling could potentially set a precedent for other organizations that have similar agreements in place, especially when it comes to the provision of services like employment.
The KRA’s stance on withholding tax is clear, and businesses will need to be cautious when structuring such deals to avoid facing similar penalties.
