No Capital Gains Tax Should be Paid in Banks’ Restructuring
The Finance Act of 2014 reintroduced Capital Gains Tax (CGT) on transfer which had been suspended in 1985. The Capital Gain Tax would be chargeable under Eighth Schedule of Income Tax Act to transactions that occurred on and after 1st January, 2015.
The tax is chargeable upon when a property is sold, exchanged, conveyed or otherwise disposed of in any manner whatever (including by way of gift) whether or not for a consideration;
Paragraph 13 (j) of Eighth Schedule of Income Tax Act exempts payment of CGT on restructuring of companies in the following words;
Exchange of property necessitated by: incorporation, recapitalization, acquisition, amalgamation, separation, dissolution or similar restructuring involving one or more companies which is certified by the Cabinet Secretary to have been done in public interest;
Companies’ restructuring by acquisition, amalgamation, separation or any other methods will be more for commercial efficacy of the parties involved rather than in public interest.
A restructuring in public interest can be that which is meant to prevent loss of employment, loss of deposits or investments by customers of a bank or company at the risk of liquidation among or to generally keep a company as a going concern among others.
Demonstrating that there was public interest in a restructuring process may therefore be an uphill task and the restructuring bank(s) may not be able to convince the cabinet secretary to exempt the transaction from payment of CGT.
Is CGT Payable when a Bank or Banks Restructure?
A bank may restructure by transferring its assets to a holding company, amalgamating, acquiring another bank, merging with another bank among other restructuring which may result in transfer of assets to a new entity.
Section 9(9) of the Banking Act makes it doubtful whether any taxes are chargeable on amalgamation or transfers of banking business. The section provides;
No transfer fees, stamp duty, registration fees, licence duty or other charges shall be payable in respect of:-
(a) a transfer of assets and liabilities under subsection (3); or
(b) any endorsement or alteration made to record such transfer, upon submission to the Registrar of Companies, Registrar of Titles or any other person referred to in subsection (8).
Though the word tax is not included in the above section, the same can be included through interpretation of “other charges” ejusdem generis. The phrase “other charges” should include taxes.
In the Sixth Edition of the Black’s Law Dictionary, the word Tax is defined as “a charge by government on the income of an individual, corporation or a trust, as well as the value of estate or gift.”
It cannot be gainsaid that a tax is a charge and by the ejusdem generis rule of interpretation of statute, section 9(9) of the Banking Act arguably exempts transfer of assets as a result of restructuring Banks from any kind of taxation.
Capital Gains Tax is charged under Income Tax Act which commenced on 1st January, 1974. Banking Act which arguably grants the exemption to any tax upon restructuring only commenced on 1st November, 1989. It is principle of interpretation of statute that when two acts of parliament are contradictory, the latter is deemed to apply in preference to the earlier. See the case of Rodgers Muema Nzioka & 2 others v Tiomin Kenya Limited [2001] eKLR.
The provisions of Eighth Schedule of the Income Tax Act with respect to payment of CGT are qualified further by the provisions of the Section 9(9) of the Banking Act.
Section 9(9) of the Banking Act should be given purposeful interpretation to ensure that amalgamation and transfer of assets in banking business are conducted seamlessly and without fear of exorbitant tax burden. The purpose of exempting the tax is to encourage amalgamation and restructuring with the intention of creating strong banking system in Kenya.
Purposeful interpretation of statutes has now been embraced by the courts in Kenya. See the case of Republic vs. Public Procurement Administrative Review Board & Another Ex Parte Selex Sistemi Integrati Nairobi HCMA No. 1260 of 2007 [2008] KLR 728 where the case cited Nothman V Barnet Council [1978] I WLR 220 with approval as follows;
“It [literal interpretation] is the voice of strict constructionists. It is the voice of those who go by the letter. It is the voice of those who adopt the strict literal grammatical construction of words, heedless of the consequences. Faced with staring injustice, the judges are, it is said, impotent, incapable and sterile. Not with us in this court. The literal method is now completely out of date. It has been replaced by the approach which Lord Diplock described as them “purposive approach.” In all cases now in the interpretation of statutes we adopt such a construction as will “promote the general legislative purpose” underlying the provision … It is no longer necessary for the judges to wring their hands and say: “There is nothing we can do about it”. Whatever the strict interpretation of a statute gives rise to an absurd and unjust situation, the judges can and should use their good sense to remedy by reading words in, if necessary – so as to do what Parliament would have done, had they the situation in mind.
It is also a principle of law that tax can only be charged when the law is clear as to whether the tax is payable. See Republic vs. Commissioner of Domestic Taxes Large Tax Payer’s Office Ex-Parte Barclays Bank of Kenya Ltd [2012] eKLR. Since there appear to be a contradiction between the Income Tax Act and Banking Act on whether the CGT is payable on restructuring involving banking institutions, the said tax should not be chargeable. A legal challenge on any attempt by Kenyan tax authorities to charge the tax would have very high chances of success.
Finally, Banking Act being a sector specific statute regulating the business and operations of banks in Kenya, ought to be applied in preference to the Income Tax Act which deals with general taxation of various transactions and businesses.
Very informative.