Airtel Kenya has lost a 16-year battle with the taxman over a disputed Sh531 million revenue claim from the telco’s purchase of an operation licence in 2000.
High Court judge David Tuiyott ruled that Airtel’s $55 million (Sh5.5 billion) purchase of an operation licensce should not have been classified as revenue expenditure.
Airtel had deducted the payment of its licence purchase as revenue expenditure — which in effect lowered its tax burden, arguing that this gave them reprieve from the Sh531 million being claimed by the Kenya Revenue Authority (KRA).
The KRA reassessed Airtel’s books and held that the purchase should be treated as capital expenditure, triggering the now protracted Sh531 million tax arrears demand.
Airtel, which was operating as KenCell at the time the transaction happened, successfully challenged KRA’s claim before a local tax committee, forcing the taxman to move to court seeking to have its demand maintained.
“I allow the appeal and set aside the decision of the local committee for Nairobi South made on March 10, 2005,” Justice Tuiyott ruled, adding that Kenya, like many other countries, lacks clear tax law on telecommunication licences.
“This court has not found any plausible reason that shakes the proposition that, on the fundamental test of purpose, the initial expenditure on the licence fee created a new asset or opened new fields of business for KenCell in Kenya.”
The taxman says Airtel owes Sh261 million for the year 2000 and Sh270 million for 2001, as the telco deducted them from its taxable income for those two years.
Airtel argued that the taxman’s demand would have been legitimate if it had made a one-off payment, which was not the case with its purchase of a Global System for Mobile communication (GSM) licence.
However, Justice Tuiyott held that despite making payments in separate years, the licence purchase can be treated as a one-off payment.
“The initial payment for the licence was a one-off payment because it was made once for 15 years. Unlike a recurrent payment, a lump sum payment tends to suggest that the expenditure is capital in nature,” he added.
The judgment comes as the telco fights to have its licence renewed for a further 10 years. Airtel says the Sh2.1 billion that the Communications Authority of Kenya (CA) is demanding for a 10-year renewal is too high for a small operator like itself.
Airtel is currently operating on a licence acquired along with Essar’s (yuMobile) assets in a deal concluded early this year.
Airtel and rival Safaricom last year acquired Essar Telcom in a joint buyout valued at Sh12.3 billion. Airtel acquired Essar’s subscribers, GSM licences and subscriber-related contracts.
The CA is demanding Sh2 billion for spectrum fees, Sh30.2 million for initial annual operating fees, outstanding frequency fees of Sh24.9 million and a penalty payment of Sh1.5 million to renew Airtel’s licence.
Airtel had also claimed that the KRA’s suit was filed outside the time provided for by law hence should have been tossed out. The KRA, however, insists that it sued the telco within 30 days of declaring its intention to appeal the local committee’s ruling.