The Kenya Revenue Authority (KRA) has won a Kshs. 234 million tax claim suit against Equity Bank Kenya Ltd after the High Court in Nairobi upheld the Tax Appeal Tribunal’s earlier decision allowing KRA to charge the Bank PAYE on Employee Stock Ownership Plan (ESOP). Equity Bank had filed an Appeal against the judgement of the Tribunal delivered on 19th December 2019 upholding the KRA’s move.
KRA had carried out a tax compliance audit of the Bank’s records with regard to Corporation Tax for the year of income 2015, Excise Duty for the period covering August 2013 to December 2015 and PAYE taxes for the year of income 2016. The KRA then issued an assessment on 21st June 2017 for Kshs.1,738,969,276 inclusive of penalties and interest being Kshs.346,147,520 on account of Corporation Tax, Kshs. 234,138,308 on account of PAYE and Kshs.1,158,683,449 on account of excise duty.
KRA contended that the Bank operates an ESOP where employees are given an opportunity to acquire the bank’s shares at discounted prices. Eligible employees are invited to take up offers when they are opened and that the shares allocated and taken up are held for a period of five years after which the same are vested in eligible staff. According to the Income Tax Act, if the employee opts to exercise that option, a taxable benefit is conferred similar to any other employment benefit as access to the benefit is only granted as a result of one’s employment thus can only be classified as a benefit of employment and is then subject to PAYE.
The High Court, in upholding the judgement of the Tribunal agreed with KRA’s submissions that the ESOP confers a benefit to an employee and the benefit to the employee arises from the fact that value of shares, whether or not they are issued at a discount, would ordinarily appreciate at the time of vesting. The appreciation in value is the benefit to the employee that is taxed.