The Kenya Revenue Authority (KRA) has won a KSh 234 Million tax claim suit against Equity Bank Kenya Limited.
This is 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).
An Employee Stock Ownership Plan (ESOP) is a type of Employment Benefit Plan intended to encourage Employees to acquire Stocks or Ownership in the Company.
Sometime in 2005, Equity Bank Limited embarked on the establishment of an ESOP.
KRA Tax Compliance Audit
KRA did a tax compliance audit of the Bank’s records concerning 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 KSh 1,738,969,276 inclusive of penalties and interest being KSh 346,147,520 on account of Corporation Tax, KSh 234,138,308 on account of PAYE and KSh 1,158,683,449 on account of excise duty.
KRA contended that the Bank operates an ESOP where employees can 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 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 service 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 the 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.
Equity Bank had filed an appeal against the Tribunal’s judgment delivered on 19th December 2019, upholding the KRA’s move.