Are Your Interchange Fees Being Double-Taxed Without You Knowing It?

ABSA Bank Kenya PLC v. Commissioner for Domestic Taxes Supreme Court Petition No. 12 (E014) of 2022

Background

KRA conducted a tax audit of Barclays Bank (now ABSA Bank Kenya PLC) covering 2007 to 2011. The audit raised two contentious withholding tax assessments:

Payments to Card Companies: KRA assessed withholding tax on payments made by the Bank to international card companies (Visa, MasterCard, and American Express) under Section 35 of the Income Tax Act, claiming these payments were royalties for using trademarks and accessing global payment networks.
Interchange Fees: KRA assessed withholding tax on interchange fees paid by the Bank (as an acquiring bank) to other issuing banks, arguing these payments were management or professional fees for services like transaction authorization, verification and settlement.

Absa challenged these assessments through judicial review proceedings.
The High Court ruled in Absa’s favor in 2015, quashing KRA’s demands.
The Court of Appeal reversed this decision in 2020, upholding KRA’s position.
The matter ultimately reached the Supreme Court, which certified it as involving matters of general public importance to the banking industry.

Absa’s Argument

On Royalties:

Payments to card companies are transaction facilitation fees, not royalties for trademark use;
Framework agreements with card companies expressly exclude royalty payments;
Displaying card logos on credit cards does not constitute “use” of trademarks warranting royalty payments; and
Card companies do not charge royalties for logo display as it is just a network membership indicator.

On Interchange Fees

Interchange fees are earnings to issuing banks, not payments for specialized services;
No direct relationship exists between acquirer and issuer as all transactions route through card company networks;
Fees are earned on a transaction-by-transaction basis when fund transfers succeed;
These fees already get taxed as part of banks’ ordinary income at 30% corporate tax and imposing a withholding tax means double taxation; and
KRA never specified which category of “management or professional fee” applied.

KRA’s Argument

On Royalties:

Getting access to card company networks requires using their trademarked cards;
Payments are consideration for the right to use trademarks and access payment platforms; and
The totality of contractual arrangements determines the true nature of payments, not just explicit clauses.

On Interchange Fees:

Issuing banks provide composite services including authorization, clearing and settlement;
Services involve verifying cardholders, maintaining accounts, and confirming creditworthiness on behalf of acquiring banks; and
Interchange fees are consideration for these specialized services, triggering withholding tax under Section 35.

Supreme Court’s Decision

The Supreme Court unanimously ruled for the Bank, overturning the Court of Appeal’s decision.

The Court made two definitive pronouncements:

Payments to Card Companies Are Not Royalties

Payments to card companies are transaction facilitation fees, not royalties within Section 2 of the Income Tax Act;
Framework agreements between the Bank and card companies explicitly prohibited royalty payments; and
Displaying card logos doesn’t constitute “use” of trademarks in a way that attracts royalty obligations

“For any payment to be classified as a royalty, the language in the relevant legislation must be clear and unambiguous, and so must the agreement between the parties.”

Interchange Fees are not Management or Professional Fees

Interchange fees do not fall within any category of “management or professional fees” defined in Section 2;
Interchange fees are income earned from banking operations, already taxed at 30% corporate rate; and
Imposing withholding tax means double taxation on the same income stream. The legislature couldn’t have intended that.

“Banks can operate both as acquirers and issuers. Credit card transactions have become an integral part of banking business. The interchange fee is paid upon successful card transactions, not as consideration for predetermined technical or consultancy services.”

Conclusion

No withholding tax obligation on payments to international card companies for network access and transaction processing;
No withholding tax obligation on interchange fees paid to or received from other banks;
KRA must specify with precision which statutory category applies when demanding withholding tax
The Court explicitly noted this case “transcends the interests of the litigants” and serves to clarify the law for the country’s revenue collection, financial system and tax-paying public;
The ruling strengthens taxpayer protections and reinforces rule-of-law principles in tax administration;
It signals that courts will rigorously apply statutory interpretation rules, requiring precision and clarity from the taxing authority;
For businesses navigating Kenya’s evolving digital economy, this provides welcome certainty and a framework for structuring compliant arrangements.