Sh200m tax arrears demand haunts Westgate Mall owners

The ghosts of the September 2013 Westgate Mall terror attack continue to haunt the building’s owners, who will now have to pay the Kenya Revenue Authority (KRA) Sh221 million in taxes on a Sh600 million insurance compensation.

COMPENSATION

High Court judge John Mativo has ruled that the taxman did not violate any laws in demanding Sh221 million on the first instalment that Sony Holdings, Westgate Mall owners, received as part of Sh7.2 billion insurance compensation package for the 2013 terror attack.

At the heart of the dispute was whether the compensation package for rebuilding should be classified as capital or revenue.

Capital is money pumped into a business to enable it run, while revenue is the money made from sales or rent depending on which industry the business falls under.

Justice Mativo argued that KRA acted within its mandate by ordering that the insurance payment be classified as revenue rather than capital.

“It is also important to mention that Sony Holdings has not demonstrated that the taxes are not due. On the contrary, the materials show that the taxes were due, hence the request for exemption. An administrative or quasi-judicial decision can only be challenged for illegality, irrationality and procedural impropriety.”

WRONG DOING

“An administrative decision is flawed if it is illegal. In view of my findings and conclusions as here above discussed, the conclusion becomes irresistible that the applicant’s application must fail,” Justice Mativo ruled.

The judge’s decision could open the door for KRA to sink its teeth into the other Sh6.6 billion that Sony Holdings received to rebuild the mall and cushion it from losing billions that would have been made in rent and other income had it not been for the terror attack.

Justice Mativo, while dismissing the suit Sony Holdings filed, argued that the Judicial Review division of the court only intervenes where laws have been violated by government institutions and officers, hence he was unable to find any wrongdoing on KRA’s part.

Sony Holdings claimed KRA duped it into thinking that a tax exemption would be granted if the mall owners used some of their revenue to construct roads and upgrade sewer lines.

RENOVATION

Westgate’s owners say they upgraded Peponi and Mwanzi roads. They also constructed a new link between Peponi Road and Lower Kabete Road.

But KRA argued that only infrastructure put up for the exclusive use of the business would have made Sony Holdings worthy of an exemption.

It took one year after the attack for Sony Holdings to start renovation of the mall. Sony Holdings said it recorded losses of Sh1.5 billion between 2014 and 2016. The mall’s owners had long before made a wise move in insuring their property against terrorism and political violence, something that has become common practice with businesses in Kenya owing to ever increasing extremist threats.

In total, Sony Holdings was entitled to Sh7.2 billion intended for renovations and compensation for rental income that would have been made between 2013 and 2015 when Westgate Mall remained completely closed.

Kenindia was to pay Sony Holdings Sh6 billion for property damage and Sh1.2 billion for loss of rental income.

By the time Sony Holdings sued KRA in 2018, Kenindia had released Sh3.1 billion in annual instalments to Westgate’s owners.

ACCUMULATED

But the mall owners had spent Sh4.04 billion renovating the mall, which meant they had done the works on a Sh944 million deficit while awaiting the balance of their compensation package.

On October 13, 2013, Kenindia Insurance deposited Sh600 million in Sony Holdings’ bank accounts, being the first instalment of the compensation package.

This is the amount that saw KRA demand Sh212 million in taxes, and which sparked the court battle with Sony Holdings.

In March 2017, Sony Holdings wrote a letter to then Treasury CS Henry Rotich requesting a waiver on withholding tax charged on rental income and copied the document to the KRA.

The mall’s owners say they expected KRA to make a recommendation to Mr Rotich, but that the taxman instead opened a probe into Sony Holdings’ books and slapped it with Sh834 million tax bill that accumulated between 2014 and 2016.

ONLY STARTED

Of that amount, Sh212 million was tax on the first insurance compensation instalment of Sh600 million.

Sony Holdings objected the amount and KRA then dropped all other levies but maintained the Sh212 corporation tax claim. Westgate’s owners have separately challenged other tax demands by KRA at the Tax Appeals Tribunal, meaning the battle between the two institutions has only began.