The State Bank of Mauritius (SBM) was ordered to pay 400 million shillings in taxes and penalties on a secret interest-free loan of 9.6 billion shillings that it contracted with the Central Bank of Kenya (CBK ) when purchasing the assets of Chase Bank.
The tax court overturned an appeal by the SBM to prevent the Kenya Revenue Authority (KRA) from claiming the payment after the lender refused to reveal its agreements with the banking sector regulator and the Kenya Deposit Insurance Corporation (KDIC) for the purchase of Chase Bank.
The court said that SBM also refused to provide proof of payment for the acquisition, analysis and valuation of assumed assets and liabilities and supporting documents for cash support of CBK 9.6 billion.
“The tribunal concludes that SBM failed to provide KRA and this tribunal with essential documents that would have helped to determine whether the amount described in SBM’s financial statements as“ other income balances owed to CBK ”could be interpreted as ‘other excise charges. duty, ”said the tribunal headed by Patrick Lutta.
“As such, the tribunal finds that SBM did not adequately challenge the assessment raised by KRA.”
Chase Bank collapsed in 2016, the third lender in less than a year after the collapse of the Imperial Bank and Dubai Bank, excluding depositors from their hard-earned money and causing a banking crisis.
It took two years to resolve the Chase Bank crisis in closely watched talks that led to the SBM taking over 75 percent of the defaulting lender’s assets and liabilities in what was the first ‘carve’ deal. out ”from Kenya.
The deal reached in August 2018 was billed as a huge success allowing around 3,100 former Chase Bank customers to collect their money, or around 57 billion shillings.
But the caveat was that they could only access 28.5 billion shillings and had to wait more than three years to get the rest in 9.5 billion shillings, ending this year.
Chase Bank is now in liquidation to pay off the rest of the liabilities as most creditors have not received their money, including investors who had invested 4.8 billion shillings in the outstanding Chase Bank bond. .
Details of the transactions were not disclosed and the taxman’s claim shed light on some of the arrangements that facilitated the Mauritian lender’s expansion into the Kenyan market.
According to documents filed with the court, SBM said that in January 2018, it sent the regulator its firm offer to buy Chase Bank under certain conditions set by the regulator.
This included the assumption of a liability of 9.6 billion shillings owed to the CBK, the granting of unrestricted success to depositors without a moratorium, the assumption of the majority of staff and branches and 75 percent of deposits.
It took assets including cash, loans, other financial receivables, investment securities, intangible assets, leases, property, plant and equipment.
SBM then agreed that the CBK 9.6 billion shillings loan would be repaid within five years without interest.
“SBM stated that it was agreed that after the acquisition, the loan owed to CBK would be transferred to SBM on the same terms and conditions as before under Chase Bank, but should be repaid within five years. One of these conditions was that the loan be interest-free, ”the court noted.
SBM said accounting rules required it to report the fair value of the loan at a 10 percent discount from the central bank’s five-year rate, resulting in negative goodwill of Sh 3.6 billion amortized over the period. .
He argued that negative goodwill or a good deal in the purchase of assets should not be subject to excise duties like other charges.
The KRA argued that the market should be treated as a discount on the fair value of an asset transferred to the profit and loss account over time and taxed like other income.
“Negative goodwill indicates a distressed sale in which adverse conditions result in depressed sale value. KRA thus argued that negative goodwill represents taxable credits, ”the court noted.
The tax authorities, however, had sway because the lender refused to provide the evidence required by law. During the hearing, the KRA agreed to settle the case once the documents were provided and the court agreed to adjourn three times, but SBM said the documents provided to the CBK were confidential.