TAX DEDUCTIONS AND ALLOWANCES FOR BANKS AND FINANCIAL INSTITUTIONS IN KENYA

Banks and financial institutions in Kenya, like other businesses, are entitled to various tax deductions and allowances under the Income Tax Act (Cap 470) and other relevant statutes. These deductions and allowances can significantly affect their tax liability. This article provides a comprehensive overview of the specific tax deductions and allowances commonly claimed by banks and financial institutions, citing relevant statutory provisions and case law to support these principles.

1. Interest Expense Deductions

Income Tax Act, Cap 470, Section 15(2)(a): allows deductions for interest paid on money borrowed for business purposes.

Principle: Interest on loans used for generating income is generally deductible, which reduces taxable income. This deduction is crucial for banks and financial institutions that often have substantial interest expenses related to their financing activities.

In Commissioner of Domestic Taxes v. CFC Stanbic Bank Ltd (2018) the court upheld the deductibility of interest expenses incurred in the ordinary course of business, emphasizing that the borrowing must be for income-producing purposes.

2. Depreciation Allowances

Income Tax Act, Cap 470, Section 15(2)(b): provides for capital allowances on depreciation of fixed assets.

Principle: Banks and financial institutions claim capital allowances on fixed assets such as buildings, machinery, and office equipment. These allowances spread the cost of an asset over its useful life, providing a tax benefit annually.

In Standard Chartered Bank Kenya Limited v. Commissioner of Domestic Taxes (2015) the court clarified the method of calculating depreciation and reaffirmed that capital allowances should be consistent with the statutory provisions.

3. Bad Debts

Income Tax Act, Cap 470, Section 15(2)(f): allows deductions for bad debts written off as irrecoverable.

Principle: Financial institutions can claim deductions for bad debts that are deemed unrecoverable. This is particularly relevant for banks, which regularly deal with loan defaults.

In KCB Group Limited v. Commissioner of Domestic Taxes (2024) addressed the criteria for classifying debts as bad and the process for writing them off, reaffirming the need for proper documentation and adherence to statutory guidelines.

4. Provision for Doubtful Debts

Income Tax Act, Cap 470, Section 15(2)(g): allows for a provision for doubtful debts, which can be deducted if it meets specific criteria.

Principle: Banks can make a provision for doubtful debts to account for potential losses from loans that may become non-performing. This provision is meant to reflect the anticipated losses more accurately.

In Barclays Bank Kenya Limited v. Commissioner of Domestic Taxes (2016), the court upheld the provision for doubtful debts but emphasized that such provisions must be based on sound accounting practices and documentation.

5. Employee-Related Deductions

Income Tax Act, Cap 470, Section 15(2)(k): provides for deductions related to employee benefits and pension contributions.

Principle: Deductions for salaries, wages, and pension contributions made on behalf of employees are permitted, which include contributions to pension schemes and other employee benefits.

In Equity Bank Kenya Limited v. Commissioner of Domestic Taxes (2017) the court supported the deductions for pension contributions and employee benefits, provided they are compliant with the statutory requirements and properly documented.

6. Tax Relief on Investments

Income Tax Act, Cap 470, Sections 28 and 31: provide tax relief on investments in certain sectors, such as infrastructure and technology.

Principle: Banks and financial institutions can claim tax relief for investments in specified sectors or assets that qualify for incentives. This aims to encourage investments in key areas of economic growth.

In NCBA Bank Kenya PLC v. Commissioner of Domestic Taxes (2020), the court reviewed the applicability of tax reliefs for investments and upheld the claim as long as it adhered to the requirements set out in the Income Tax Act.

CONCLUSION

In Kenya, banks and financial institutions are entitled to various tax deductions and allowances that significantly impact their tax obligations. 

The primary statutory provisions governing these claims are found in the Income Tax Act, Cap 470. Case law further clarifies and supports the application of these provisions, ensuring that deductions and allowances are applied fairly and consistently. 

Understanding these tax benefits is crucial for effective tax planning and compliance within the financial sector.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Taxlex Consulting Group is a participating tax services consultancy within SLS Group.