TAX EXEMPTIONS

CBA defends tax waiver on NIC merger deal

CBA chief executive Jeremy Ngunze said the case would be different if it was an acquisition

In Summary

•CBA chief executive Jeremy Ngunze has defended the tax exemption of share transfer tax, citing the nature of the transaction.

•Investment analyst Daniel Kuyo said the tax waiver is common across sectors but this one was off as it is seen as a political decision

The CBA and NIC Group Board Chairmen and Group Managing Directors taking questions from investors and the press on january 31. 2019.
The CBA and NIC Group Board Chairmen and Group Managing Directors taking questions from investors and the press on january 31. 2019.
Image: COURTESY

Commercial Bank of Africa chief executive Jeremy Ngunze has defended the tax exemption of share transfer tax, citing the nature of the transaction.

“I don't want to comment on the matter that is in court but it is not like we are buying but combining businesses of equally same size,” Ngunze has said.

“It would be different if it was an acquititon.”

 

In July, the National Treasury granted a tax waiver on the transfer of shares between the expected merger of Kenyatta family associated bank, CBA and NIC Bank.

The transaction involves a share swap where CBA shareholders will exchange their shares for 53 per cent of the new shares in NIC.

Therefore, 34 shareholders of CBA will own the majority 53 per cent of the combined bank entity while NIC shareholders will own 47 per cent.

The grant was however made public on August 18.

Last month, activist Okiya Omtatah moved to court to challenge the tax waiver, saying the action by former National Treasury Cabinet Secretary Henry Rotich was irregular and unlawful.

“Omtatah is questioning the powers of the National Treasury on the tax waiver and not the merger,” Ngunze said.

Asset or share acquisition are normally charged a five per cent tax.

 

Investment analyst Daniel Kuyo said tax waivers were common across different sectors of insurance and investment, but proposed transaction faces restriction over its ownership.

“Other companies seek exemption on the transfer of shares but this one was off because it was seen as a political decision due to shareholders' proximity,” Kuyo said.

Omtatah argues the deal will cost Kenya Revenue Authority Sh350 million in revenue, but analysts say, on the other hand, the waiver would improve cash flows of companies.

CBA group and NIC were valued at Sh245.11 and Sh208.4 billion in the financial year ending December 2018.

The current interest rate cap and increased competition from digital lenders are propelling increased mergers and acquisition with companies seeking to increase their performance.

“There is a shortage of cash flows in the banking sector. The exemption will increase capitals of both banks as long as they are able to show that it will be beneficial at the end,” Kuyo added.

The partnership will give the merged entity strength in NIC asset financing and CBA’s corporate and micro-lending through M-Shwari and make the joint entity the third-largest lender in the country by asset value.

This tax waiver gives the banks a competitive advantage, however, it is a shoot on the leg for government in terms of revenue,” Kuyo said.

Kuyo said the court case interrupts the transaction and delays would be a demerit that leaves employees, investors and customers on the lockout.

The high court on September 9 ruled that the parties will appear before the court on October 16 to answer questions on whether they should provide a bank guarantee for the waived taxes.