Win for financial firms as KRA loses appeal to tax forex gains

Foreign exchange (forex) margins earned from currency conversions will not be subject to excise duty; the Tax Appeals Tribunal has ruled delivering a major win for financial institutions.

KRA had sought to impose excise duty on the forex margins earned from currency transactions, arguing that such margins were part of the fees charged for international money transfer services.

However, financial institutions disputed KRA’s decision and filed an appeal before the tribunal, arguing that forex margins earned from buying and selling foreign currencies are not fees for money transfer services and should not be taxed.

When the KRA upheld its decision, the financial institutions appealed to the Tribunal. The tax tribunal contended that these margins resulted from currency purchase and sale and were not fees or premiums for money transfer services.

“The tribunal held that the forex margins are not subject to excise duty. The Tribunal reasoned that forex margins are gains made from currency conversion at a rate higher than the prevailing market rate and are not fees or charges for services rendered,” the ruling reads in part.

KRA had argued that the forex margins earned by the financial institutions should be subject to Excise duty as they allegedly constituted part of the fees charged for money transfer services.

They maintained that the operations, including currency conversion, are interconnected with the money transfer services and should be treated as a single transaction.

However, the tribunal noted that the Money Remittance Regulations expressly provide that “the money remittance provider must disclose all charges as well as the exchange rate to be used for converting the payment transaction”, that by this provision, the law separates an exchange rate from “all charges”, demonstrating that the gain made from forex is not a charge.

The Tribunal further added that the literal definition of fees, which is a payment for a service or for the use of something, does not include exchange rates.

“Therefore, forex margins are not fees and cannot be treated as charges or “other fees.” The ruling reads.

The Tribunal further noted that in interpreting tax laws, there is no room for intendment, and taxing statutes must be unambiguous.

The Tribunal cited legal precedents that support the principle that a subject is not to be taxed unless the words of the taxing statute unambiguously impose the tax.

Based on this principle, the Tribunal found that the forex margins are not explicitly provided for in the Excise Duty Act Cap 476 as subject to excise duty.

The Tribunal pointed out that the Excise Duty Act does not specifically mention forex margins as excisable, and therefore, the KRA’s assessment of excise duty on forex margins was unjustified.

PwC senior manager for indirect taxes Michael Wachinga says that the ruling reinforces a key tax principle, that taxpayers should only pay taxes explicitly stated in the law.

“This decision significantly enhances certainty and clarity for financial institutions by confirming that forex margins from currency conversion transactions are not classified as “other fees” and are therefore not subject to excise duty,” said Wachinga.