Inside KRA’s Eye-Popping Sh9B ‘Tax Error’ Haunting Keroche Breweries

KEROCHE VS KRA: PART 1

Being a law-abiding Kenyan Company, Keroche Breweries Limited says it did not want to discuss anything that is in court but because one of the most respected institutions in the Republic of Kenya has decided to put this information in the public domain. Here below it responds respond based on KRA statement.

Dear Kenyans,

We would never want to be seen to be engaging in a back and forth with one of the most respected Kenyan institutions, KRA. It is with a lot of humility that we seek to respond to what KRA has explained to the Kenyan public on the brief history of the dispute between Keroche Breweries and KRA. We wish to respond as follows:

Introduction

Keroche Breweries Limited (Keroche) was established 25 years ago and, from a very humble beginnin, has grown to be the largest, fully locally owned brewery in Kenya, and in the East African region. Keroche is globally recognized for ending the 80-year-old monopoly in Kenya’s alcòholic beverages industry.

Keroche now stands as a state-of-the-art brewing facility with a capacity to produce 1.1 million hectolitres per year of beer and spirits and wine line with a capacity of 10,000 bottles per hour and 15,000 bottles per hour respectively. Keroche has directly employed hundreds of workers and is a source of livelihood for thousands of others through its distributorship and retail supply chain.

Background Information

For the last 16 years, the Kenya Revenue Authority (KRA) has classified Keroche as a large tax payer. Keroche’s current annual tax remittances amount to approximately Ksh2 billion. The firm has been progressively working to capture increased market share, which at full capacity, would lead to remittances of annual taxes in excess of Ksh10 billion and would create more direct and indirect employment for thousands of Kenyans.

As in other parts of the world, economic development in manufacturing and other business ventures, Kenya is not devoid of tax disputes between the taxing authority and tax payers. Tax disputes are a normal feature of tax administration, globally. However, Keroche and KRA’s tax dispute has spanned over a decade and a half and has grown into a subject of sharply divided public opinion.

So what has made the Keroche vs KRA tax disputes become almost toxic and a subject that has severely divided public opinion in Kenya?

Reclassification of Existing Products to Higher Tax Brackets & Backdating of uncollected Tax by KRA

At inception, through a letter dated 4th June 1997, KRA gave Keroche’s Viena Fortified wine a classification under Harmonized System (HS) Code Tariff 22.04 attracting 45% as the excise duty. This classification was reconfirmed by KRA to Keroche through a letter dated 27th April 1998.

The cost-friendly and high-quality Viena Fortified Wine brought more Kenyans into the drinking tax bracket. KRA’s tax collections from Keroche surged, tax relations between the Keroche and KRA were amicable and by June 2006, KRA was due to remit to Keroche a tax refund of Ksh84 million.

Shockingly on 23rd Oct 2006 , KRA wrote to Keroche stating it had made a mistake by classifying Viena Fortified Wine under HS Code Tariff 22.04 attracting 45% as the excise duty, and that KRA had decided to re-classify the product in a higher HS Code Tariff 22.06, attracting excise duty at the rate of 60%. The tax rate on Viena Fortified Wine was disrupted.

Keroche wrote an objection on 9th November 2006 regarding the tax audit and on 29th November 2006 KRA wrote informing us that its position as communicated to us earlier through their letter dated 23rd Oct 2006 remained and consequently went ahead to issue assessments of Ksh1.1 billion. In the assessment, KRA had backdated the new HS Code Tariff 22.06 for 5 years to recover their “error” amounting to Ksh1.1 billion (the difference between the initial HS Code tariff 22.04 and the new HS Code Tariff tariff 22.06) with full knowledge Keroche had NEVER collected this money from the consumers.

The matter went to court. In a ruling delivered in Nairobi on 6th July, 2007, the High Court quashed KRA’s notice ruling and stated:

“The classification of the products had a direct bearing on the price Keroche was selling its products and applying a different classification years later is unfair, oppressive, irrational, unreasonable and constitutes abúse of power and authority aimed at aiding Keroche’s competitors.”

However, Keroche’s victory was short-lived. Soon afterwards, the 2007/2008 Finance Bill forced the change of Viena Fortified Wine classification to a higher HS Code Tariff 22.06 attracting 60% excise duty. This high taxation priced our Viena Fortified wines out of reach of the intended target market by tripling the cost.

KRA appealed the High Court ruling through the Còurt of Appèal. The Còurt of Appèal in its judgment in summary ruled that:

• “An order of certiorari is hereby issued to remove into the high court and quash the decision of the appellants contained in the letter dated 29th November 2006 to issue assessments on income tax, excise duty and withholding tax for the total sum of 802,919,447.00.”
• “An order of certiorari is hereby issued to remove into the high court and quash the decision of the appellants’ contained in the letter dated 29th November 2006 to issue an assessment on Value Added Tax, interest and penalty thereon for the total sum of Ksh305,094,183.00.”

“The above orders shall remain in force until the appellants have issued a reasonable notice(s) accompanied by supporting documents. For the avoidance of doubt, we set aside the following orders (1), as follows:”

• An order of certiorari be and is hereby issued to remove into the High Court and quash the decision of the respondents and/or the fifth respondent to remove the applicant’s fortified products from the classification under Harmonized system (H.S) Code tariff Heading 22.04 and to classify the applicants fortified wine produces under the Harmonized System (H.S) Code Tariff heading 22.06.
• An order of prohibition be and is hereby issued directed to each and all the respondents prohibiting each and all of them from removing the applicants fortified wine products from the classification under the harmonized system (H.S) Code tariff Heading 22.06
• An order of prohibition be and is hereby issued directed to each and all the respondents prohibiting each and all of them from classifying the applicants fortified wine products from the classification under the harmonized system (H.S) Code tariff Heading 22.06

Shockingly, on 10th May 2017, KRA in defiance sent the same assessment of 29th November 2006 – that had been quashed by the High Court – demanded that Keroche pays the Ksh1.1 billion within 14 days.

On 2nd June 2017, Keroche objected to the demand of the Ksh1.1 billion by KRA and on 3rd August 2017, KRA made an objection decision confirming the assessments of the Ksh1.1 billion and advised Keroche that: “if you wish to appeal to this assessment you may do so as provided for and in accordance with section 52 of the Tax Procedures Act, 2015 within thirty (30) days as provided under section 13 of the Tax Appeals Tribunal Act, 2013.”

READ: Here Is The Truth: KRA Responds To Keroche Accusations In Tax Saga

Unsatisfied with the KRA assessment despite the court’s decision that KRA issues reasonable notice(s) accompanied by supporting documents, Keroche took the matter to the TAT (Tax Appeals Tribunal). In our considered opinion, 11 years down the line cannot be considered reasonable notice. Furthermore, the 2006 documents re-issued by KRA were based on reclassification of Viena Fortified wines from HS Code tariff 22.04 to HS Code Tariff 22.06 which had been nullified by two court decisions (High Court, 2006 and Còurt of Appèal, 2017) making all the demands arising thereof amounting to Ksh1.1 billion null and void.

The matter remained pending till 2019 when the newly constituted Tax Appeals Tribunal (TAT), took it up and in March 2020 decided in favour of KRA in the much-publicized, Ksh9.1 billion decision.

Keroche stands with:

1. The 2006 High Court ruling that, “the classification of the products had a direct bearing on the price Keroche was selling its products and applying a different classification years later is unfair, oppressive, irrational unreasonable and constitutes abuse of power and authority aimed at aiding Keroche’s competitors”. 

2. The 2017 Còurt of Appèal ruling that: “the orders shall remain in force until the appellants have issued reasonable notice(s) accompanied by supporting documents.” To date, KRA have never issued Keroche with any new supporting documents. Moreover, eleven years down the line cannot be reasonable time to file ‘reasonable notice(s)’.
3. KRA was disallowed from reclassifying Keroche’s Viena fortified wines from HS Code tariff 22.04 to HS Code Tariff 22.06 and all the demands arising thereof amounting to Kes.1.1 billion were therefore null and void.

The 2006 demands of Ksh1.1 billion marked the beginning of the false narrative; Keroche owes billions to KRA” and “Keroche does not pay Taxes”. As earlier stated, the contested Ksh1.1 billion amount concerns a product phased out in 2006 after the reclassification of Viena Fortified Wine priced it out of the intended market leading to its demise.

Conclusion

The chain of events triggered by the 2006 KRA demand interestingly coincided with Keroche’s announcement of a Ksh1 billion investment in a beer brewing plant. This marked the first “coincidence” that would be repeatedly manifested in a suspicious pattern going forward.

The question is; why and how can KRA propagate the false narrative that Keroche is a tax evader when one considers the following facts?

1. How can KRA issue a start up with a tariff for a product, allow that company to manufacture for 10 years, collect taxes, then turn around and issue an assessment based on a different higher tariff and backdate it by 5 years and send a demand on monies that they know were never collected?

2. The High Court in 2006, and, the Appeals Court in 2017 barred the KRA from reclassifying Keroche’s Viena fortified wines from HS Code tariff 22.04 to HS Code Tariff 22.06. This makes the KRA demands amounting to Ksh1.1 billion derived from this quashed classification to be null and void.

After the death of Viena Fortified Wine in 2007 Keroche Breweries was left with no choice than deploy fresh strategy to recapture a market it had cultivated for 10 years.

The effect of the 2007/2008 Finance Bill forced the change of Viena Fortified Wine classification to a higher HS Code Tariff 22.06 that attracts 60% excise tax. This plus the high taxation priced our Viena Fortified wines out of reach of the intended target market by tripling the cost.

SEE: Hundreds Set To Lose Jobs On Keroche Factory Closure

[It is important to note that in the same 2007/2008 Finance Bill, Keroche’s main competitor- ‘Senetor Keg’ was zero rated to enable the low end market afford the product. During the same budget speech Keroche’s Viena Fortified Wine (the pioneer for low end consumption and which had been in the market for 9 years) excise tax was hiked from HS Code Tariff 22.04 attracting 45% as excise duty to a higher HS Code Tariff 22.06 attracting 60% as excise duty.]

Our competitor’s new product was given a tax incentive. This selective legislation was done on 2 occasions by two different Ministers for Finance.

Being the pioneer in the Kenyan low end alcòholic beverages market, Keroche Breweries in 2007 presented a new alternative for moderate drinking, a ready-to-drink vodka derived from our existing Crescent Vodka. This is similar to what a consumer would do – walk into a bar, buy some tots of Crescent Vodka and mix with water or soda. The only difference is that Keroche uses naturally distilled water and mixes to precision for moderate drinking. For illustration, 188ml of Crescent Vodka (40%) is mixed with 312ml of naturally distilled high quality water, which makes 500ml of Viena Ice ready-to-drink Vodka (15%).

Seven (7) years later, on 20th August 2014 Keroche Breweries received communication from KRA disputing our formula of the Viena Ice ready-to-drink Vodka.

The letter directed that our Viena Ice ready to drink Vodka would now attract Ksh101.20 per litre. This in essence meant that water added to our Crescent vodka to make Viena Ice ready to drink Vodka would now attract excise duty at the same rate as the vodka itself. This meant that our Viena Ice ready to drink vodka would now attract higher taxes than any other expensive vodkas, whiskys, brandys and gins that are known worldwide that cater for the high end market. One again, the logic was questionable as it demonstrated the overwhelming influence that foreign multinationals have over the decisions made by government agencies geared towards suppressing local enterprises.

SEE ALSO >> Keroche Managing Director Dives Into Politics

This was the basis of the computation of the several assessments that we received that were backdated for 3 years amounting to Ksh6.113 Billion!).

On 23rd August 2014, we disputed the basis of KRA’s computation and illustrated clearly that the formula of our Viena Ice ready to drink vodka is 188ml crescent vodka plus 312ml water.

This is the genesis of the highly publicized new Ksh9.1 Billion demand. It is important to note that the two issues at the TAT – 2006 Reclassification and new demands on water added to our vodka to make Viena Ice ready to drink Vodka – totals Ksh 7.2 Billion (Ksh1.1Billion + Ksh6.1Billion).

While we protested the new tax on the water as irrational and punitive, after several correspondences with KRA on the matter, KRA on 22nd July 2015 clearly acknowledged that Viena Ice ready-to-drink Vodka met the standards of innovation.

In the letter KRA advised the following to resolve the issue;

• Address the concerns to the National Treasury or Parliament, or,
• The Alternative Dispute Resolution (ADR), or,
• The Tax Appeals Tribunal – TAT.

We opted to go to the ADR which lasted between 2016 and 2018.

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