Kenya Airways faces Sh14bn tax bill for eight new aircraft

POLITICS AND POLICY


The Kenya Airways Dreamliner B787 on the tarmac at the Jomo Kenyatta International Airport Nairobi, during its official reception last month. Photo/Salaton Njau 

By WANGUI MAINA, pmaina@ke.nationmedia.com

IN SUMMARY
Experts say the airline could pay up to Sh14 billion in VAT for the six Boeing 787 Dreamliners and a Boeing 777-300 ER expected to arrive before the end of the year.
VAT poses a new challenge to the airline’s operations at a time it is struggling with high fuel costs, a dip in passenger numbers on some routes due to Kenya’s security concerns and stiff competition in the market.
Parliament last month introduced VAT on aeroplanes weighing more than 2,000 kilogrammes.

Parliament’s recent decision to impose value added tax (VAT) on large aircraft has left national carrier Kenya Airways (KQ) with one of the largest tax bills ever for its planned purchase of Dreamliner jets.

Tax experts say the airline could pay up to Sh14 billion in VAT for the six Boeing 787 Dreamliners and a Boeing 777-300 ER expected to arrive before the end of the year besides the one Dreamliner that was delivered last month.

Each Dreamliner is priced at about Sh11 billion and paying 16 per cent VAT on the eight aircraft poses a new challenge to the airline’s operations at a time it is struggling with high fuel costs, a dip in passenger numbers on some routes due to Kenya’s security concerns and stiff competition in the market.

The new law particularly hurts Kenya Airways’ ability to effectively compete with key rivals such as Ethiopian Airlines and Middle East carriers, who are not carrying the extra cost that is likely to be passed on to passengers in the form of pricier airline tickets.

“There will be a huge negative impact since all KQ aircraft if purchased are now taxable. Spares and engines are also taxable under this new legal regime,” KQ said a statement, adding that the amendment “isn’t good news for the business”.

Parliament last month introduced VAT on aeroplanes weighing more than 2,000 kilogrammes, removing the burden on operators of small aircraft as it shook up the operations of the large aircraft owners.

The exempt aircraft account for about 46 per cent of the total Kenyan registered fleet. Helicopters are not affected by the law and do not attract VAT.

Tax experts say the change in law should ordinarily have no impact on Kenya Airways’ finances because all VAT payments are recoverable through the claims mechanism but the Kenya Revenue Authority’s (KRA) huge refunds backlog means a huge amount of the airline’s capital could be tied down with the taxman for years even as it struggles to keep its operations afloat in a difficult business environment.

“VAT is recoverable from the KRA, but the problem is the delay in refunds. It sometimes takes years before one gets back the money and this affects cash flow,” said Rajesh Shah, a tax partner at PricewaterhouseCoopers (PwC).

READ: KQ plans to borrow more due to delayed tax refunds

Kenya Airways chief executive Titus Naikuni said the full impact of the tax measure lies in the fact that the long delays may force the airline to take on expensive debt to fill the financing gap.

“The refunds take so long that we’re forced to borrow money to fill that hole,” he said. Parliament rejected nearly a third of the items that Suba MP John Mbadi wanted to be exempted from Vat to ease the high cost of living burden on ordinary Kenyans.

The decision left prices of many goods and services that increased after the government introduced a 16 per cent charge on hundreds of consumer goods last September unchanged.

The Kenya Air Operators Association (KAAO), an industry lobby, said Parliament’s choosing to cushion light aircraft owners that are mostly used by the rich for private travel while taxing big operators like KQ who employ thousands of people was discriminatory.

“We lobbied for all aircraft not to be taxed because any additional cost burden would have negative impact on the industry’s growth,” said Karumba Waithaka, the KAAO chief executive.