Centum Investment Company agreed to
compensate the buyer of its Coca-Cola beverage businesses to the tune of
$34.4 million (Sh3.7 billion) representing tax demands by the Kenya
Revenue Authority (KRA).
The Nairobi Securities
Exchange-listed firm sold its stakes in Almasi Beverages and Nairobi
Bottlers to Coca-Cola Beverages Africa (CCBA) last year for a total of
Sh19.3 billion.
The transactions were completed despite
the taxman seeking Sh3.7 billion excise taxes on returnable bottles, a
claim that the bottlers are still fighting in court.
CCBA,
owned 66.5 percent by soft drinks giant Coca-Cola and 33.5 percent by
Gutsche Family Investments, required Centum to guarantee that it would
settle the tax liability should the KRA win the legal battle.
The
investment firm had booked gains of Sh12.3 billion on the two
transactions and the pending tax demand risks eroding the profit by a
substantial amount
“Under the terms of the respective share purchase agreements …
Centum is required to provide a guarantee of $34.4 million (Sh3.7
billion) to CCBA against general and contingent liabilities (including
tax liabilities) that were unresolved as at the transaction date,” the
company says in its latest annual report.
“Those
liabilities largely relate to an ongoing court case in relation to a
contested historical KRA demand for tax arrears, penalties and interest
for the period 2006 to 2009 relating to excise tax on returnable
containers.”
Centum says it has obtained a bank
guarantee from Stanbic Bank Kenya Limited to cover the full amount. The
guarantee is in turn secured by a charge on Centum’s portfolio of
marketable securities which is mostly made up of fixed-income
instruments including government bonds.
This means that
should the bottlers, now owned by CCBA, be required to pay the tax,
they will be compensated by Stanbic Bank. The lender will then seek
compensation from Centum and will have a right to liquidate the
investment firm’s portfolios that are held as security.
Such
arrangements are common in mergers and acquisitions, with buyers
hedging against liabilities such as taxes and contract disputes that may
materialise in the near future.
Centum sold its 53.9
per cent stake in Almasi Beverages and 27.6 per cent stake in Nairobi
Bottlers to CCBA on September 30, 2019.
It also
disposed of its 100 per cent interest in King Beverage Limited to Danish
Brewing Company EA Limited, a subsidiary of Bounty Global Management
DWC LLC on August 19, 2019, receiving Sh147.5 million in the deal.
Centum
received an aggregate of Sh19.5 billion from the three transactions and
used the cash to pay back part of its loans and increase its investment
in bonds.
“The directors’ assessment is that the
matter will be resolved with minimal impact to the business of disposed
bottling companies and consequently the likelihood of the liabilities
crystallising is remote,” the company said of the potential tax
liability.
The taxman and the bottling companies have
fought a drawn-out legal battle that has now gone to the Supreme Court,
with the case revolving on whether or not excise duty ought to be levied
on returnable bottles.
The High Court in 2012 allowed
the KRA to collect the taxes, a decision that was overturned in July
last year by the Court of Appeal. The taxman subsequently appealed the
ruling at the Supreme Court of Kenya which will make the final decision.
Before
2004, the Customs & Excise Act made exceptions in respect of
determining the ex-factory selling price and expressly excluded the cost
of returnable bottles.
There was therefore no excise duty charged on the cost of returnable containers.
A
2004 amendment to the law, however, deleted the entire subsection that
dealt with the returnable containers, effectively going silent on how
they should be treated.
The KRA interpreted this to
mean that it could collect taxes on these goods, a move the bottlers
said would amount to multiple taxation on the same items.
The
soft drinks manufacturers argue that bottles are manufactured once and
used many times, with distributors paying a refundable deposit on the
goods.
The KRA on the other hand says that the bottles
and drinks are sold as one package, saying this justifies the tax demand
on the bottles.
In the Court of Appeal, the three-judge bench said the taxman cannot take advantage of ambiguity in the law to collect taxes.
“The
norm is that a taxing legislation must be construed with perfect
strictness whether or not such construction is against the State or
against the person sought to be taxed,” the judges ruled.
“If
however there is any real ambiguity in a taxing Act, such ambiguity may
be resolved in favour of the taxpayer, or, as it is sometimes stated:
contra fiscum.”
The judges agreed with the bottlers
that the bottles are manufactured once and used multiple times, with
distributors and all other parties along the supply chain paying
refundable deposits to incentivise them to return the goods.
The
judges said that this unique situation may perhaps explain why such
returnable containers were excluded from the ex-factory selling price.
“Levying
tax on returnable containers every time they are refilled would amount
to multiple taxation which is, needless to say, unconscionable and
unlawful,” the judges said.
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