The brutal war of Sh5.6bn the dramatic events leading to KRA losing billions to Coca-Cola

Brutal war 5.6 Billion dramatic events
Brutal war 5.6 Billion dramatic events

The Kenya Revenue Authority (KRA) efforts seeking to have Coca-cola Bottlers pay Kshs 5.6 billion in tax suffered a historical set up after the Supreme Court, Kenya’s highest court, squashed their application to restart the ligation that has existed for over a decade.

In her ruling, Kenya’s Chief Justice Martha Koome faulted the Taxman in the bid to compel the soft drink to pay the claimed sum by stating that not only were the customary laid down procedures not followed, but the tax authority was a bit too casual in the handling of the matter and was also cruel, insensitive, and excessive.

“We note that the dispute commenced in the High Court in October 2012, ten years ago, then moved to the Court of Appeal, over nine years ago in July 2013,” said a five-judge bench comprising of Martha Koome, Chief Justice, Philomena Mwilu, Deputy Chief Justice, and Justices Njoki Ndung’u, Mohamed Ibrahim, and William Ouko.

SUMMARY

  1. Supreme Court upholds High Court’s earlier decision directing KRA not to seek Kshs 5.6 billion excise duties from Coca-Cola Bottling limited.
  2. The tax arrears date back more than 10 years ago and cover tax, interest, and penalties for the 2006 to 2009 period on returnable crates and bottles.
  3. The tax war between the Taxman and Coca-Cola has been going on since 2009 and has seen courts make different rulings.

What Exactly Happened?

The Supreme Court judges unanimously agreed that KRA had been “imprudent in the matter and also disregarded the court’s directions issued through the Deputy Registrar. The tax authority’s lawyers also failed to furnish the court with the necessary documents.

Ms. Koome further reiterated that “To start the case all over again, for no fault of the respondents, is not only unconscionable but also insensitive and cruel.”

Coca-Cola bottlers wanted the Supreme Court not to reopen the litigation and to stick to the earlier ruling made by the High Court on September 22, 2021. On the other hand, KRA sought redress from the court to dismiss the case and start the litigation afresh.

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At the end of the day, the judges of the Supreme Court rejected KRAs request and allowed the earlier decision that favored Coca-Cola to stand.

how it all started

How It All Started

In 2009, KRA went to court to compel Coca-Cola to pay Kshs 5.6 billion as tax due. They argued that the beverage maker should pay taxes originating from the washing and sanitization of returned crates and bottles. 

The Taxman claimed that the costs were taxable, but the soft drink maker hadn’t made any excise duty remittance for 2006-2009.

On the other hand, Coca-Cola stated that the cost of sanitizing and washing the returned bottles doesn’t generate an income. The bottle is simply a carrier for the drinkable liquid and is a property that, although it belongs to Coca-Cola, isn’t manufactured by the firm.

The beverage maker further insisted that distributors pay a deposit on all the returnable bottles. The money is refunded once they bring them back; hence, the beverage maker doesn’t make any income.

The lower court, in 2009, ruled in the Taxman’s favor, compelling Coca-Cola to pay the outstanding excise duty plus interest. However, the High Court later overturned the decision, providing reprieve to the soft drink manufacturer.

In October 2012, KRA, not convinced, went back to court to overturn the earlier decision but unfortunately lost. The recent attempt to go to the highest court of the land, The Supreme Court’ also went according to the Taxman’s wishes.

The Back and Forth

In 2009 a lower court ruled in favor of KRA and mandated the soft drinks company to make the necessary tax payments. According to the court, the Taxman was acting within the legal threshold in demanding the tax payment. 

According to KRA, revelations from an audit carried out revealed that Coca-Cola, through its subsidiaries – Nairobi Bottlers, Mount Kenya Bottlers, Kisii Bottlers, and Rift Valley Bottlers hadn’t paid excise duty on returnable crates and bottles for the period 2006-2008.

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The total amount owing, including the excise duty and interest, was Sh5.6 billion.

Unhappy with the ruling, Coca-Cola Bottlers went to the High Court to squash the earlier decision.

The company argues that the bottle wasn’t the product being sold but rather a carrier or “wrapper” for the liquid soda. Therefore, the costs associated with cleaning and sanitizing the bottles and crates shouldn’t attract any excise duty.

“The respondents’ demanding taxes in respect of audits reflecting the period between 2006 and 2008 in the year 2009, is unjustifiable and grossly unfair as were not in a position to backtrack and pass on to our customers any of the taxes sought by the taxman,” Nairobi Bottlers Finance Manager Cyrus. 

In its ruling, the High Court judges ruled in favor of the beverage maker and squashed the earlier decision made by the lower court. According to Justice Kantai Ole Sankale, the case represented multiple taxation which was unlawful.

“In our view, the exclusion of returnable containers from the ex-factory selling price as per the previous legislation must have appreciated the unique nature of the practice in the industry and the dealing in such containers,” said Otieno Odek, Justices Wanjiru Karanja, and Kantai ole Sankale said in official court documents.

The Aftermath

Besides Coca-Cola, there were other winners during the landmark ruling. 

The five-judge bench, through its constitutional powers, released an Sh2.6 billion guarantee, which at the time was a liability to Centum Investment Ltd and portrayed negatively to the Investment firm’s financial records.

By selling a stake in Nairobi Bottlers and Almasi Beverages, subsidiaries of Coca-Cola Sabco East Africa, Centum Investment earned Sh2.6 billion, which for the 10plus years was treated as a liability owing to the bottle sanitization and handling dispute.

Centum Ltd’s shareholding in Almasi Beverages was 53.9% and 27.6 % in Nairobi Bottlers.

The investment firm’s total value in the subsidiary firms as of March 31, 2019, was Sh16.8 billion. Following the offloading of the shares, Centum got Shs 19.4 billion from Coca-Cola Sabco East Africa, thus making an Sh2.6 billion return on investment (ROI).

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Coca-Cola Sabco East Africa shareholding in Nairobi Bottlers was previously 72.4%. After the additional purchase of shares from Centum, the beverage maker became Nairobi Bottler’s sole shareholder. 

Being a shareholder in Nairobi Bottlers, Centum agreed to bear part of the tax burden and waited for the court’s final decision. Following the win, the investments company is now free to use all the proceedings in other ventures.

Conclusion

The Sh5.6 billion tax loss is historical and has dented the Taxman’s upward trajectory in improving tax revenue collection that comes at a time when the authority has shown good progress to meet and exceed its targets.

To Coca-Cola, the court’s decision couldn’t have come at a better time as the soft drinks manufacturer strives hard to maintain its hold on the consumer market, with more and more people seemingly shying away from consuming manufactured drinks.

In recent times, KRA has been entangled in tax wars with large companies in Kenya. Keroche Breweries was slapped with a Kshs 9 billion excise duty fine,  Citibank is engaged in a Kshs 127 million tax row. At the same time, one of the richest Kenyan tycoons, Humphrey Kariuki, allegedly owes Kshs 41billion in taxes through his liquor company, Africa Spirits.

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