Insurance agents who offer asset management services, including bonds, equities, and money market funds (MMFs), are required to pay 16 percent value-added tax (VAT) on the commissions or fees earned from these financial products, the Tax Appeals Tribunal has said.
The tribunal’s verdict affects the close to 15,000 insurance agents who also deal in asset management services on behalf of financial providers such as Britam, ICEA, CIC, and Old Mutual.
The ruling followed an appeal by Martin Kinyingi Waweru, an insurance agent, against a tax assessment by the Kenya Revenue Authority (KRA).
The taxman had demanded VAT of Sh5,317,609 on the commissions that Mr Waweru earned between January 2020 and May 2022. Under the Tax Procedures Act, the KRA Commissioner has the authority to appoint taxpayers making supplies of over Sh5 million annually as withholding VAT agents.
Mr Waweru had objected to the tax assessment, noting that the High Court on December 16, 2021, had declared the introduction of VAT on insurance services in the Tax Laws (Amendment) Act 2020 unconstitutional. Consequently, Mr Waweru wanted the tribunal to compel the KRA to deregister him as a VAT agent, arguing he was not offering vatable services.
However, the tribunal agreed with the KRA’s argument that only insurance agencies, insurance brokerage, and securities brokerage services had been spared from VAT by the High Court.
“For the reasons set out above, the tribunal finds that this appeal lacks merit and accordingly proceeds to make the following orders...The appeal is hereby dismissed,” reads the ruling delivered on February 13 by a three-bench tribunal chaired by Rodney Odhiambo Oluoch.
Besides offering insurance services, many companies also offer asset management services such as equities, unit trusts, and bonds.
Most intermediaries tend to bundle these services under one roof, said Clifford Ochieng, Chairman of the Association of Kenya Professional Insurance Agents.
In the case of asset management services, agents earn their commissions from the interest earned on capital invested by clients. It is this commission that is then supposed to be subject to VAT.
“If a person's sales do not reach the Sh5 million threshold, they are not supposed to register for VAT. And if they are not registered, they are not supposed to charge VAT. It is illegal,” said Steve Okoth, Tax Advisory Director and Regional Head of Tax at BDO East Africa.
Mr Waweru had argued that following the enactment of the Tax Laws (Amendment) Act of 2020, some business players made it mandatory for insurance brokers to have VAT registration in place as they were effecting the withholding of the VAT amount when making commission payments to the brokers.
“There is no law currently requiring any agent or broker to pay VAT on commission earned from sales of asset management financial services.
“The law that had introduced the same was declared unconstitutional by the Court,” Mr Waweru said in an email to the KRA. In the email, Waweru is said to have admitted receiving annual commission income from asset management products in 2023 and 2024, amounting to Sh2,182,891 and Sh1,714,682, respectively.
He insisted that he did not make any taxable supplies that should be rendered for value-added tax because asset management services are ideally VAT-exempt as provided for in Paragraph 1 of Part II of the First Schedule of the VAT Act 2013, which states that the supply of financial services is exempt from the consumption tax.
But the Tribunal agreed with the KRA's argument, noting that it is only insurance and reinsurance services that were excluded from VAT, with "management and related insurance consultancy services" being excluded from the list of services exempt from the tax in the VAT Act. Others that are not exempt include actuarial services and services of insurance assessors and loss adjusters.
"The sale of asset management has not been included in the list of insurance business that would enjoy the privilege of exemption under the First Schedule to the Act and the decision of the court in Association of Kenya Insurers (AKI) suing through its Chairman Mr Mathew Koech v Kenya Revenue Authority & 2 others," said the tribunal.
