CASE BRIEF

CASE BRIEF:  Tax Appeal 1237 Of 2022: M-Kopa -Vs- Commissioner Of Domestic Taxes

When filing its tax returns, the Kenya Revenue Authority refused to allow M-Kopa to write off Kshs 308,512,947 debt from defaulting customers. Writing off this debt would enable them to claim it as a loss in that financial year, hence exempting them from paying income taxes for a similar amount.

Introduction

Background

The Trail blazing fin-tech company M-Kopa offers different products including solar mobile phones, Solar Panels and Televisions. All the products were supplied on a pay as you go (PAYG) scheme where customers would be issued with the product upon payment of a deposit. They would then make daily payments through a sim-card issued specially for the purpose. In 2022, M-Kopa ventured into the Electrical Vehicle space through its electrical motorcycle line , where customers would similarly pay a deposit of Kshs 25,000 and make daily payments until the balance is offset.

M-Kopa was primarily popular among the rural populations which had limited access to electricity, which posed a difficult challenge on the accessibility of defaulters. When filing its tax returns, the Kenya Revenue Authority refused to allow them to write off Kshs 308,512,947 debt from defaulting customers. Writing off this debt would enable them to claim it as a loss in that financial year, hence exempting them from paying income taxes for a similar amount.

M-Kopa stated that the sums were owed by hardcore defaulters who refused to to pay despite receiving several demands through calls and text messages. M-Kopa further argued that the cost of recovering the sums from the 47,625 defaulting customers would exceed the principle debt, and thus made no financial sense.

The Case

The taxman  insisted that the write off was a tax avoidance scheme by M-Kopa who had not invested adequate resources and effort in recovering the owed sums.

M-Kopa responded to the allegations stating that they have already issued multiple demands and gone as far as switching off electronic devices. It also presented evidence showing that hiring a private investigator would cost it about Kshs 952 Million, out of court settlements would set it back Kshs 1.77 Billion, and taking the defaulters to court would cost Kshs 5.22 Billion in expenses.

Holding of the Tax Appeals Tribunal

The tribunal sided with the Company, stating that it had satisfactorily demonstrated that attempts had been made to recover the monies. It also acknowledged the high costs of recovering the sums. 

It therefore ruled that M-Kopa could write off the debt and rely on it as a tax deduction.

Relevance of the Case

The case highlighted one of various ways in which businesses can mitigate losses through legal tax avoidance schemes. It also emphasized the importance of:

  1.  Keeping clear financial records as evidence of debt i.e contracts
  2. Issuing demands for repayment and keeping records of the demands
  3. Archiving all attempts to reasonably recover the debt
  4. Properly filing taxes and tax deduction claims

Key Insights at a Glance

It is important for a business to use all reasonable avenues to recover debt before writing them off
Records of all attempts to recover debt should be well documented
One has to include the losses/bad debt in their tax filings to enjoy a tax deduction

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