KRA Loses $5.5m Case Against I&M Bank

(NAIROBI, KENYA) – I&M Bank has won a KES 713 million ($5.5 million / £4.2 million) tax dispute after the Tax Appeals Tribunal ruled that the Kenya Revenue Authority wrongly taxed a reversal of loan-loss provisions as bad debts written off in 2019.

The tribunal found that KRA misclassified a KES 1.3 billion ($10.0 million / £7.6 million) write-back as taxable income, even though the money had previously been set aside against possible loan losses.

“The Tribunal accordingly finds and holds that the sum of KSh1.3 billion is a write-back of provision and not a bad debt written off in the year of income 2019; that it yielded no deduction and constitutes no income,” the tribunal said, allowing the bank’s appeal.

The disputed tax comprised KES 393.9 million ($3.0 million / £2.3 million) in principal, KES 19 million ($146,000 / £111,000) in penalties, and KES 299.4 million ($2.3 million / £1.8 million) in interest.

The dispute followed KRA’s review of I&M’s 2019 accounts, including returns and audited accounts.

KRA issued an additional income-tax assessment on 16th June 2025, demanding KES 2.27 billion ($17.5 million / £13.3 million), including interest.

It later sent detailed workings and a letter dated 1st July, setting out six adjustments that put the total at KES 2.34 billion ($18.0 million / £13.7 million).

A spreadsheet sent on 17th June 2025 showed a lower total of KES 1.96 billion ($15.1 million / £11.5 million). The three figures differed by about KES 380 million ($2.9 million / £2.2 million), which I&M cited in challenging the assessment.

KRA partially allowed I&M’s objection in September 2025, dropping some adjustments but retaining two.

One was KES 965,742 ($7,400 / £5,600) in tax, penalties and interest over brokerage costs linked to tax-exempt infrastructure-bond income. The other was the KES 713 million bad-debt adjustment.

I&M paid the smaller amount and pursued the larger dispute.

I&M’s 2019 statements showed total loan write-offs of KES 2.91 billion ($22.4 million / £17.0 million).

Of that, KES 906 million ($7.0 million / £5.3 million) went directly through its profit-and-loss account, while KES 2 billion ($15.4 million / £11.7 million) was set against the provision for bad and doubtful debts.

The bank said it had added back the direct write-off in its tax computation.

KRA accepted that treatment but said the provision account showed only KES 698 million ($5.4 million / £4.1 million) in write-offs.

It could not trace the remaining KES 1.31 billion and disallowed the amount. I&M said KRA had mistaken a net figure for the full amount written off.

The tribunal examined the two columns in the accounts. The gross loan balance showed KES 2.9 billion in write-offs, while the provision fell by a net KES 698 million.

The difference was the KES 1.31 billion write-back, not another debt written off, the tribunal found. It said KRA relied on the net figure without reconciling it with the gross loan amount.

The bank said the write-back came from its adoption of International Financial Reporting Standard 9 (IFRS 9), which changed how lenders account for possible loan losses.

“The 2018 entry debited the provision and credited loans and advances, thereby reducing the carrying value of the loan book. The 2019 entry reversed that treatment, so that the loans were restored to their gross amount and the impairment was carried as a separate provision against them,” the bank said.

IFRS 9 became effective for Kenyan banks on 1st January 2018, requiring lenders to use an expected-credit-loss model.

I&M said its 2018 entry reduced the recorded value of loans against the provision, and that it reversed the entry in 2019 because the loans had not been written off and remained on its books.

The tribunal found that neither entry passed through profit and loss; both shifted amounts between the loan asset and the provision.

It said I&M supported its explanation with audited statements, a reconciliation schedule and tax returns for 2018, 2019 and 2020.

“The principle cuts both ways, and no coin is due upon an accounting entry which yielded no deduction and produced no income.”

The tribunal allowed the appeal and set aside KRA’s objection decision, removing the disputed KES 713 million charge.

However, it did not expressly order a refund of the KES 965,742 paid on the separate brokerage issue.

The bank had also argued that KRA’s assessment dated 1st July 2025 came after the five-year statutory deadline, which expired on 17th June 2025.

But the tribunal found that the valid assessment was issued through iTax on 16th June 2025, within the legal time limit, and that the July letter merely explained the earlier assessment.