KRAand#039s Sbn tax demand stalls Choppiesand#039 takeover of Ukwala

A Sh946 million tax dispute between the Kenya Revenue Authority (KRA) and Ukwala Supermarkets has put at risk Botswana’s Choppies Enterprises’ planned entry into Kenya’s retail market.

The taxman accuses Ukwala, whose stores Choppies plans to acquire, of failing to pay the colossal amount of money in corporate, PAYE and witholding tax between 2011 and 2014.

The KRA wants Ukwala to settle the debt before completing the sale of its outlets to Choppies.

Choppies has made public its intention to acquire Ukwala for $10 million (S billion) as it seeks to grab a piece of Kenya’s fast-growing retail market.

The Competition Authority of Kenya (CAK) last month gave Ukwala and Choppies the green light to complete the transaction but the KRA’s demand now looks set to put it on hold.

Retail rush

New York Stock Exchange-listed research firm Nielsen in March ranked Kenya as Africa’s second-biggest formalised retail economy after South Africa, adding impetus to the rush by foreign firms to enter the country.

Ukwala had in September obtained a court order stopping the KRA from further inspecting its books or making any revenue demands until the case is heard and determined.

But the taxman sent another demand notice to Ukwala in November before alerting Choppies of the claim it has against the local retailer.

The Commissioner of Domestic Taxes and the Commissioner of Income Tax sent another letter to Ukwala’s aocates, and the aocates on record for Choppies Enterprises informing them of Ukwala’s tax liabilities in regards to a separate transaction between Ukwala and Choppies, and by reason of which they have jeopardised the said transaction, UKwala says in court documents.

Choppies in June announced it had reached a deal to buy the 10 Ukwala stores, half of which are located in Kisumu, three in Nairobi and one in Nakuru.

The retailer, listed on both the Botswana Stock Exchange and Johannesburg Stock Exchange, will become the first foreign supermarket to successfully enter Kenya through an acquisition if the deal with Ukwala is successful.

South Africa’s Massmart resorted to setting up its own store at Garden City Mall in Nairobi after a bid to buy a majority stake in third-placed Naivas Supermarkets collapsed in the wake of sibling rivalry.

Ukwala last month asked its customers to redeem their loyalty points and pick uncollected goods by the end of the year or risk losing them. The notice is part of the retailer’s move to clear with creditors ahead of Choppies’ takeover.

READ: Ukwala asks customers to redeem loyalty points

The KRA had initially demanded S,012,664,667 but later reviewed the amount downwards after further inspection of the supermarket’s books of accounts.

High Court judge George Odunga had issued the order stopping the KRA from further inspecting Ukwala’s books on condition that the retail chain acquire a bank guarantee for Sh60 million in favour of the taxman. The retailer has already complied with the directive.

Ukwala’s lawyer Taib Ali Taib is now seeking to pursue the KRA for contempt of court, arguing that the November demand was made in breach of Justice Odunga’s directive.

The KRA, however, holds that the order has stopped it from carrying out his duty as prescribed in the law, and wants the judge to reverse his decision.

The KRA had prior to Justice Odunga’s orders sent agency notices to Equity Bank, KCB and Diamond Trust Bank seeking to compel them to deduct the S01 million admitted tax from Ukwala’s accounts. The banks, however, stated in response that they held no funds on behalf of Ukwala.

Ukwala moved to court in September after the taxman threatened to attach its assets and those of the retailer’s Nakuru and Kisumu subsidiaries to recover the claimed amounts.

Mr Taib insists that the KRA’s claim had been challenged and that the demands should be put on hold until the dispute is resolved. The The KRA, however, argues that the court could only stop it from demanding disputed taxes but cannot reverse revenue Ukwala has admitted owing.

The KRA adds that Ukwala did not disclose to the court that it had admitted to owing some taxes to KRA.

Benson Olando, a manager at the domestic taxes office, says the KRA fears it may not be able to recover any amounts if Ukwala is allowed to complete the sale of its outlets to Choppies before the revenue demanded is paid.

Ukwala failed to disclose that taxes amounting to over S01 million had actually been admitted by them. If the orders are not set aside immediately, government revenue in excess of Sh946 million shall have been lost since KRA will have no means of recovering the same from Ukwala which is in the process of disposing its entire business to Choppies Enterprises, Mr Olando says.

The KRA argues Ukwala filed the suit prematurely as it should have filed an appeal before the Local Committee � a tribunal that hears any appeals against the taxman.