[2023] KETAT 1021 (KLR)

Metropolitan Cannon General Insurance Limited v Commissioner of Legal Services & Board Coordination (Tax Appeal 637 of 2022) [2023] KETAT 1021 (KLR) (8 September 2023) (Judgment)

Neutral citation: [2023] KETAT 1021 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 637 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, Jephthah Njagi & AK Kiprotich, Members

September 8, 2023

Between

Metropolitan Cannon General Insurance Limited

Appellant

and

Commissioner of Legal Services & Board Coordination

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya and its principal business activities include providing general insurance solutions by underwriting insurable risks.

2. The Respondent is a principal appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and the Kenya Revenue Authority is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent issued a notice of assessment to the Appellant dated 18th November 2021 for the period 2016 and 2017. In the assessment letter, the Respondent notified the Appellant of additional Corporate Income Tax ("CIT'), Withholding tax ("WHT'), and Pay-As-You-Earn ("PAYE") amounting to Kshs. 89,517,921. 00, inclusive of penalties and interest.

4. The Appellant filed its notice of objection against the Respondent’s assessment vide a letter dated 17th December 2021.

5. The Respondent rendered its objection decision vide a letter dated 5th May 2022.

6. The Appellant being dissatisfied with the Respondent’s decision filed a Notice of Appeal on 17th June 2022. Notably, the Appellant only appealed to the Respondent's CIT assessment of Kshs. 83,992,368. 00 stemming from the transfer of statutory reserves.

The Appeal 7. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal dated and filed on 17th June 2022: -a).That the Respondent erred in law and fact by treating the hiving off of Kshs. 189,172,000. 00 being the entire statutory reserve of Cannon Assurance Limited ("CAL") to Metropolitan Cannon Life Assurance Limited ("MCLAL") as a transfer from the life fund for the benefit of shareholders subject to Corporate Income Tax ("CIT");b.That the Respondent erred in fact and law by demanding penalties amounting to Kshs. 2,837,580. 00 based on an erroneous assessment; andc.That the Respondent erred in law and fact by demanding late payment interest amounting to Kshs. 24,403,188. 00 based on an erroneous assessment.

Appellant’s case 8. The Appellant’s case is premised on the following documents:a)Appellant’s Statement of Facts dated and filed on 17th June 2022 together with the documents attached thereto.b)The Appellant’s written submissions dated and filed on 9th January 2023 together with the authorities attached thereto.c)The Appellant’s witness statement of Joseph Muthama dated 19th December 2022 and filed on 20th December 2022 that was admitted as evidence under oath on the 26th January, 2023.

9. That Cannon Assurance Limited ("CAL") was a company established in 1964 to offer general insurance solutions by underwriting insurable risks. That CAL purely operated as a life assurance company until 1984 when it undertook underwriting general insurance risks in addition to the life business.

10. That thereafter, CAL operated under a composite licence with a clear distinction between the two lines of business in compliance with the provisions of the Insurance Act, Cap 487 of the laws of Kenya, and as such record-keeping and reporting were done as if the two lines of business were two separate entities.

11. That in 2014, the Legislature introduced amendments to the Insurance Act, prohibiting the Insurance Regulatory Authority ("IRA"), from issuing a licence to an insurer that will permit the insurer to carry on a composite insurance business. That as such, the IRA encouraged composite insurers to separate their business and operate either as life insurers or general insurers. IRA even took a further step and ceased the issuance of licences to composite insurance businesses.

12. That in accordance with Section 113 of the Insurance Act and in compliance with the above change in legislation, CAL made an application to the IRA to transfer its life business to Metropolitan Cannon Life Assurance Limited (formerly trading as Metropolitan Life Insurance Kenya Limited', “MCLAL”).

13. That in response to the above application, the IRA vide a letter dated 28th June 2017 issued a preliminary approval of the application for the transfer of life business from CAL to MCLAL. That in addition, the IRA also granted CAL an exemption from Section 114 (1) of the Insurance Act that prescribes serving notice to every affected policy holder and any other person who may claim an interest in the policy included in the transfer.

14. That a Gazette Notice, Number 9337 of 2017 informing the general public of the IRA's approval of CAL's transfer of life business to MCLAL was published by CAL in the Kenya Gazette.

15. That the IRA subsequently issued an approval notice dated 18th December 2017 in accordance with Section 117 of the Insurance Act 2017, through a Gazette Notice Number 1158 of February 2018.

16. That on behalf of CAL, the IRA wrote to the National Treasury on the 9th June 2018 recommending, inter alia, that the National Treasury finds that the transfer is in the public interest and consequently no taxable gain or loss shall be included in the taxation of income under Section 3 (2) (f) of the Income Tax Act.

17. That after the hive off of the life business, CAL retained the short-term business and changed its name to Metropolitan Cannon General Insurance Limited (the Appellant's current business).

18. That Clause 4 of the Asset Transfer Agreement between CAL and MCLAL defines consideration to mean the assumption of liabilities by the purchaser, MCLAL. That the Appellant thus fervently maintains that there was no cash consideration other than the assumption of liabilities by MCLAL.

19. That the transfer was done in December 2017 and recorded in the financial statements of both CAL and MCLAL. That as at 1st January 2017, CAL had a statutory reserve of Kshs. 204,897,000. 00 as shown in the audited financial statements. That the statutory reserve is related to CAL’s life business. That when the transfer took place in December 2017, CAL released the statutory reserve of Kshs. 204,897,000. 00 to MCLAL.

20. That the breakdown of the statutory reserve as indicated on page 20 of CAL's Statement of Changes in Equity for the year ended 31st December 2017 was as shown below:Description Amount - KES '000'Accumulated reserves (189,172)Net loss on available for sale equity investments (2,328)Fair value gain on available for sale government securities 1,603Fair value losses on property and equipment (15,000)Total (204,897)

21. That the Respondent erroneously selected the Kshs. 189,172,000. 00 as a transfer of statutory reserves for the benefit of shareholders. That the Respondent alleges that this amount constitutes a transfer from CAL's life fund for the benefit of the shareholders and proceeded to charge the same to tax under Section 19 (5) of the ITA.

22. The Appellant avers that the Respondent’s assertion above is not only legally erroneous but also an incorrect accounting treatment. That the Kshs. 189,172,000. 00 does not comprise a transfer for the benefit of shareholders of the life business. That to demonstrate this, the Appellant has provided its breakdown below:Description Amount - KES '000'Deferred Tax 109,295Net loss (195,043)Statutory Reserves (103,423)Total (189,172)

23. That the deferred tax credit of Kshs. 109,295,000. 00 shown in the table above related to the income statement charges arising from time differences in the year as indicated in Note 11 of CAL's audited financial statements.

24. That in 2017, the life business made a loss of Kshs. 195,043,000. 00 as indicated on page 14 of CAL's audited financial statements.

25. That the Kshs. 103,423,000. 00 indicated in the table above represents the transfer of the life business from CAL to MCLAL. That the total transfer amount which was recorded in both CAL's and MCLAL's audited financial statements amounted to Kshs. 710,379,000. 00 as reflected in Note 52 of the 2017 AFS for CAL hereto annexed and marked as MCGIL-12. That the Appellant has tabulated a summary of the composition of the Kshs. 710,379,103. 00 as below:Description Amount - KES '000'Retained Earnings (150,000)General Reserves ·1 (456,956)Statutory Reserves (103,423)Total Transfer of Life Equity from CAL (710,379)

26. That the transfer of Kshs. 710,379,000. 00 represented the transfer of assets and liabilities as provided for in the Asset Transfer Agreement between CAL and MCLAL. The details of the assets and liabilities are duly disclosed under Note 52 to the Audited Financial Statements of the Appellant for the year ended 31st December 2017.

27. That the breakdown above clearly indicates that the Respondent erred in deeming that Kshs. 189,172,000. 00 amounted to a transfer from the life fund for the benefit of shareholders, liable to income tax.

28. That this transfer of the statutory reserves was pertinent because CAL needed to retain a zero statutory reserve balance as it would no longer be dealing with life business in order to comply with the IRA requirement of having separate businesses.

29. It is against this background that the Respondent erroneously seeks to charge to tax the hiving off of the statutory reserves of Kshs. 189,172,000. 00 of CAL to MCLAL by inaptly treating this as a transfer from the life fund for the benefit of shareholders.

30. The Appellant maintains that a transfer from statutory reserves is distinct from a transfer from the life fund for the benefit of shareholders and therefore not chargeable to tax. Section 19 (5) of the ITA clearly provides that only a transfer from the life fund for the benefit of shareholders is chargeable to tax. The Section provides as follows:“The gains or profits for a year of income from the long-term insurance business of a resident insurance company, whether mutual or proprietary, shall be the sum of the following -(a)the amount of actuarial surplus, as determined under the Insurance Act and recommended by the actuary to be transferred from the life fund for the benefit of shareholders.(b)any other amounts transferred from the life fund for the benefit of shareholders: and(c)thirty per centum of management expenses and commissions that are in excess of the maximum amounts allowed by the Insurance Act.”

31. The Appellant avers that pursuant to the Insurance Regulatory Authority ("IRA") Regulations discouraging the operation of composite insurance businesses, the life business operated by the Appellant was hived off to Metropolitan Cannon Life Assurance Limited ("formerly trading as Metropolitan Life Insurance Kenya Limited', "MCLAL") in December 2017.

32. That following the hiving off the life business, the former CAL retained the short-term general business and subsequently changed Its business name from CAL to Metropolitan Cannon General Insurance Limited (the Appellant's current business name). That the general business was and has since then continued to be carried out under the Appellant's current business name. That post the hiving off of the life business, MCLAL and the Appellant had the same shareholders with the same shareholding percentage.

33. The Appellant further asserts that the amount of Kshs. 189,172,000. 00 sought to be charged to CIT by the Respondent represents the book movement in statutory reserve because of the transfer of the life business from CAL to MCLAL and is not in any way a transfer from the life fund for the benefit of shareholders. That these facts are as provided in the background of the transaction and are duly disclosed under Note 52 to the Audited Financial Statements of the Appellant for the year ended 31st December 2017.

34. That the transfer was done at no consideration and the loss on transfer recognized in the Appellant's Statement of Profit and Loss was to close the books of accounts of the Appellant to that extent. That the loss on the transfer of assets transferred out of the Appellant amounting to Kshs. 710,379,000. 00 comprised the statutory reserve, general reserve, and retained earnings. That this did not in any way impact the life fund held for the benefit of policyholders.

35. The Appellant further postulates that an examination of the audited financial statements of MCLAL for the year of income 2017 reveals that the amount of Kshs. 710,379,000. 00 represents the net assets transferred from the Appellant and are represented under the common control reserve of MCLAL. That this is as per the supporting excerpts of Note 11 and Note 32 of the audited financial statements of MCLAL.

36. The Appellant, therefore, submitted that the hiving off of the long-term life business was a book movement only and no consideration was paid out to the shareholders and therefore no benefit accrued to the shareholders.

37. That in its objection decision, the Respondent notes that there was a transfer from the statutory reserve for the benefit of shareholders totalling Kshs. 189,172,000. 00. That the Respondent subsequently erroneously charged the said amount to CIT, thereby demanding tax amounting to Kshs. 83,992,368. 00 inclusive of principal tax, penalties, and interest from the Appellant.

38. That as noted above on the accounting treatment of the transaction, the Kshs. 189,172,000. 00 comprised deferred tax, loss for the year and statutory reserves. That the Appellant submits to the Honourable Tribunal that the transfer relates to the transfer of the statutory reserve from the books of CAL to MCLAL following the hiving off of life insurance long-term business from CAL to MCLAL.

39. That as part of the transfer of the life business of the Appellant, the regulator, Insurance Regulatory Authority ("IRA", "the Regulator") conducted an ordinary investigation as is done during the transfer of any life business to ascertain that the transfer was not done to the detriment of policyholders and more so to ensure that any policies transferred were valued at fair value. That the relevant report by the Regulator was issued via a letter dated 28th May 2019 in which the IRA confirms that indeed the transfer was done for no consideration.

40. That to buttress the above point, as part of the recommendation by the IRA towards the transaction being exempt from stamp duty, the Appellant annexed the Regulator's assertion that the transfer was done without consideration, as per an exemption application, which confirms that the hiving off of the life business was a mere book transfer for no consideration and should therefore not be treated as a transfer for the benefit of shareholders.

41. That in light of the foregoing, the Appellant avers that its life fund was not appropriated in any way or distributed for the benefit of shareholders which would be the trigger point for subjecting such an appropriation or distribution to CIT under the provisions of Section 19 (5) of the ITA.

42. The Appellant placed reliance on the High Court's decision in the case of Kenindia Assurance Company Limited vs. Commissioner of Domestic Taxes [2020} eKLR (“the Kenlndia case”) where the High Court in holding that only a transfer from a life fund is chargeable to tax, not a transfer from a statutory reserve as per the provisions of Section 19 (5) of the ITA stated that:“The Tribunal failed to consider the fact that the two funds were distinct and only the Life Fund fell within the provisions of section 19 (5) (b) of the ITA. A transfer from the Statutory Reserve, as a distinct and separate fund, could not be taxed under the aforesaid provision.”

43. That further, the High Court of Kenya in the Kenindia case found as follows under Paragraph 40:“From my analysis above, I have found that the appellant created two funds; a Life Fund and a Statutory Reserve. The Life Fund is a mandatory requirement for an insurance company like the appellant to carry on long-term insurance business and is specifically provided for under Section 45 (1) of the Insurance Act to support that business and to protect policyholders. It is separate and distinct from the Statutory Reserve which was created by the appellant in 2004 and which is for the benefit of shareholders. The transfer of Kshs. 111,338,000. 00 which the Commissioner subjected to taxation under section 19(5)(b) of the ITA was from the Statutory Reserve and not the Life Fund and was therefore not chargeable with tax under the aforesaid provision which only applies to a, "transfer from the life fund for the benefit of shareholders.”

44. The Appellant also prayed that the Honourable Tribunal be guided by the principle in Cape Brandy Syndicate vs. Inland Revenue Commissioner [1921} 1 KB 64, where the court held that:-“In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There Is no presumption as to a tax. Nothing Is to be read in, nothing is to be implied. One can only look fairly at the language used...”

45. The Appellant maintained that it is clear that the use of the word “the life fund” in Section 19 (5) (b) of the ITA is intended to apply to funds created under Section 45 of the Insurance Act and specifically in relation to the life assurance business. It was not intended to cover any other funds outside the scope of Section 45 of the Insurance Act or in relation to other classes of long-term insurance business.

46. That accordingly, whilst submitting that there was in the first instance no transfer from the life fund for the benefit of shareholders that would be subject to CIT, the Appellant further submits that a transfer of a statutory reserve is in any case distinguished from a transfer from the life fund, for the benefit of shareholders which incident is what would attract taxation.

47. That additionally, the Appellant submitted that the Court in Republic vs. Kenya Revenue Authority Ex-parte Bata Shoe Company (Kenya) Limited [2014} eKLR, stated as follows:“This brings me to the role and Interpretation of tax laws. Payment of tax is an obligation imposed by the law. It Is not a voluntary activity. That being the case, a taxpayer is not obliged to pay a single coin more than is due to the taxman. The taxman on the other hand is entitled to collect up to the last coin that is due from a taxpayer.”

48. That the Respondent sought to charge a tax shortfall penalty at the rate of 5% on the alleged principal CIT due to subjecting the Appellant's transfer from the statutory reserve to CIT.

49. That considering its detailed grounds of Appeal above, the Appellant submitted that there is no tax shortfall due to the Respondent given that hiving off of the long-term life business was only a book movement and no consideration was paid out to the shareholders and therefore no benefit accrued to the shareholders.

50. That accordingly, the CIT assessment for additional penalties of Kshs. 2,837,580. 00 on the principal liability amounting to Kshs. 56,751,600. 00 lacks legal merit and should be vacated in its entirety.

51. The Appellant noted that the Respondent vide its assessment letter sought to levy late payment interest at the rate of 1% per month on an erroneous assessment.

52. The Appellant submitted that the Respondent erred in law and fact by imposing late payment interest on a tax obligation that did not exist in the first place.

53. That in this regard, the Appellant submits that the Respondent's imposition of interest of Kshs. 24,403,188. 00 was based on an erroneous assessment, and on this basis, the same should be vacated in its entirety.

Appellant’s Prayers 54. The Appellant prayed that this Honourable Tribunal considers its grounds of appeal and finds that:a.This Appeal is allowed;b.The Respondent's objection decision dated 5th May 2022 be hereby partially set aside;c.The Respondent erred in law and fact by treating the transfer of the statutory reserve of Kshs. 189,172,000. 00 from the Appellant to Metropolitan Cannon Life Assurance Limited as a transfer from the life fund for the benefit of shareholders subject to CIT under Section 19 (5) (b) of the ITAd.The principal tax of Kshs. 56,751,600. 00 in its entirety and the attendant penalties and interest was incorrectly demanded by the Respondent and be vacated forthwith in their entirety,e.The costs of and incidental to this Appeal be awarded to the Appellant: andf.Any other orders that the Tribunal may deem fit

Respondent’s Case 55. The Respondent’s case is premised on the hereunder filed documents:-i.The Respondent’s Statement of Facts dated and filed on 15th July 2022 together with the documents attached thereto.ii.The Respondent’s written submissions dated 8th February 2023 and filed on the same date together with the authorities attached thereto.

56. That in 2014, Momentum International Holdings based in South Africa acquired majority stake of Cannon Assurance Limited (currently known as Metropolitan Cannon General Insurance Limited MCGIL). That the Company continued to transact in both general and life business for a while until December 2017 when the life business was transferred to Metropolitan Cannon Life Assurance Limited (MCLAL).

57. That following the hiving off the life business, the former CAL retained the short-term general business and subsequently changed its name from CAL to MCGIL in the year 2018.

58. That it is against this background that the industry regulator, Insurance Regulatory Authority (IRA) conducted an investigation to establish whether policyholder's funds were being safeguarded in accordance with the Insurance Act, Cap. 487.

59. That the IRA went ahead to appoint Actuarial Consultancy Services EA (Actserv) to do an investigation on the transfer of life business of CAL to Metropolitan Cannon Life Assurance Limited (MCLAL) where the report was submitted to IRA on 27th May 2019.

60. That the Appeal evokes only one issue for determination:-“Whether the Respondent was justified in rejecting the input VAT claim made by the Appellant.”

61. The Respondent avers that the review of the Appellant's financial statements (statement of changes in equity) noted that the statutory reserve of Kshs. 189,172,000. 00 was transferred to shareholder's equity account.

62. That further, the Respondent noted that the Appellant relied on the case of Kenindia Assurance vs. CDT (2020) where the High Court held that only a transfer from life fund is chargeable to tax and not a transfer from statutory reserve as per the provisions of Section 19 (5) of the Income Tax Act. That the court stated as follows·“the tribunal failed to consider the fact that the two funds were distinct and only the life fund fell within the provisions of Section 19 (5) (b) of the ITA. A transfer from the statutory reserve as distinct and separate fund could not be taxed under the previously mentioned provision.”

63. That further, the High Court of Kenya in KenIndia case found as follows under paragraph 41. “From my analysis above, I have found that the Appellant created two funds, a life and a statutory reserve. The Life Fund is a mandatory requirement for an insurance company like the Appellant to carry on long term insurance business and is specifically provided for under Section 45 (1) of the Insurance Act to support that business and to protect policy holders. It is separate and distinct from the Statutory Reserve which was created by the Appellant in 2004 and which is for the benefit of shareholders. The transfer of Kshs. 111. 338. 000. 00 which the Commissioner subjected to taxation under Section 19 (5) (b) of the ITA was from the Statutory Reserve and not the Life Fund and was therefore not chargeable with tax under the aforesaid provision which only applies to a "transfer from the life fund for the benefit of shareholders.”

64. The Respondent notes that in the case of KenIndia Assurance vs. CDT (2020) the issue was about the existence of two distinct funds where it was ruled that only life fund was put under the provisions of Section 19 (5) (b) of the Income Tax Act

65. That furthermore, in the latter case there was a clear distinction between the life fund and statutory reserve, hence the case at hand is totally different since there is no clear distinction between the statutory fund and life fund.

66. The Respondent avers that in arriving at the decision to charge, it placed reliance on the principle in Cape Brandy Syndicate vs. Inland Revenue Commissioner (1921) where the court held that;“...in a taxing act, one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in. Nothing is to be implied. One can only look fairly at the language used.”

67. That additionally, the provisions of Section 19 (5) (b) of Income Tax Act Cap. 470 provides that “any other amounts transferred from the life fund for the benefit of shareholders is chargeable for Corporation Income Tax”. That the said Section states;“the gains or profits for a year of income from the insurance company, whether mutual or proprietary, shall be the sum of the following:(b)any other amounts transferred from the life fund for the benefit of shareholders.”

68. The Respondent reiterates that the Appellant being only underwriter of general business and the assessment being irrelevant does not hold. It is worth noting that for the period under review, the Appellant was undertaking life insurance business which is governed by Section 19 (5) of the Income Tax Act and therefore any unpaid taxes arising from that period should be demanded from it.

69. That the provisions of Section 19 (5) (b) of the ITA envision a situation where any transfer from the life fund to shareholders equity becomes a taxable income and therefore the argument that the transfer of the statutory funds to the shareholder's equity is a mere book transfer and that there were no considerations cannot hold.

70. That this position held by the Appellant has, however, not been proven by way of records or any other documents from the Appellant. It is a mere allegation and not supported by fact.

71. That the Respondent reviewed the Appellant's Financial Statements prepared by its own auditors that showed that there was indeed a transfer for the benefit of the shareholders and thus chargeable to tax as provided for under Section 19 of ITA.

72. That the lack of consideration has also not been proven by the Appellant as Section 30 of the Tax Appeals Tribunal Act states as follows on burden of proof:“In a proceeding before the Tribunal. the appellant has the burden of proving-a.Where an appeal relates to an assessment, that the assessment is excessive or;b.In any other case, that the tax decision should not have been made or should have been made differently.”

73. That in furtherance of this submission, the Respondent relies on Section 107 of the Evidence Act which states as follows regarding burden of proof:“(1)Whoever desires any court to give judgment as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist.(2)When a person is bound to prove the existence of any fact it is said that the burden of proof lies on that person.”

74. The Respondent maintains that the transfer of Kshs. 189,172,000. 00 from the statutory reserve to shareholders equity account is a transfer from the life fund for the benefit of shareholders chargeable to tax as per Section 19 (5) (b) of the Income Tax Act

75. That contrary to the Appellant's averments, the Respondent's decision and assessment was rendered in accordance with the law.

Respondent’s Prayers 76. The Respondent prays that The Tribunal considers the case and:a.Dismisses the Appeal.b.Upholds the Respondent's assessment and decision dated 5th May 2022. c.Awards the Respondent the costs of the Appeal.

Issues for determination 77. The Tribunal has carefully studied the pleadings and documentation filed by both parties and is of the respectful view that the issue falling for its determination is as follows:-a.Whether the Corporation tax assessment was justified.

Analysis and findings 78. The Tribunal having established the issue for its determination, proceeds to analyse as hereunder.

79. This dispute arose from the Respondent’s assessment of Corporation tax on a transfer of statutory reserves in the course of separation of life insurance business and general insurance business by the Appellant. This separation was precipitated by the need for the Appellant to comply with the IRA requirement of having separate businesses.

80. The Appellant submitted that in 2014, the Legislature introduced amendments to the Insurance Act, prohibiting the Insurance Regulatory Authority ("IRA"), from issuing a licence to an insurer that will permit the insurer to carry on a composite insurance business. That as such, the IRA encouraged composite insurers to separate their business and operate either as life insurers or general insurers. That IRA even took a further step and ceased the issuance of licences to composite insurance businesses.

81. The Appellant further submitted that in accordance with Section 113 of the Insurance Act and in compliance with the above change in legislation, CAL made an application to the IRA to transfer its life business to Metropolitan Cannon Life Assurance Limited (formerly trading as Metropolitan Life Insurance Kenya Limited', “MCLAL”).

82. The Appellant further submitted that in response to the above application, the IRA vide a letter dated 28th June 2017 issued a preliminary approval of the application for the transfer of life business from CAL to MCLAL. That in addition, the IRA also granted CAL an exemption from Section 114 (1) of the Insurance Act that prescribes serving notice to every affected policy holder and any other person who may claim an interest in the policy included in the transfer.

83. The Respondent averred that for the period under review, the Appellant was undertaking life insurance business which is governed by Section 19 (5) of the Income Tax Act and therefore any unpaid taxes arising from that period should be demanded from it.

84. The Respondent further averred that upon a review of the Appellant's financial statements (statement of changes in equity) noted that a statutory reserve of Kshs. 189,172,000. 00 was transferred to shareholder's equity account.

85. The Respondent submitted that the provisions of Section 19(5)(b) of the ITA envisions a situation where any transfer from the life fund to shareholders equity became a taxable income and therefore the argument that the transfer of the statutory funds to the shareholder's equity is a mere book transfer and that there were no considerations cannot hold.

86. The Respondent additionally stated that the position held by the Appellant has ,however, not been proven by way of records or any other documents from the Appellant. That it is a mere allegation and not supported by fact.

87. The Tribunal having reviewed the parties pleadings established that the Appellant made an application to the IRA to separate its general insurance business from its life insurance business in compliance with IRA requirements and Section 113 of the Insurance Act.

88. The Tribunal noted that the Appellant further made an application to the National Treasury for exemption from tax on capital gains arising from the transfer of Metropolitan Cannon General’s life insurance business to Metropolitan Cannon Life Assurance Limited on the grounds of public interest as per Paragraph 13 of the Eighth Schedule to the Income Tax Act.

89. Further, the Tribunal established that the IRA issued an approval for the transfer through a letter dated 28th June 2017 that additionally granted the Appellant an exemption from the provisions of Section 114 (1) of the Insurance Act which requires the serving of a notice to every policy holder and, in the same correspondence, required the Appellant to publish the notice approved by the IRA in the Kenya Gazette and at least two newspapers published and circulated in Kenya.

90. Thereafter, the Appellant proceeded to comply and published a Gazette Notice Number 9337 of 2017 informing the public of the approval by IRA of the transfer of its life business from Cannon Assurance Limited to Metropolitan Cannon Life Assurance Limited.

91. On 18th December 2017 the IRA issued a letter approving the scheme of the transfer in accordance to Section 117 of the Insurance Act. The Section states as follows:“(1)The Authority may, after considering the documents and reports deposited with him under this Part and the representations, if any, made under Section 114 (2), subject to such terms and conditions as he considers necessary, approve the scheme of amalgamation or transfer.(2)On determining an application made under subsection (1) the Authority shall-a.publish a notice of his decision in the Gazette and in such other manner as he thinks fit; andb.send a copy of that notice to the parties to the amalgamation or the transferor and the transferee and every person who made representations in accordance with the notice referred to in Section 114, and if he refuses the application he shall inform the parties to the amalgamation or the transferor and the transferee in writing of the reasons for his refusal.”

92. Section 114 of the Insurance Act states as follows regarding a notice of the intention to apply for amalgamation or transfer:-“(1)The Authority shall not determine an application under this part unless-a.notice of the intention to apply for amalgamation or transfer, approved by the Authority for the purpose, has been published in the Gazette and in at least two newspapers published and circulating in Kenya;b.except in so far as he has otherwise directed, a copy of the notice has been sent to every affected policy holder and every other person who claims an interest in a policy included in the amalgamation or transfer and has given written notice of his claim to one of the insurers involved in the amalgamation or to the transferor, as the case may be; andc.copies of a statement setting out particulars of the amalgamation or transfer, including in the case of long term insurance business the report of the actuary, and approved by the Authority, have been available for inspection at one or more places in Kenya for a period of not less than thirty days beginning with the date of the first publication of the notice in accordance with paragraph (a).(2)The notice referred to in subsection (1) shall invite any person (including an employee, director, shareholder or policy holder) who has reasonable grounds for believing that he would be adversely affected by the carrying out of the scheme to write or make oral representations to the Authority within thirty days of the publication of the notice, stating the grounds on which he believes he would be adversely affected by the carrying out of the scheme of amalgamation or transfer.”

93. The Tribunal additionally established that a response to the Appellant’s letter to the National Treasury was issued by the Cabinet Secretary in charge of the National Treasury on 9th April 2018. The letter stated, inter alia, that:-a.Cannon Assurance Limited applied to transfer its life insurance business to Metropolitan Cannon Life Assurance Limited to enable it to consolidate the two life businesses.b.The Board of the IRA approved the scheme through Gazette Notice Number 1158 of 9th February 2018. c.The transfer of the life assurance business of Cannon Assurance Limited was in line with the Authority’s recommendations that composite insurers do merge in line with global trends towards separation of life insurance business from general insurance business.d.To effect the transfer Cannon Assurance Limited would need to transfer the investment assets relating to its life assurance business to Metropolitan Life Assurance Limited.e.Unless exemptions were sought the transfer would result in capital gains tax and stamp duty crystallising.f.Cannon Assurance Limited and Metropolitan Cannon are subsidiaries of MMI, a leading insurance-based financial services company listed in the Johannesburg Stock exchange, are both companies incorporated in Kenya and within the same group. As such, the transfer of the life business between the two entities does not involve sale of any assets or transfer or conferment of any benefit to any person or entity outside of the group.g.The assets being transferred were meant to cover policyholders’ liabilities which had already been transferred from Cannon Assurance Limited to Metropolitan Cannon Life Assurance Limited.h.On the basis that the transfer is based on policyholders and public interest considerations initiated by the IRA, the National Treasury recommended that:i.Pursuant to Paragraph 13 of the Eighth Schedule to the Income Tax Act, the transfer was in public interest and consequently no taxable gain or loss should be included in the computation of income under Section 3 (2) (f) of the Income Tax Act; andii.Pursuant to Section 106 (1) of the Stamp duty Act, the instruments subject to the transaction be exempted from the provisions of the Stamp Duty Act being satisfied that it is in public interest to do so.

94. The Tribunal further reviewed the “Asset Transfer Agreement in relation to The Long-Term Business of Cannon Assurance Limited” and established that as per Clause 4 of this Agreement, the consideration for the sale of assets by the Vendor to the Purchaser would be the assumption of liabilities by the Purchaser.

95. Further, Clause 11 of the above stated agreement provides that the Purchaser agrees to assume the liabilities and undertakes to discharge the same and to indemnify and keep indemnified on a full and unqualified basis the Vendor fully at all times from and against any and all claims, actions, proceedings, demands, liabilities, costs and expenses suffered or incurred in connection with any of the liabilities.

96. Section 19 (5) of the Income Tax Act states as follows regarding gains and profits from long term insurance business:-“The gains or profits for a year of income from the life insurance business of a resident insurance company, whether mutual or proprietary, shall be the sum of the following –a.the amount of actuarial surplus, as determined under the Insurance Act and recommended by the actuary to be transferred from the life fund for the benefit of shareholders and policy holders.b.any other amounts transferred from the life fund for the benefit of the shareholders; andc.thirty per centum of management expenses and commissions that are in excess of the maximum amounts allowed by the Insurance Act.” Emphasis ours

97. The Tribunal notes that, from the foregoing correspondences between the Appellant and the IRA as well as between the Appellant and the National Treasury, the transfer of assets by CAL to MCLAL was purely on the basis of the recommendation and guidance by the IRA that composite insurance businesses should separate their life assurance businesses from their general assurance businesses.

98. In this regard, it is clear to the Tribunal that specific actions were required of the Appellant by the IRA in complying with the guidance by the IRA on separation of business. Further, it is apparent that the Appellant complied with all the steps required of it and received the necessary documentation (approvals from both the National Treasury and IRA; and exemptions) to enable it successfully comply with the IRA’s directives.

99. Paragraph 13 of the Eighth Schedule to the Income Tax Act states as follows regarding exemption of certain transactions from computation of income under Section 3 (2) (f):-“No gain or loss shall be included in the computation of income under section 3(2)(f) in the case of a transfer of property that is necessitated by a transaction involving the incorporation, recapitalization, acquisition, amalgamation, separation, dissolution or similar restructuring of a corporate entity, where such transfer is—a.a legal or regulatory requirement;b.as a result of a directive or compulsory acquisition by the government;c.an internal restructuring within a group which does not involve transfer of property to a third party; ord.in the public interest and approved by the Cabinet Secretary.”

100. The Tribunal is persuaded, on the basis of the documents adduced by the Appellant in its pleadings, and the provisions of the law stated in the foregoing analysis, that the transfer of the Appellant’s life assurance business did not constitute a sale or transfer of assets on consideration that would trigger an income tax obligation as per Section 19 (5) of the Income Tax Act. Specifically, the transaction under dispute was not undertaken for the benefit of the shareholders. It was undertaken due to a requirement by the IRA which the Appellant complied with.

101. As a result of the foregoing, the Tribunal finds that the Respondent was not justified in issuing the Corporation tax assessment to the Appellant for the transfer of its life assurance business.

Final decision 102. The upshot of the foregoing is that the Appeal is merited and consequently, the Tribunal proceeds to make the following Orders: -a.The Appeal be and is hereby allowed.b.The Respondent’s Objection decision dated 5th May 2022 be and is hereby set aside.c.Each party to bear its own costs.

103. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 8TH DAY OF SEPTEMBER,2023ERIC NYONGESA WAFULA.......................CHAIRMANCYNTHIA B. MAYAKA............................MEMBERGRACE MUKUHA.................................MEMBERJEPHTHAH NJAGI.................................MEMBERABRAHAM K. KIPROTICH...........................MEMBER