What happened

I&M Bank has successfully challenged a Sh713 million tax assessment raised by the Kenya Revenue Authority (KRA) on the bank's write‑off of bad debts. The tax demand, which stemmed from KRA’s interpretation that the write‑off should be treated as taxable income, was dismissed by the tax tribunal after the bank argued that the debts were irrecoverable. The tribunal’s decision, reported by Business Daily, means the bank will not have to pay the disputed amount and will recover the cash it had set aside for the liability. This ruling marks a significant win for the banking sector, which has long argued that taxing bad‑debt write‑offs creates a double burden.

Context and background

I&M Bank, one of Kenya’s leading commercial banks, has a loan portfolio that includes corporate, SME and retail lending. Over recent years, the bank, like many of its peers, has faced a rise in non‑performing loans (NPLs) due to economic pressures such as higher interest rates and supply‑chain disruptions. When a loan is deemed unrecoverable, banks typically write it off as a loss, which reduces their taxable profit under normal accounting practice. However, KRA has, in several cases, taken the position that the write‑off represents a gain and should be subject to income tax.

The dispute arose after KRA issued a notice demanding Sh713 million from I&M Bank, asserting that the bank’s write‑off of a specific tranche of bad debts should be added back to its taxable income for the relevant fiscal year. I&M Bank contested the notice, arguing that the debts were genuinely unrecoverable and that the tax demand contradicted the Income Tax Act provisions that allow for deductions on bad‑debt write‑offs. The bank filed an appeal with the tax tribunal, presenting evidence of the borrowers’ insolvency, the bank’s recovery efforts, and the standard accounting treatment for such losses.

The tax tribunal, after reviewing the submissions and hearing oral arguments, ruled in favour of I&M Bank. The decision underscored that the bank had complied with the statutory requirements for recognising a bad‑debt loss and that KRA’s assessment was inconsistent with established tax law. Business Daily highlighted that the ruling could set a precedent for other financial institutions that are grappling with similar tax assessments. The case also reflects ongoing tension between the banking sector and the revenue authority over the interpretation of tax rules related to loan impairments.

Compared with what is normal

In Kenya, tax disputes involving bad‑debt write‑offs are not uncommon, but the amounts involved vary widely. Historically, banks have faced assessments ranging from a few million shillings to over Sh1 billion, depending on the size of the loan portfolio and the extent of the write‑offs. The Sh713 million figure in this case sits near the higher end of typical disputes, reflecting the scale of I&M Bank’s exposure. Compared with previous rulings, the tribunal’s decision aligns with a growing body of case law that recognises the legitimacy of bad‑debt deductions when proper procedures are followed.

• Typical tax assessments on bad debts: usually between Sh50 million and Sh500 million for mid‑size banks.
• Previous tribunal outcomes: many have upheld banks’ positions, but a minority have sided with KRA, leading to payments of up to Sh1.2 billion.
• Impact of this ruling: places the Sh713 million dispute at the upper‑mid range, signalling that large‑scale write‑offs can be defended successfully.

Why it matters

The tribunal’s decision has immediate financial implications for I&M Bank, freeing up Sh713 million that would otherwise have been paid to the treasury. For the bank’s balance sheet, the relief improves capital adequacy ratios, which are closely monitored by the Central Bank of Kenya. Moreover, the ruling sends a clear signal to other lenders that the tax authority’s stance on bad‑debt taxation can be challenged, potentially reducing the risk of future large‑scale assessments. For Kenyan SMEs and borrowers, the outcome may translate into more willingness from banks to restructure or write off distressed loans, knowing that such actions will not automatically trigger hefty tax bills.

Beyond the banking sector, the case highlights the importance of robust documentation and compliance when dealing with non‑performing assets. Companies in other industries that write off bad debts can look to this precedent when negotiating with KRA, especially if they can demonstrate that the debts are genuinely unrecoverable. The decision also reinforces the role of the tax tribunal as an avenue for resolving disputes without resorting to prolonged litigation, which can be costly for both taxpayers and the revenue authority.

Practical steps

• 1. Review your loan or receivable portfolio to ensure that any write‑offs are fully documented, including evidence of collection attempts and borrower insolvency.
• 2. Align your accounting treatment with the Income Tax Act provisions, seeking clarification from a qualified tax adviser if there is any doubt about deductibility.
• 3. If you receive a tax assessment on a bad‑debt write‑off, consider filing an appeal promptly, attaching all supporting documentation to demonstrate compliance.
• 4. Keep abreast of recent tribunal rulings, such as the I&M Bank case, to understand how the courts are interpreting the law and to adjust your tax risk management strategy accordingly.

Beavoren Ventures offers a specialised Tax Planning & Compliance service that can help businesses navigate complex tax disputes, ensure proper documentation of bad‑debt write‑offs, and represent clients in appeals before the tax tribunal.

Need help with compliance? Email info@beavorenventures.co.ke or call +254 716 296 857.

Disclaimer: This article is informational and does not constitute formal tax, audit or legal advice. For guidance specific to your circumstances, please contact Beavoren Ventures.