Car & General (C&G), a diversified Kenyan firm listed on the Nairobi Securities Exchange (NSE), is embroiled in a tax dispute with the Kenya Revenue Authority (KRA).

The company disclosed in its latest annual report that KRA issued three separate tax demands totalling Sh468 million (US$4.2 million) for the year ending December 2023.

This comes amidst a period of financial strain for C&G, which reported a net loss of Sh273.7 million (US$2.5 million) during the same period.

The loss stemmed from a combination of factors, including Sh826 million (US$7.4 million) in foreign exchange and demurrage costs.

Tax Disputes:

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The crux of the tax disagreements centres on the classification of import duties for C&G's three-wheeler business (tuk tuks) and transfer pricing practices of its subsidiary, Cummins C&G Limited.

Tuk Tuk Tariff Classification: KRA initially demanded Sh677 million (US$6.1 million) in back taxes related to the import duties on tuk tuks between 2015 and 2021.

C&G contested this assessment, and after a series of legal battles, KRA withdrew the claim.

However, they issued a fresh demand of Sh224 million (US$2 million) for the period between January 2022 and January 2023, citing the same product classification issue.

Transfer Pricing Audit: KRA conducted a transfer-pricing audit on C&G's subsidiary, Cummins C&G Limited, and issued an additional income tax assessment of Sh109 million (US$1 million) for 2017 and Sh135 million (US$1.2 million) for the years 2018 to 2021.

C&G disputes these assessments as well. Both parties have submitted their cases to the Tax Appeals Tribunal for a ruling.

Cummins C&G Acquisition:

Adding another layer of complexity, C&G acquired the remaining 50 per cent stake in Cummins C&G Holdings Limited, formerly a joint venture with CMI Africa Holdings BV, in June 2023.

This acquisition contributed Sh112 million (US$1 million) to C&G's profit for the period between the acquisition and the reporting date.

C&G estimates that full-year group revenue and profit would have been significantly higher if the acquisition had been completed earlier.

Shifting Gears:

C&G also reported a shift in its financial year-end from September to December 2023.

This resulted in a 15-month reporting period, leading to a net loss compared to the Sh679.46 million (US$6.1 million) net profit reported in the previous 12-month period.

Looking Forward:

C&G faces a period of uncertainty with ongoing tax disputes and a recent acquisition.

The motorcycle business, a key segment, also faces challenges due to rising fuel prices and inflation.

The company's performance in the coming year will hinge on the resolution of these issues and its ability to navigate the current economic climate.