' REPUBLIC OF KENYA
IN THE HIGH COURT OF KENYA AT NAIROBI MILIMANI COMMERCIAL & TAX DIVISION
INCOME TAX APPEAL NO. E191 OF 2023 (CONSOLIDATED WITH ITA NO. E207 OF 2023)
(CORAM: CHARLES KARIUKI – J)
BAKER HUGHES EHO LIMITED (K)……………………….APPELLANT
-VERSUS-
COMMISSIONER OF LEGAL SERVICES &
BOARD COORDINATION………………………………….RESPONDENT
JUDGEMENT
BACKGROUND
The Appellant is a company registered in Kenya under the Companies Act. And a registered taxpayer. The Respondents is a principal officer appointed under the Kenya Revenue Authority Act, Cap 460 Laws of Kenya. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all revenue. Further, under Section 5(2) of the Act with respect to the performance of its function under subsection (1). The Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 & 2 of the First Schedule for the Act for the purpose of assessing, collecting and accounting for all revenues per those laws.
The Respondent by a Letter dated 1 st May 2020 notified the Appellant of ongoing investigations into its tax affairs. The letter told that from the Appellant’s bank statements. proforma invoices copies and swift transfer copies it appeared to the Respondent that the Appellant took part in the business of importing mobile phones and reselling the tame in Kenya.
The Respondent states that in the years 2018 and 2019 the Appellant sent out through its Equity account Kshs. 192,021.513.00 to various companies in Hong Kong, Taiwan, India and Dubai to buy mobile phones. The Respondent states further that the same Equity account received the rum of Kshs. 192,688,093.00 in the form of cash and cheque deposits from the Appellant''s clients.
The Respondent communicated to the Appellant that these facts shown that the Appellant was in the business of importing goods. making supplies and earning income without filing tax returns.
The Respondent asked for an explanation on the tax infringements and the Appellant submitted contracts between it and 4 Chinese companies indicating that the Appellant was a commission agent through whom consumers in Kenya bought mobile phones and that the Appellant was paid a commission of 0.5% of the remittances.
On 1 st August 2021 the Respondent calculated the Appellant''s Corporation tax, VAT and custom duties at Kshs. 80,682,940.00.
The Appellant objected to the same in its notice of Objection of 30 th April 2021.
The Respondent confirmed its assessment in its Objection Decision of 16 th August 2021 for Kshs. 86,890,940.00 and the Appellant being aggrieved by the same filed the Appeal before the Tribunal.
The Tribunal after hearing the parties made a finding that the Appellant did not provide material information for the Respondent to find the taxes payable on its part and to that extent the Respondent appropriately resorted to alternative information for taxation. The Tribunal found that the Respondent did not misapply the law in making the assessments in issue. Therefore, tribunal held that the Appeal lacked merit. and made the orders dismissing the appeal. The Respondent''s objection decision dated 16th August 2021 confirmed and upheld the tax assessment for the sum of Kshs. 86,890.803.00 inclusive of penalties and interest and parties to bear their own costs.
The appellant, being aggrieved by the said verdict appealed and mounted 20 grounds.
The decision of the Tribunal is bad in law for purporting to uphold an Objection Decision which was issued outside the sixty (60) day statutory timeline. The Objection Decision was irredeemably invalid for contravening Section 51 (11) of the Tax Procedures Act.
The decision of the Tribunal is bad in law as it purported to uphold the Respondent’s amended assessments for the years of income 2015 and 2016 which was time barred by operation of Section 31 of the Tax Procedures Act having been issued outside the five (5) year statutory limit. The assessments in respect of the period prior to the year 2017 was in the circumstances contra statute.
The Tribunal erred in law in faulting the Appellant for failing to provide documents relating to the period 2015 and 2016 which were outside the five (5) year period that the Appellant was required to keep documents in accordance with Section 23 of the Tax Procedures Act.
The Tribunal errored in failing to consider that the withholding tax assessment with respect to the period 9th June 2016 to 7th November 2019 is without legal basis and is contrary to Article 210 of the Constitution.
The Tribunal erred in law in failing to find that the Appellant is a non-resident company and therefore not subject to deemed interest provisions under the Income Tax Act.
The Tribunal erred in failing to consider the totality of the evidence provided by the Appellant and thereby arrived at the erroneous conclusions that the Appellant had not provided evidence and/or sufficient evidence to challenge the assessment. In so doing, the Tribunal placed an unreasonably high burden of proof on the Appellant.
The Tribunal erred in law in disregarding or failing to consider the totality of the documents and evidence provided by the Appellant and erroneously found that the Appellant did not provide documents to challenge the assessment and further erroneously finding that the Respondent was justified in using its best judgement in raising its assessment on inter-company costs.
The Tribunal erred in law in upholding the Respondent’s assessment on intercompany rental costs on the basis that the Appellant failed to produce documents to support the transactions. This finding was erroneous because:
The Tribunal failed to consider the evidence provided by the Appellant as proof that the tools were rented from Baker Hughes Netherlands and as such the Appellant could not have the purchase invoices in its possession;
The Tribunal failed to consider that the Respondent’s request for Baker Hughes Netherland’s financial statements was unreasonable and contrary to Section 59 of the Tax Procedures Act;
The Tribunal failed to consider the fact that the benchmarking analysis advanced by the Respondent was erroneous as it was based on overall financial data of all of the Appellant’s business segments rather than the intercompany subleasing activity; and
The Tribunal failed to consider the fact that the assessment by the Respondent was based on revenue data from the Appellant’s Completions, Cementing and Drilling Bits business segments instead of revenue data from the Appellant’s intercompany subleasing activity. The tools under the Completions, Cementing and Drilling Bits business segments are owned by the Appellant and not leased from Baker Hughes Netherlands
The Tribunal erred in law by disregarding the reconciliations provided by the Appellant on wear and tear variances assessed by the Respondent and thereby arrived at the erroneous finding that the Respondent was justified in disallowing the wear and tear costs.
The Tribunal erred in law in disregarding the Appellant’s explanations on wear and tear claimed on “leased assets” that had been disallowed by the Respondent and thereby arrived at an erroneous conclusion that the Respondent was justified in disallowing the wear and tear costs.
The Tribunal erred in law in failing to consider the evidence produced by the Appellant supporting the correct tax treated of scrap assets write-off that had been disallowed by the Respondent.
The Tribunal erred in law in failing to consider the evidence produced by the Appellant in support of the provisions of obsolescence and thereby arrived at an erroneous finding that the Respondent was justified in disallowing the provisions for obsolescence.
The Tribunal erred by failing to find that \the amounts deducted in respect to obsolete inventory was justified due to the global recession in the oil and gas industry and was therefore an expense wholly and exclusively incurred in the generation of the company’s income in accordance with Section 15 of the Income Tax Act.
The Tribunal erred in law by failing to find that the amounts deducted as bad debts written off met the conditions under section 15 of the Income Tax Act and Legal Notice No. 37 of 2011.
The Tribunal erred in law in failing to consider the explanations, breakdown of expense items, and Ledger extracts provided by the Appellant which demonstrated that there were no management support services provided by Baker Hughes SAS and as a result, wrongly concluded that the Respondent was justified in disallowing the amounts claimed as inter-company management fees.
The Tribunal erred in law in finding that the documents provided by the Appellant did not meet the OECD guidelines for Transfer Pricing. This finding by the Tribunal was erroneous because there were no management support services provided by Baker Hughes SAS and accordingly the OECD Transfer Pricing guidelines for intragroup services were not applicable.
The Tribunal erred in law in finding that the Respondent was justified in disallowing the forex exchange gains and losses claimed by the Appellant. This finding is erroneous as it disregarded the Appellant’s explanations and computations setting out the correct tax position for the foreign exchange gains and losses.
The Tribunal erred in law by disregarding the evidence provided by the Appellant to the effect that the costs associated with written off scrap assets were in fact disallowed by the Appellant in its returns. The confirmation of the assessment subjects the Appellant to double taxation contrary to Section 210 of the Constitution.
The Tribunal misinterpreted law in finding that time-barred input VAT claims is a non- deductible expense under Section 16(2)(c) of the Income Tax Act.
The decision appealed against is to the extent set out herein wrong in law and unjust in effect and therefore ought to be set aside.
APPELLANT CASE AND SUBMISSIONS
APPELLENT''S CASE:
The Appellant''s case is premised on the Statement of facts filed on 15th September 2021 and Written Submis5ions filed on 27''° June 2022.The Appellant was dissatisfied with the Respondent''s objection decision of 16th August 202s and demand for the payment of Kshs. 86,890.803.00.
The Appellant avers that its business is that of a commission agent whose role is to ease Collection and remittances of payments from the importers of mobile phones and accessories to companies based in Asia. It earns a commission of 0.5% of the value of the remittances for the service. The support of this assertion is in the Agreements provided to the Respondent.
On 15 th May 2020 the Appellant received a Notice from the Respondent on ongoing investigations into its tax affairs and it responded to the same through a letter dated 4 th June 2020 explaining its nature of business. The Respondent requested further documents vide a letter dated 7 th October 2020 and fixed a meeting wherein it supplied the requested documents to prove the nature of its business. The Respondent then issued a notice of assessment dated 1 st April 2021 at Kshs.80.682.940.00. The Appellant lodged a Notice of Objection to the assessment vide a Letter dated 30 th April 2021. The grounds in the same said precisely that the Appellant had no tax obligation related to importation. There was further correspondence between the parties that culminated in the Objection Decision dated 16 th August 2021 that told further that the evidence provided by the Appellant was insufficient.
The Respondent argues that its nature of work was solely that of a Commission agent and relies on Halsbury Law of England 4 th Ed. Vol.1{2) Para. 19 and 20 where it is told that a principal agency relationship is created by the express implied agreement of the parties or by ratification by the principal of the agent''s acts done on its behalf. It also relies on several cases to support the principal/agency relationship establishment. The cases include Julius Mwema Nyuguto vs. Anne Wairimu Gitogenin [20191 elk: KRA VS Man Diesel and Turbo Se [2021] e KLR and Sita Information Networking Computing BV vs. The Commissioner of Domestic Taxes [TAT case No.45 of 2015] .
The Appellant further argues that the treatment of the Appellant''s bank swift transfers as company purchases was mistaken, unreasonable, illegal and unlawful as the same disregarded the Appellant''s nature of business. The Appellant relies on the provisions of Section 54(A) (1) of ITA but adds that it’s not bound by the requirements off that Section due to the nature of Its business.
The Appellant also argues that Respondent baselessly applied the 11:22% “Industry/Startup” on the Appellant''s swift remittances as the Appellant does not engage in the business of importation of electronics and mobile phones as alleged by the Respondent. It relies on the case of R vs. Kenya Revenue Authority Exported Jaffer Mujtab Mohammed [2015] e KLR were. The High Court held that:
“A faxing Lithotrity is not entitled to pluck a figure from the air ......and not another figure. Such action would be arbitrary, capricious and bad faith. It would be an unreasonable exercise our poser and discretion and that son/o’/u/// he Court in intervening”.
It further adds that the Respondent''s assessment was premised on error of facts. Let state that the swift transfer whatsoever made to buy mobile phones as alleged by the Respondent and the same was not an income of the Respondent from the sale of mobile phones but payment from importers for orders to be remitted by the Appellant. The cost of sales and the consequent gross profit quoted were therefore not factual but based on mistaken sanctions.
The Appellant also submits that the Respondent did not consider the evidence and documents supplied by the Appellant. It refers to the Commission agreements tendered vide the letter dated 7 th October 2020.
The Appellant further submits that the Respondent''s request for documents vide its letter dated 18 th May 2021 including list of importers of mobile phones in Kenya. instructions from suppliers in Asia and agreements between the Appellant and the mobile phones importers in Kenya was farfetched and unreasonable in view of the provisions of Sections 23, 30 and 51(1) of the TPA.
The Appellant also submits that the Respondent erred in increasing the tax in the final Objection Decision. On 1 st April 2021, the Respondent issued a Notice of Assessment to the Respondent demanding Kshs.80,682.940.00 to which the Appellant objected. The Respondent issued the final decision dated 16’h August 202a demanding for Kshs.86,890.803.00. The Appellant relies on the provisions of Section II (8) of the TPA nod states that based on the same the Objection Decision must be limited to the objected amount, which is Kshs.80,682.940.00 contained in the letter of 1st April 2020.
The Appellant also argues that its service is an exported service and thus is zero rated. The Appellant also argues that it provides services which are consumed outside Kenya and therefore its services are zero rated. It tells that it has no relationship with the Kenyan mobile phone importers but only makes services to the suppliers in China.
SUBMISSIONS:
The appellant submits that, the statutory timeline within which the Respondent ought to issue an objection decision is set out in Section 51 (11) of the Tax Procedures Act (“the TPA”). At the time, Section 51(11) provided as follows:(11) The Commissioner shall make the objection decision within sixty days from the date of receipt of—the notice of objection; or any further information the Commissioner may need from the taxpayer, failure to which the objection shall be allowed.
The Appellant filed its notice of objection on 2 nd March 2022. The Respondent misdirected the Tribunal and had incorrectly captured the date at which the objection was filed as 27 th May 2022, which position the Tribunal erroneously reproduced in its decision.
The Respondent had sixty days from 2nd March 2022 or the date it requested more information from the Appellant to issue its objection decision. There were no other information requests from the Respondent and as such, the Respondent was allowed by law to issue his objection decision on or before 1st May 2022, failure to which the objection shall be reconsidered be allowed.
A reading of Section 51(11) clearly shows that where the Respondent does not issue an objection decision within sixty days from the date of the objection, the objection filed by the Appellant was allowed by operation of law.
In this matter, the Respondent issued its objection decision on 30 th August 2022, 180 days from the date the Appellant filed its objection. The effect of an objection decision being issued outside the statutory timelines is that the taxpayer’s objection is allowed by operation of law. See - In Equity Group Holdings Limited v Commissioner of Domestic Taxes (Civil Appeal E069 & E025 of 2020) [2021] KEHC 25 (KLR Republic v Kenya Revenue Authority Ex Partee M-Kopa Kenya Limited [2018] elk, Vivo Energy Kenya Limited v Commissioner of Customs & Border Control, Kenya Revenue Authority & another [2020].
The upshot of the above is the Respondent’s objection was allowed by operation of the law and the assessment ought to be quashed.
GROUND 2:
WHETHER THE RESPONDENT’S WHT ASSESSMENTS FOR 2015 AND 2016 WERE TIME BARRED FOR HAVING BEEN ISSUED OUTSIDE THE FIVE-YEAR STATUTORY LIMIT
Section 31(4)(b)(I) of the TPA states that the Commissioner may amend a taxpayer’s self- assessment within five years from the date that the taxpayer gave the self-assessment return.
Different taxes have different tax periods. For example, income tax returns for a year of income are filed yearly. On the other hand, taxes such as withholding tax (WHT), Value Added Tax, Excise duty and pay as you Earn have monthly reporting periods. See Nakuru Cement Supplies Limited v Commissioner of Investigations and Reinforcement (Tax Appeal E038 of 2021) [2022] KEHC 16518 (KLR), Commissioner of Domestic Taxes v Airtel Networks Kenya Limited (Income Tax Appeal E062 of 2022) [2023] KEHC 25059 (KLR), , Stefanutti Stocks Kenya Limited v Commissioner of Domestic Taxes (Tax Appeal E117 of 2021) [2023] KEHC 2322 (KLR).
It is submitted that once 5 years from the date a self-assessment is made has lapsed, the Respondent has no power or discretion to demand or collect taxes for the period outside the said time limit. So, the WHT assessments for 2015 and 2016 amounting to Kshs. 16,401,425 and Kshs. 64,525,603 were statutorily time-barred and should be vacated in their entirety.
GROUND 3.
WHETHER THE TRIBUNAL ERRED IN LAW IN FAULTING THE APPELLANT FOR FAILING TO PROVIDE DOCUMENTS RELATING TO 2015 AND 2016 WHICH WERE OUTSIDE THE FIVE (5) YEAR STATUTORY PERIOD THAT THE APPELLANT WAS REQUIRED TO KEEP DOCUMENTS AS PROVIDED FOR IN SECTION 23 OF THE TAX PROCEDURES ACT
Paragraph(s) 59 and 60 of its judgement (Page 402 to 403 of the Record), the Tribunal faulted the Appellant for not providing documents that supported its transactions. Based on this finding, the Tribunal held that the Respondent’s tax assessment based on its best judgement was justified.
The Appellant submits that the Tribunal misinterpreted Section 23 of the TPA. Section 23(1) of the TPA below as follows: -
“(1) A person shall—
claim any document required under a tax law, in either of the official languages.
claim any document required under a tax law to enable the person''s tax liability to be readily found; and
subject to subsection (3), keep the document for a period of five years from the end of the reporting period to which it relates, or such shorter period as may be specified in tax law.”
The Tribunal ignored the provisions of Section 23(1)(c) of the TPA, which provide that the taxpayer should retain documents for five years from the end of the reporting period to which it relates, or a shorter period as may be specified in a tax law. The term “reporting period” is defined in Section 2 of the TPA as:
for income tax, the year of income or, when section 27 of the Income Tax Act applies, the accounting period of the taxpayer.
for withholding tax under the Income Tax Act, the period for which the deduction of tax relates.
a) the income tax assessments
In relation to the income tax assessments, the term year of income is defined in Section 2 of the Income Tax Function as the period of twelve months beginning on 1st January in any year and ending on 31st December in that year. Section 27 of the Income Tax Act does not apply in this case, as the Appellant’s year ends is December and coincides with the year of income.
The income tax assessments that were the subject matter before the Tribunal were for the periods 1st January 2015 – 31st December 2017. For the years of income 2015 and 2016, the Appellant only had to keep December 2020 and 31st December 2021.
b) the withholding tax assessments
With respect to WHT, the reporting period is monthly, which means that for the entire 2015 and 2016 years, the Appellant similarly only had to keep December 2020 and 31st December 2021 for the 2015 and 2016 years, respectively.
The tax assessment that forms the subject matter of this dispute was issued by the Respondent on 4th February 2022, which is outside the statutory period within which the Appellant had to keep poses.
The statutory period for which the Appellant had to retain dokeep2015 and 2016 had however lapsed before the Respondent issued its tax assessment.
The Appellant submits that the Tribunal error in finding that the Appellant had to keep records of its documents for 2015 and 2016 since the statutory period for retention of documents that supported the demands for 2015 and 2016 had lapsed on 31st December 2020 and 31st December 2021.See Republic v Commissioner of Domestic Taxes (Large Taxpayers Office) Ex- Partee Unilever Tea Kenya Limited [2017] elk, Commissioner of Domestic Taxes v Airtel Networks Kenya Limited (Income Tax Appeal E062 of 2022) [2023] KEHC 25059 (KLR) the Court found that the Taxpayer is absolved of the burden of maintaining records after five years from the end of a reporting period.
In view of the foregoing, it is our submission that the Tribunal erred in finding that the Appellant had to keep keeps beyond the five-year period provided by statute. This finding is unfair, arbitrary and runs contrary to Section 23 of the TPA. We therefore urge this Honorable Court to quash the Tribunal’s decision.
GROUND 4.
WHETHER THE TRIBUNAL ERRED IN LAW IN FAILING TO CONSIDER THAT THE WITHHOLDING TAX ASSESSMENT WITH RESPECT TO THE PERIOD 9TH JUNE 2016 TO 7TH NOVEMBER 2019 LACKS A LEGAL BASIS
Section 35 of the Income Tax Act places an obligation on a person making payment of amounts which are subject to withholding tax to deduct and remit withholding tax to the Commissioner at the prescribed resident or non-resident rates.
Before 9 th June 2016, the Income Tax Act under Section 35(6) empowered the Commissioner in instances where a taxpayer did not withhold tax when making payments to recover the withholding tax from the person making the payment as follows:
“35 (6) Where a person who is required under this section, by the rules made under section 130 to deduct tax:
does not make the deduction or does not deduct the whole amount of the tax which he should have deducted; or
does not remit the amount of deduction to the Commissioner on or before the twentieth day following the month in which the deduction was made or ought to have been made.
the Commissioner may impose such penalty as may, from time to time, be prescribed under the rules, and the provisions of this Act relating to the collection and recovery of tax and the payment of interest thereon, shall apply to the collection and recovery of that amount of tax and penalty as if they were tax due and payable by that person and the due date for the payment of which was the date on which the amount of tax should have been remitted to the Commissioner.”
The Finance Act 2016 repealed this provision with effect from 9th June 2016. Once Section 35 (6) of the Income Tax Act was repealed, there was no legal basis for the Respondent to demand payment of withholding tax from the Bank for alleged failure to withhold for the period 9th June 2016 to 7th November 2019. The deletion of section 35 (6) of the ITA meant that effective 9th June 2016, where a person did not deduct or remit the WHT from any payment made, the Commissioner had no statutory power to demand WHT from the payer.
This was the position until a similar provision was reintroduced into the law by Section 29 of the Finance Act 2019 with effect from 7 th November 2019. The provision that was introduced is section 39A of the TPA which provides as follows:
“Where a person who is required under a tax law to deduct or withhold tax and remit the tax to the Commissioner fails to do so, the provisions of this Act relating to the collection and recovery of tax, and the payment of penalties and interest thereon, shall apply to the collection and recovery of that tax not deducted or withheld as if it were tax due and payable by that person and the due date for the payment shall be the date on which the amount of tax should have been remitted to the Commissioner.”
The demand for withholding tax in the absence of a legal provisions is therefore contrary to the provisions of Article 210 (1) of the Constitution of Kenya which provides that no tax may be imposed, waived, or varied except as provided by legislation. See Commissioner of Domestic Taxes v Pecans East Africa Limited & 6 others (Tax Appeal E003 of 2019) [2022] where the Court held that:
“I agree with the Tribunal that prior to 2016, section 35(6) of the ITA provided that the commissioner could claim taxes from a player who does not make a deduction as though the taxes were due from them. However, the amendment introduced by the Finance Act, 2016 deleted the said section 35(6) of the ITA meaning that the Commissioner could no longer demand taxes not withheld from the person who should have withheld the same and that this position remained until the enactment of the Finance Act, 2019 came into force on November 7, 2019 when the previously deleted provisions of section 35(6) of the ITA were now reintroduced and reproduced as a new section 39A under the TPA .Consequently, I therefore find and hold that during the subject years of 2018 and 2019, the Commissioner could not collect the WHT that ought to have been deducted by the Respondents from the punters and that all the Commissioner could do was seek the same from the punters directly.”
GROUND 5.
WHETHER THE TRIBUNAL ERRED IN LAW IN FAILING TO FIND THAT THE APPELLANT IS A NON-RESIDENT COMPANY AND THEREFORE NOT SUBJECT TO DEEMED INTEREST PROVISIONS UNDER THE INCOME TAX ACT
This issue relates to the Tribunal’s findings at paragraph’s 118 to 122 of the Tribunal’s decision (Page 416 of the Record) where the Tribunal found that the Appellant is a resident company and as such, deemed interest and withholding tax on deemed interest apply to interest free advances from the Appellant’s related parties.
It is an uncontroverted fact that the Appellant is a branch of Baker Hughes EHO Limited, a company incorporated in Bermuda. A copy of the Appellant’s certificate of compliance is attached at Page 296 of the Record.
A resident company is defined under Section 2 of the Income Tax Function as follows:
“resident” in relation to a body of persons, means.
that the body is a company incorporated under a law of Kenya; or
that the management and control of the affairs of the body was exercised Kenya in a particular year of income under consideration; or
iii. that the body has been declared by the Minister, by notice in the Gazette, to be resident in Kenya for any year of income.
A branch is, however, a permanent establishment of a non-resident company and is considered non-resident for tax in Kenya. Section 2(1) of the Income Tax Act defines the term permanent establishment to include inter alia, a fixed place of business through which business is wholly or partly carried on and includes a place of management, a branch, an office, a factory, a workshop….
A branch is non-resident and unambiguous evidence of this is that a company incorporated in Kenya would pay corporate income tax at the resident tax rate of 30% and a Branch, would pay corporate income tax at the non-resident rate of 37.5%.
From the definition of the term considered interest in Section 2 of the Income Tax A considered interest only applies to bodies that are considered tax resident in Kenya. Section 2 of the ITA defines considered interest as follows:
“Deemed interest” means an amount of interest equal to the average ninety-one-day Treasury Bill rate, considered to be payable by a resident person in respect of any outstanding loan provided or secured by the non-resident, where such loan is provided free of interest”
The Tribunal made a grave error and misdirected itself at paragraph 120 of its judgement in finding that a Branch of a foreign company is incorporated in Kenya. Section 3 of the Companies Act, 2015 defines a foreign company as a company incorporated outside Kenya. Branches of foreign companies are foreign companies that are incorporated outside Kenya but registered in Kenya. This is why Branch companies are granted certificates of compliance and not certificates of incorporation.
From the definition of considered interest, Clearent that considered interest only applies to residents.
In addition, Section 10(1)(ii) of the Income Tax Act specifically provides that WHT shall not apply for any payments made to its head office. We reproduce Section 10 below:
“10. Income from management or professional fees, royalties, interest and rents
1) For the purposes of this Act,
[...truncated]
IN THE HIGH COURT OF KENYA AT NAIROBI MILIMANI COMMERCIAL & TAX DIVISION
INCOME TAX APPEAL NO. E191 OF 2023 (CONSOLIDATED WITH ITA NO. E207 OF 2023)
(CORAM: CHARLES KARIUKI – J)
BAKER HUGHES EHO LIMITED (K)……………………….APPELLANT
-VERSUS-
COMMISSIONER OF LEGAL SERVICES &
BOARD COORDINATION………………………………….RESPONDENT
JUDGEMENT
BACKGROUND
The Appellant is a company registered in Kenya under the Companies Act. And a registered taxpayer. The Respondents is a principal officer appointed under the Kenya Revenue Authority Act, Cap 460 Laws of Kenya. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all revenue. Further, under Section 5(2) of the Act with respect to the performance of its function under subsection (1). The Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 & 2 of the First Schedule for the Act for the purpose of assessing, collecting and accounting for all revenues per those laws.
The Respondent by a Letter dated 1 st May 2020 notified the Appellant of ongoing investigations into its tax affairs. The letter told that from the Appellant’s bank statements. proforma invoices copies and swift transfer copies it appeared to the Respondent that the Appellant took part in the business of importing mobile phones and reselling the tame in Kenya.
The Respondent states that in the years 2018 and 2019 the Appellant sent out through its Equity account Kshs. 192,021.513.00 to various companies in Hong Kong, Taiwan, India and Dubai to buy mobile phones. The Respondent states further that the same Equity account received the rum of Kshs. 192,688,093.00 in the form of cash and cheque deposits from the Appellant''s clients.
The Respondent communicated to the Appellant that these facts shown that the Appellant was in the business of importing goods. making supplies and earning income without filing tax returns.
The Respondent asked for an explanation on the tax infringements and the Appellant submitted contracts between it and 4 Chinese companies indicating that the Appellant was a commission agent through whom consumers in Kenya bought mobile phones and that the Appellant was paid a commission of 0.5% of the remittances.
On 1 st August 2021 the Respondent calculated the Appellant''s Corporation tax, VAT and custom duties at Kshs. 80,682,940.00.
The Appellant objected to the same in its notice of Objection of 30 th April 2021.
The Respondent confirmed its assessment in its Objection Decision of 16 th August 2021 for Kshs. 86,890,940.00 and the Appellant being aggrieved by the same filed the Appeal before the Tribunal.
The Tribunal after hearing the parties made a finding that the Appellant did not provide material information for the Respondent to find the taxes payable on its part and to that extent the Respondent appropriately resorted to alternative information for taxation. The Tribunal found that the Respondent did not misapply the law in making the assessments in issue. Therefore, tribunal held that the Appeal lacked merit. and made the orders dismissing the appeal. The Respondent''s objection decision dated 16th August 2021 confirmed and upheld the tax assessment for the sum of Kshs. 86,890.803.00 inclusive of penalties and interest and parties to bear their own costs.
The appellant, being aggrieved by the said verdict appealed and mounted 20 grounds.
The decision of the Tribunal is bad in law for purporting to uphold an Objection Decision which was issued outside the sixty (60) day statutory timeline. The Objection Decision was irredeemably invalid for contravening Section 51 (11) of the Tax Procedures Act.
The decision of the Tribunal is bad in law as it purported to uphold the Respondent’s amended assessments for the years of income 2015 and 2016 which was time barred by operation of Section 31 of the Tax Procedures Act having been issued outside the five (5) year statutory limit. The assessments in respect of the period prior to the year 2017 was in the circumstances contra statute.
The Tribunal erred in law in faulting the Appellant for failing to provide documents relating to the period 2015 and 2016 which were outside the five (5) year period that the Appellant was required to keep documents in accordance with Section 23 of the Tax Procedures Act.
The Tribunal errored in failing to consider that the withholding tax assessment with respect to the period 9th June 2016 to 7th November 2019 is without legal basis and is contrary to Article 210 of the Constitution.
The Tribunal erred in law in failing to find that the Appellant is a non-resident company and therefore not subject to deemed interest provisions under the Income Tax Act.
The Tribunal erred in failing to consider the totality of the evidence provided by the Appellant and thereby arrived at the erroneous conclusions that the Appellant had not provided evidence and/or sufficient evidence to challenge the assessment. In so doing, the Tribunal placed an unreasonably high burden of proof on the Appellant.
The Tribunal erred in law in disregarding or failing to consider the totality of the documents and evidence provided by the Appellant and erroneously found that the Appellant did not provide documents to challenge the assessment and further erroneously finding that the Respondent was justified in using its best judgement in raising its assessment on inter-company costs.
The Tribunal erred in law in upholding the Respondent’s assessment on intercompany rental costs on the basis that the Appellant failed to produce documents to support the transactions. This finding was erroneous because:
The Tribunal failed to consider the evidence provided by the Appellant as proof that the tools were rented from Baker Hughes Netherlands and as such the Appellant could not have the purchase invoices in its possession;
The Tribunal failed to consider that the Respondent’s request for Baker Hughes Netherland’s financial statements was unreasonable and contrary to Section 59 of the Tax Procedures Act;
The Tribunal failed to consider the fact that the benchmarking analysis advanced by the Respondent was erroneous as it was based on overall financial data of all of the Appellant’s business segments rather than the intercompany subleasing activity; and
The Tribunal failed to consider the fact that the assessment by the Respondent was based on revenue data from the Appellant’s Completions, Cementing and Drilling Bits business segments instead of revenue data from the Appellant’s intercompany subleasing activity. The tools under the Completions, Cementing and Drilling Bits business segments are owned by the Appellant and not leased from Baker Hughes Netherlands
The Tribunal erred in law by disregarding the reconciliations provided by the Appellant on wear and tear variances assessed by the Respondent and thereby arrived at the erroneous finding that the Respondent was justified in disallowing the wear and tear costs.
The Tribunal erred in law in disregarding the Appellant’s explanations on wear and tear claimed on “leased assets” that had been disallowed by the Respondent and thereby arrived at an erroneous conclusion that the Respondent was justified in disallowing the wear and tear costs.
The Tribunal erred in law in failing to consider the evidence produced by the Appellant supporting the correct tax treated of scrap assets write-off that had been disallowed by the Respondent.
The Tribunal erred in law in failing to consider the evidence produced by the Appellant in support of the provisions of obsolescence and thereby arrived at an erroneous finding that the Respondent was justified in disallowing the provisions for obsolescence.
The Tribunal erred by failing to find that \the amounts deducted in respect to obsolete inventory was justified due to the global recession in the oil and gas industry and was therefore an expense wholly and exclusively incurred in the generation of the company’s income in accordance with Section 15 of the Income Tax Act.
The Tribunal erred in law by failing to find that the amounts deducted as bad debts written off met the conditions under section 15 of the Income Tax Act and Legal Notice No. 37 of 2011.
The Tribunal erred in law in failing to consider the explanations, breakdown of expense items, and Ledger extracts provided by the Appellant which demonstrated that there were no management support services provided by Baker Hughes SAS and as a result, wrongly concluded that the Respondent was justified in disallowing the amounts claimed as inter-company management fees.
The Tribunal erred in law in finding that the documents provided by the Appellant did not meet the OECD guidelines for Transfer Pricing. This finding by the Tribunal was erroneous because there were no management support services provided by Baker Hughes SAS and accordingly the OECD Transfer Pricing guidelines for intragroup services were not applicable.
The Tribunal erred in law in finding that the Respondent was justified in disallowing the forex exchange gains and losses claimed by the Appellant. This finding is erroneous as it disregarded the Appellant’s explanations and computations setting out the correct tax position for the foreign exchange gains and losses.
The Tribunal erred in law by disregarding the evidence provided by the Appellant to the effect that the costs associated with written off scrap assets were in fact disallowed by the Appellant in its returns. The confirmation of the assessment subjects the Appellant to double taxation contrary to Section 210 of the Constitution.
The Tribunal misinterpreted law in finding that time-barred input VAT claims is a non- deductible expense under Section 16(2)(c) of the Income Tax Act.
The decision appealed against is to the extent set out herein wrong in law and unjust in effect and therefore ought to be set aside.
APPELLANT CASE AND SUBMISSIONS
APPELLENT''S CASE:
The Appellant''s case is premised on the Statement of facts filed on 15th September 2021 and Written Submis5ions filed on 27''° June 2022.The Appellant was dissatisfied with the Respondent''s objection decision of 16th August 202s and demand for the payment of Kshs. 86,890.803.00.
The Appellant avers that its business is that of a commission agent whose role is to ease Collection and remittances of payments from the importers of mobile phones and accessories to companies based in Asia. It earns a commission of 0.5% of the value of the remittances for the service. The support of this assertion is in the Agreements provided to the Respondent.
On 15 th May 2020 the Appellant received a Notice from the Respondent on ongoing investigations into its tax affairs and it responded to the same through a letter dated 4 th June 2020 explaining its nature of business. The Respondent requested further documents vide a letter dated 7 th October 2020 and fixed a meeting wherein it supplied the requested documents to prove the nature of its business. The Respondent then issued a notice of assessment dated 1 st April 2021 at Kshs.80.682.940.00. The Appellant lodged a Notice of Objection to the assessment vide a Letter dated 30 th April 2021. The grounds in the same said precisely that the Appellant had no tax obligation related to importation. There was further correspondence between the parties that culminated in the Objection Decision dated 16 th August 2021 that told further that the evidence provided by the Appellant was insufficient.
The Respondent argues that its nature of work was solely that of a Commission agent and relies on Halsbury Law of England 4 th Ed. Vol.1{2) Para. 19 and 20 where it is told that a principal agency relationship is created by the express implied agreement of the parties or by ratification by the principal of the agent''s acts done on its behalf. It also relies on several cases to support the principal/agency relationship establishment. The cases include Julius Mwema Nyuguto vs. Anne Wairimu Gitogenin [20191 elk: KRA VS Man Diesel and Turbo Se [2021] e KLR and Sita Information Networking Computing BV vs. The Commissioner of Domestic Taxes [TAT case No.45 of 2015] .
The Appellant further argues that the treatment of the Appellant''s bank swift transfers as company purchases was mistaken, unreasonable, illegal and unlawful as the same disregarded the Appellant''s nature of business. The Appellant relies on the provisions of Section 54(A) (1) of ITA but adds that it’s not bound by the requirements off that Section due to the nature of Its business.
The Appellant also argues that Respondent baselessly applied the 11:22% “Industry/Startup” on the Appellant''s swift remittances as the Appellant does not engage in the business of importation of electronics and mobile phones as alleged by the Respondent. It relies on the case of R vs. Kenya Revenue Authority Exported Jaffer Mujtab Mohammed [2015] e KLR were. The High Court held that:
“A faxing Lithotrity is not entitled to pluck a figure from the air ......and not another figure. Such action would be arbitrary, capricious and bad faith. It would be an unreasonable exercise our poser and discretion and that son/o’/u/// he Court in intervening”.
It further adds that the Respondent''s assessment was premised on error of facts. Let state that the swift transfer whatsoever made to buy mobile phones as alleged by the Respondent and the same was not an income of the Respondent from the sale of mobile phones but payment from importers for orders to be remitted by the Appellant. The cost of sales and the consequent gross profit quoted were therefore not factual but based on mistaken sanctions.
The Appellant also submits that the Respondent did not consider the evidence and documents supplied by the Appellant. It refers to the Commission agreements tendered vide the letter dated 7 th October 2020.
The Appellant further submits that the Respondent''s request for documents vide its letter dated 18 th May 2021 including list of importers of mobile phones in Kenya. instructions from suppliers in Asia and agreements between the Appellant and the mobile phones importers in Kenya was farfetched and unreasonable in view of the provisions of Sections 23, 30 and 51(1) of the TPA.
The Appellant also submits that the Respondent erred in increasing the tax in the final Objection Decision. On 1 st April 2021, the Respondent issued a Notice of Assessment to the Respondent demanding Kshs.80,682.940.00 to which the Appellant objected. The Respondent issued the final decision dated 16’h August 202a demanding for Kshs.86,890.803.00. The Appellant relies on the provisions of Section II (8) of the TPA nod states that based on the same the Objection Decision must be limited to the objected amount, which is Kshs.80,682.940.00 contained in the letter of 1st April 2020.
The Appellant also argues that its service is an exported service and thus is zero rated. The Appellant also argues that it provides services which are consumed outside Kenya and therefore its services are zero rated. It tells that it has no relationship with the Kenyan mobile phone importers but only makes services to the suppliers in China.
SUBMISSIONS:
The appellant submits that, the statutory timeline within which the Respondent ought to issue an objection decision is set out in Section 51 (11) of the Tax Procedures Act (“the TPA”). At the time, Section 51(11) provided as follows:(11) The Commissioner shall make the objection decision within sixty days from the date of receipt of—the notice of objection; or any further information the Commissioner may need from the taxpayer, failure to which the objection shall be allowed.
The Appellant filed its notice of objection on 2 nd March 2022. The Respondent misdirected the Tribunal and had incorrectly captured the date at which the objection was filed as 27 th May 2022, which position the Tribunal erroneously reproduced in its decision.
The Respondent had sixty days from 2nd March 2022 or the date it requested more information from the Appellant to issue its objection decision. There were no other information requests from the Respondent and as such, the Respondent was allowed by law to issue his objection decision on or before 1st May 2022, failure to which the objection shall be reconsidered be allowed.
A reading of Section 51(11) clearly shows that where the Respondent does not issue an objection decision within sixty days from the date of the objection, the objection filed by the Appellant was allowed by operation of law.
In this matter, the Respondent issued its objection decision on 30 th August 2022, 180 days from the date the Appellant filed its objection. The effect of an objection decision being issued outside the statutory timelines is that the taxpayer’s objection is allowed by operation of law. See - In Equity Group Holdings Limited v Commissioner of Domestic Taxes (Civil Appeal E069 & E025 of 2020) [2021] KEHC 25 (KLR Republic v Kenya Revenue Authority Ex Partee M-Kopa Kenya Limited [2018] elk, Vivo Energy Kenya Limited v Commissioner of Customs & Border Control, Kenya Revenue Authority & another [2020].
The upshot of the above is the Respondent’s objection was allowed by operation of the law and the assessment ought to be quashed.
GROUND 2:
WHETHER THE RESPONDENT’S WHT ASSESSMENTS FOR 2015 AND 2016 WERE TIME BARRED FOR HAVING BEEN ISSUED OUTSIDE THE FIVE-YEAR STATUTORY LIMIT
Section 31(4)(b)(I) of the TPA states that the Commissioner may amend a taxpayer’s self- assessment within five years from the date that the taxpayer gave the self-assessment return.
Different taxes have different tax periods. For example, income tax returns for a year of income are filed yearly. On the other hand, taxes such as withholding tax (WHT), Value Added Tax, Excise duty and pay as you Earn have monthly reporting periods. See Nakuru Cement Supplies Limited v Commissioner of Investigations and Reinforcement (Tax Appeal E038 of 2021) [2022] KEHC 16518 (KLR), Commissioner of Domestic Taxes v Airtel Networks Kenya Limited (Income Tax Appeal E062 of 2022) [2023] KEHC 25059 (KLR), , Stefanutti Stocks Kenya Limited v Commissioner of Domestic Taxes (Tax Appeal E117 of 2021) [2023] KEHC 2322 (KLR).
It is submitted that once 5 years from the date a self-assessment is made has lapsed, the Respondent has no power or discretion to demand or collect taxes for the period outside the said time limit. So, the WHT assessments for 2015 and 2016 amounting to Kshs. 16,401,425 and Kshs. 64,525,603 were statutorily time-barred and should be vacated in their entirety.
GROUND 3.
WHETHER THE TRIBUNAL ERRED IN LAW IN FAULTING THE APPELLANT FOR FAILING TO PROVIDE DOCUMENTS RELATING TO 2015 AND 2016 WHICH WERE OUTSIDE THE FIVE (5) YEAR STATUTORY PERIOD THAT THE APPELLANT WAS REQUIRED TO KEEP DOCUMENTS AS PROVIDED FOR IN SECTION 23 OF THE TAX PROCEDURES ACT
Paragraph(s) 59 and 60 of its judgement (Page 402 to 403 of the Record), the Tribunal faulted the Appellant for not providing documents that supported its transactions. Based on this finding, the Tribunal held that the Respondent’s tax assessment based on its best judgement was justified.
The Appellant submits that the Tribunal misinterpreted Section 23 of the TPA. Section 23(1) of the TPA below as follows: -
“(1) A person shall—
claim any document required under a tax law, in either of the official languages.
claim any document required under a tax law to enable the person''s tax liability to be readily found; and
subject to subsection (3), keep the document for a period of five years from the end of the reporting period to which it relates, or such shorter period as may be specified in tax law.”
The Tribunal ignored the provisions of Section 23(1)(c) of the TPA, which provide that the taxpayer should retain documents for five years from the end of the reporting period to which it relates, or a shorter period as may be specified in a tax law. The term “reporting period” is defined in Section 2 of the TPA as:
for income tax, the year of income or, when section 27 of the Income Tax Act applies, the accounting period of the taxpayer.
for withholding tax under the Income Tax Act, the period for which the deduction of tax relates.
a) the income tax assessments
In relation to the income tax assessments, the term year of income is defined in Section 2 of the Income Tax Function as the period of twelve months beginning on 1st January in any year and ending on 31st December in that year. Section 27 of the Income Tax Act does not apply in this case, as the Appellant’s year ends is December and coincides with the year of income.
The income tax assessments that were the subject matter before the Tribunal were for the periods 1st January 2015 – 31st December 2017. For the years of income 2015 and 2016, the Appellant only had to keep December 2020 and 31st December 2021.
b) the withholding tax assessments
With respect to WHT, the reporting period is monthly, which means that for the entire 2015 and 2016 years, the Appellant similarly only had to keep December 2020 and 31st December 2021 for the 2015 and 2016 years, respectively.
The tax assessment that forms the subject matter of this dispute was issued by the Respondent on 4th February 2022, which is outside the statutory period within which the Appellant had to keep poses.
The statutory period for which the Appellant had to retain dokeep2015 and 2016 had however lapsed before the Respondent issued its tax assessment.
The Appellant submits that the Tribunal error in finding that the Appellant had to keep records of its documents for 2015 and 2016 since the statutory period for retention of documents that supported the demands for 2015 and 2016 had lapsed on 31st December 2020 and 31st December 2021.See Republic v Commissioner of Domestic Taxes (Large Taxpayers Office) Ex- Partee Unilever Tea Kenya Limited [2017] elk, Commissioner of Domestic Taxes v Airtel Networks Kenya Limited (Income Tax Appeal E062 of 2022) [2023] KEHC 25059 (KLR) the Court found that the Taxpayer is absolved of the burden of maintaining records after five years from the end of a reporting period.
In view of the foregoing, it is our submission that the Tribunal erred in finding that the Appellant had to keep keeps beyond the five-year period provided by statute. This finding is unfair, arbitrary and runs contrary to Section 23 of the TPA. We therefore urge this Honorable Court to quash the Tribunal’s decision.
GROUND 4.
WHETHER THE TRIBUNAL ERRED IN LAW IN FAILING TO CONSIDER THAT THE WITHHOLDING TAX ASSESSMENT WITH RESPECT TO THE PERIOD 9TH JUNE 2016 TO 7TH NOVEMBER 2019 LACKS A LEGAL BASIS
Section 35 of the Income Tax Act places an obligation on a person making payment of amounts which are subject to withholding tax to deduct and remit withholding tax to the Commissioner at the prescribed resident or non-resident rates.
Before 9 th June 2016, the Income Tax Act under Section 35(6) empowered the Commissioner in instances where a taxpayer did not withhold tax when making payments to recover the withholding tax from the person making the payment as follows:
“35 (6) Where a person who is required under this section, by the rules made under section 130 to deduct tax:
does not make the deduction or does not deduct the whole amount of the tax which he should have deducted; or
does not remit the amount of deduction to the Commissioner on or before the twentieth day following the month in which the deduction was made or ought to have been made.
the Commissioner may impose such penalty as may, from time to time, be prescribed under the rules, and the provisions of this Act relating to the collection and recovery of tax and the payment of interest thereon, shall apply to the collection and recovery of that amount of tax and penalty as if they were tax due and payable by that person and the due date for the payment of which was the date on which the amount of tax should have been remitted to the Commissioner.”
The Finance Act 2016 repealed this provision with effect from 9th June 2016. Once Section 35 (6) of the Income Tax Act was repealed, there was no legal basis for the Respondent to demand payment of withholding tax from the Bank for alleged failure to withhold for the period 9th June 2016 to 7th November 2019. The deletion of section 35 (6) of the ITA meant that effective 9th June 2016, where a person did not deduct or remit the WHT from any payment made, the Commissioner had no statutory power to demand WHT from the payer.
This was the position until a similar provision was reintroduced into the law by Section 29 of the Finance Act 2019 with effect from 7 th November 2019. The provision that was introduced is section 39A of the TPA which provides as follows:
“Where a person who is required under a tax law to deduct or withhold tax and remit the tax to the Commissioner fails to do so, the provisions of this Act relating to the collection and recovery of tax, and the payment of penalties and interest thereon, shall apply to the collection and recovery of that tax not deducted or withheld as if it were tax due and payable by that person and the due date for the payment shall be the date on which the amount of tax should have been remitted to the Commissioner.”
The demand for withholding tax in the absence of a legal provisions is therefore contrary to the provisions of Article 210 (1) of the Constitution of Kenya which provides that no tax may be imposed, waived, or varied except as provided by legislation. See Commissioner of Domestic Taxes v Pecans East Africa Limited & 6 others (Tax Appeal E003 of 2019) [2022] where the Court held that:
“I agree with the Tribunal that prior to 2016, section 35(6) of the ITA provided that the commissioner could claim taxes from a player who does not make a deduction as though the taxes were due from them. However, the amendment introduced by the Finance Act, 2016 deleted the said section 35(6) of the ITA meaning that the Commissioner could no longer demand taxes not withheld from the person who should have withheld the same and that this position remained until the enactment of the Finance Act, 2019 came into force on November 7, 2019 when the previously deleted provisions of section 35(6) of the ITA were now reintroduced and reproduced as a new section 39A under the TPA .Consequently, I therefore find and hold that during the subject years of 2018 and 2019, the Commissioner could not collect the WHT that ought to have been deducted by the Respondents from the punters and that all the Commissioner could do was seek the same from the punters directly.”
GROUND 5.
WHETHER THE TRIBUNAL ERRED IN LAW IN FAILING TO FIND THAT THE APPELLANT IS A NON-RESIDENT COMPANY AND THEREFORE NOT SUBJECT TO DEEMED INTEREST PROVISIONS UNDER THE INCOME TAX ACT
This issue relates to the Tribunal’s findings at paragraph’s 118 to 122 of the Tribunal’s decision (Page 416 of the Record) where the Tribunal found that the Appellant is a resident company and as such, deemed interest and withholding tax on deemed interest apply to interest free advances from the Appellant’s related parties.
It is an uncontroverted fact that the Appellant is a branch of Baker Hughes EHO Limited, a company incorporated in Bermuda. A copy of the Appellant’s certificate of compliance is attached at Page 296 of the Record.
A resident company is defined under Section 2 of the Income Tax Function as follows:
“resident” in relation to a body of persons, means.
that the body is a company incorporated under a law of Kenya; or
that the management and control of the affairs of the body was exercised Kenya in a particular year of income under consideration; or
iii. that the body has been declared by the Minister, by notice in the Gazette, to be resident in Kenya for any year of income.
A branch is, however, a permanent establishment of a non-resident company and is considered non-resident for tax in Kenya. Section 2(1) of the Income Tax Act defines the term permanent establishment to include inter alia, a fixed place of business through which business is wholly or partly carried on and includes a place of management, a branch, an office, a factory, a workshop….
A branch is non-resident and unambiguous evidence of this is that a company incorporated in Kenya would pay corporate income tax at the resident tax rate of 30% and a Branch, would pay corporate income tax at the non-resident rate of 37.5%.
From the definition of the term considered interest in Section 2 of the Income Tax A considered interest only applies to bodies that are considered tax resident in Kenya. Section 2 of the ITA defines considered interest as follows:
“Deemed interest” means an amount of interest equal to the average ninety-one-day Treasury Bill rate, considered to be payable by a resident person in respect of any outstanding loan provided or secured by the non-resident, where such loan is provided free of interest”
The Tribunal made a grave error and misdirected itself at paragraph 120 of its judgement in finding that a Branch of a foreign company is incorporated in Kenya. Section 3 of the Companies Act, 2015 defines a foreign company as a company incorporated outside Kenya. Branches of foreign companies are foreign companies that are incorporated outside Kenya but registered in Kenya. This is why Branch companies are granted certificates of compliance and not certificates of incorporation.
From the definition of considered interest, Clearent that considered interest only applies to residents.
In addition, Section 10(1)(ii) of the Income Tax Act specifically provides that WHT shall not apply for any payments made to its head office. We reproduce Section 10 below:
“10. Income from management or professional fees, royalties, interest and rents
1) For the purposes of this Act,
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