A Costly Lesson, Transfer Pricing On Personnel Costs Deductions

Case study: Stefanutti Stocks Kenya Limited v Commissioner of Domestic Taxes (Tribunal Appeal 18 of 2020) [2025] KETAT 185 (KLR) (14 March 2025) (Judgment)

Background

The case revolves around the disallowance of Kshs. 46,391,512 in personnel costs claimed by Stefanutti Stocks Kenya Limited for the tax year ending February 2013. KRA rejected the deduction, leading to an additional corporation tax assessment.

SSKL, a Kenyan subsidiary of a South African firm, claimed personnel costs related to expatriates hired from its parent company (Stefanutti Stocks (Pty) Ltd) for a project with Base Titanium Ltd.

KRA conducted a review (2017–2019) and disallowed Kshs. 46.4M due to discrepancies between audited financials and PAYE records.

SSKL objected, but KRA upheld the disallowance, prompting an appeal to the TAT.

The TAT initially dismissed the appeal, but the High Court (2023) found that the Tribunal failed to properly assess whether the salary expenses were allowable under Section 15 ITA.

The High Court remanded the case back to the TAT solely to determine the allowability of the salary costs.

SSKL Arguments

• The expenses were legitimate personnel costs incurred for expatriates working on Kenyan projects.
• SSKL relied on:

-Intercompany invoices (described as “salary recovery” or “cost recovery”).

– A transfer pricing policy (though dated 2016, post-assessment).

• Local expertise was unavailable, justifying related-party transactions.

KRA’s Counterarguments

• SSKL failed to reconcile the variance between financial statements and PAYE records.
• No employment contracts, work permits, or project-specific records were provided to prove the expatriates’ roles in Kenya.
• The transfer pricing policy (2016) was irrelevant for the 2013 assessment.
• Intercompany invoices alone were insufficient to prove the expenses were for income generation.

Tribunal’s Analysis & Findings

• Section 56(1) TPA and Section 30 TATA place the burden on the taxpayer to disprove KRA’s assessment.
• SSKL failed to provide contemporaneous, project-specific records(e.g., employment contracts, work permits, timesheets).
• The intercompany invoices lacked detail (e.g., names of employees, nature of work, project allocation).
• The 2016 transfer pricing policy could not justify 2013 expenses (violating the principle of contemporaneous documentation).
• SSKL introduced new documents at the appeal stage (violating Section 56(3) TPA, which restricts new evidence unless permitted).
• The Tribunal found no proof that the expenses were “wholly and exclusively” for income generation.

Final Decision

The Tribunal dismissed the appeal, upholding KRA’s disallowance of Kshs. 46.4M.

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