A purchase from an EPZ by local institutions/Businesses/Persons is treated as an import for tax purposes

Case Study:De La Rue Currency And Security Print Limited Vs KRA

De la Rue is a licensed EPZ .It engages in the business of manufacturing bank notes and security printing.

A purchase from an EPZ by local institutions/Businesses/Persons is treated as an import for tax purposes.

DLR was audited for VAT, withholding tax, and corporate tax in respect to 2013-2017 period.

DLR and KRA engaged in meetings, including a meeting held on 01/02/ 2018. At this meeting, the VAT issue was resolved. However, KRA reopened the VAT issue on 28/11/2018 and assessed DLR for the sale of bank notes to CBK at KES 1.22B

DLR appealed to TAT

In its Submission, DLR stated the following:

• DLR is an EPZ entity and, therefore, not required to register for VAT, Section 29 of EPZ Act
• Section 5(5) of the VAT Act imposes obligation on the importer. CBK is the importer of the bank notes. Section 24 of the EPZ Act also provides that.

24. Goods deemed to be exported and imported into Kenya Unless otherwise provided under this Act or under any other written law— (a) goods which are taken out from any part of the customs territory and brought into the export processing zone or services provided from part of the customs territory to an export processing zone shall be deemed to have been exported from Kenya and shall be paid for in convertible currency; and (b) goods which are brought out of an export processing zone and taken into any part of the customs territory for use therein or services provided from an export processing zone to any part of the customs territory shall be deemed to be imported into Kenya

• Importation of bank notes/currency/money is not subject to VAT under the VAT Act, as earlier communicated by KRA and CBK.
• The contract of supply between CBK and DLR had placed the obligation of accounting for taxes on CBK; Ex -works.
• KRA breached the agreement of closing the VAT issue

In its response, KRA stated the below:

• DLR operated under tax holiday up to 2014 when it got registered as an EPZ. Currently, DLR operates under a condition EPZ licence, which allows it to sell up to 50% to the local market subject to approval by the ministry of trade.
• DLR had violated the EPZ license by selling more than 50% of its notes in Kenya
• That DLR had violated the Customs laws by exporting into the custom territory without proper approval. The offences include failing to lodge custom entries for goods exported into Kenya and exceeding the threshold(50%) for local sales
• Having violated the EPZ Act and the East Africa Community Customs Management Act, DLR should be deprived of the benefits of operating as an EPZ
• Between September 2013 and March 2017, bank notes were a taxable supply .Bank notes were exempted from VAT after September 2017.
• Money is defined by the VAT Act as a legal tender. DRL was only contracted to make bank notes but not money. Bank notes get the legal tender status once issued by CBK

In its ruling, the tribunal stated that it had examined the import entry that was submitted by KRA. The entry indicated that CBK was the importer, and as such The ruling was issued on 04/06/2021CBK was responsible for VAT. The removal of goods from an EPZ could not be charged VAT since it is an export

The Appeal Succeeded

The ruling was issued on 04/06/2021

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