- November 4, 2024
- Posted by: admin
- Category: Uncategorized
Case Study: Kenya Tea Development Agency Dubai Multi Commodities Centre v Commissioner of Domestic Taxes (Tax Appeal E387 of 2023) [2024] KETAT 1487 (KLR) (25 October 2024) (Judgment)
KTDADMC is private limited company incorporated in Dubai, the United Arab Emirates and carrying on the business of buying and selling Kenyan tea in Gulf and Middle East. KTDADMC is a subsidiary of Chai Trading Company Limited which is a subsidiary of Kenya Tea Development Holdings Plc.
Sometime in 2021, KRA conducted an audit of KTDADMC and its parent company, Chai Trading Company Limited (CTCL) for the period 2015-2021. KRA issued a letter of its preliminary findings on 9th December, 2022 and on 17th February 2023, KTDADMC responded to the findings.
KRA thereafter, on 15th March, 2023 issued a default notice assessment for the amount of Kshs. 120,093,511.00 which KTDADMC objected to on 12th April, 2023. KRA issued its objection decision on 9th June, 2023 confirming the tax assessments for the periods 2018 to 2020 amounting to Kshs. 122,672,965.00.
Aggrieved by KRA’s decision, KTDADMC lodged its Notice of Appeal dated 27th June, 2023 on the following grounds:
- That KRA erred in law and fact by holding that KTDADMC was a resident in Kenya for purposes of tax for the years 2018-2020.
- That KRA erred in law and fact by holding that KTDADMC carried on or exercised its business partly within and partly outside Kenya.
- That KRA erred in law and fact by holding that the law required KTDADMC to impose withholding tax on management fees and other payments.
- That KRA erred in law and fact by failing to appreciate the nature of KTDADMC’s business thereby treating KTDADMC as a Kenyan as well as carrying on or exercising business partly within and partly outside Kenya.
- That KRA misapplied the law thereby arriving at an erroneous decision by confirming assessments.
KTDADMC argued that:
- KTDADMC averred that KRA erred in law and fact by failing to appreciate the nature of the its business thereby treating KTDADMC as a Kenyan resident as well as carrying on or exercising business partly within and partly outside Kenya. The Articles of Association of KTDADMC allow its directors to delegate their powers as they think fit and such a person shall exercise the powers to, among others, exclusion of the directors.
- KTDADMC, on the basis of the provisions of its Articles of Association, vested a broad and wide array of powers on the regional manager through a power of attorney. The regional manager based in the United Arab Emirates was the loci of and nerve center of KTDADMC’s key policy and strategic decisions and these key policy and strategic decisions are made in the UAE and were executed and implemented by the regional manager
- KTDADMC signed a service level agreement with CTCL under which the latter offers several services to KTDADMC including warehousing, storage, packaging, and delivery of tea. KTDADMC pays CTCL for the services it receives, and the payments are at arm’s length and competitive so KTDADMC cannot be viewed as an agent of the CTCL.
- KTDADMC was a foreign subsidiary carrying on bona fide foreign operations in Dubai. The day-to-day operations were conducted in Dubai. KTDADMC entered contracts and had bank accounts in Dubai for which the regional manager was an authorized signatory. The relationship between Appellant and its parent could not be used as a basis for determining residency of KTDADMC. The two entities had a commercial relationship and did enter into a service agreement with CTCL and provided services for which KTDADMC paid.
KRA responded That:
- the conversion of KTDADMC from a branch to a Company was done following a transfer pricing tax planning scheme orchestrated by KTDADMC’s management and parent company to shift income from Direct Sales Overseas line of business to KTDADMC. This scheme shifted profits to UAE.
- As evidenced by the Board of Directors meeting minutes, KTDADMCs directors sitting in Kenya were involved in the day-to-day running of its affairs whilst in Kenya. The major discussion points of the Board of Directors meetings were; reviews of the performance of KTDADMC, reviews of the credit policies and debt management, and market expansion strategies.
- Further, KTDADMC’s management team sat in Kenya and managed the affairs of KTDADMC in performing the following functions in Kenya:
-Negotiation and execution of agreements with customers; Accounting and bookkeeping;
-Strategy and budgeting;
-Human resources management;
-Financial support and Debt collection;
-Running of bank accounts in Dubai and Nairobi; Payment of regional manager through KTAH; and Approval of customers and customer orders.
- Section 2 of ITA defines who is “resident” for tax purposes. This Section states that a corporation (a body of persons) is tax resident in Kenya if:
“
……………….or
that the management and control of the affairs of the body was exercised in Kenya in a particular year of income under consideration; or
……………..”
- The management functions of KTDADMC were carried out in Kenya and not in UAE. KRA stated that the Board of Directors of KTDADMC played a key role in all the strategic decisions of the company, and thus, the management and control of its affairs were exercised in Kenya. KRA concluded that KTDADMC was tax resident in Kenya during the period 2018 to 2020 and thus was governed by the indices of the Kenya tax laws.
- Section 4(a) of the ITA provides as follows:
“For the purposes of section 3(2) (a) (i)-
Where a business is carried on or exercised partly within and partly outside Kenya by a resident person, the whole of the gains or profits from that business shall be deemed to have accrued in or to have been derived from Kenya.”
- In view of the above, KTDADMC’s gains or profits were chargeable to tax in Kenya
In its judgment on 25/10/2024, the TAT observed that:
- since KTDADMC was a wholly owned subsidiary of CTCL and its regional manager was also appointed by CTCL, it is evident that it is on that basis controlled by CTCL.
- having reviewed the Minutes that were presented as evidence, that the regional manager would attend the board meetings of KTDADMC in his capacity as a senior employee. The power of attorney was not proof that the regional manager was a strategic decision maker or that his decisions were final. The regional manager would report to the Board of Directors. the view of the Tribunal in this regard would be that the decisions would be in relation to his duties as an employee.
- KTDADMC was carrying on business partly within and partly outside Kenya. Pursuant to section 2 of the ITA, a business includes any trade , profession or vocation and every manufacture , adventure and concern in the nature of trade and does not include employment. KTDADMC signed a service level agreement with CTCL , its parent company. which was adduced as evidence by KTDADMC. Accordingly, the further view of the Tribunal in this regard was that the assertion of KTDADMC that an analysis of its operations showed that its business operations were solely carried on or exercised in the UAE, was incorrect.
