- February 19, 2024
- Posted by: admin
- Category: Uncategorized
Case Study: KRA vs. Angelique International Limited
Angelique International Limited is a branch of Angelique International Limited-India .Its principal activity is turnkey projects
-AIL entered into three contracts with KPLC for the ‘ last-mile connectivity”
-KRA performed a desktop audit on AIL and assessed additional income tax worth KES 210.8m and KES 12.9m VAT.
– The additional taxes were to cover undeclared sales
– After unsuccessful objection, AIL appealed to TAT on 27/11/2020
– AIL averred that as per the agreement, AIL was to purchase some materials locally while the rest were to be procured abroad.
-AIL averred that AIL-India allocated AIL all roles that required the acquisition of goods and services locally.
-AIL stated that consignments of plant and equipment shipped from abroad were billed to KPLC by AIL-India. As such, the income generated from the same was taxed in India.
-AIL argued that the whole income from the contract could not be attributed to AIL since some roles were performed by AIL India.
-AIL further submitted that Paragraph 1 of Article 7 of the Kenya-India DTA provides that:
The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on or has carried on business as aforesaid, the profits of the enterprise may be taxed in the other state, but only so much of them as is attributable to that permanent establishment
– As such, only profits attributable to AIL were taxable in Kenya. Sales attributable to AIL-India were therefore taxable in India, not Kenya. The said sales included all goods and services supplied by AIL-India directly to KPLC
-KRA argued that the contract could only be construed to be one contract, as such the contract could not be broken down into materials and labor components ; the contract entered into was one , ‘last mile connectivity’
-KRA Further argued that AIL assumed all the risks of delivering the project on behalf of AIL-India.
In its ruling, the TAT observed that:
The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on or has carried on business as aforesaid, the profits of the enterprise may be taxed in the other state, but only so much of them as is attributable to that permanent establishment
As such, only profits attributable to AIL were taxable in Kenya. Sales attributable to AIL-India were therefore taxable in India, not Kenya. The said sales included all goods and services supplied by AIL-India directly to KPLC
Article 7 of OECD Model Tax Convention 2017 provides that:
1. Profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits that are attributable to the permanent establishment in accordance with the provisions of paragraph 2 may be taxed in that other State
- The three contracts were distinct. AIL -INDIA solely shouldered the cost of supplying materials sourced abroad, including import taxes. Income Attributable to AIL India could not, therefore, be taxed in Kenya
- AIL had provided a reconciliation of VAT to sales that proved that AIL had accurately filed its VAT return. As such, KRA assessment was erroneous