“Permanent Establishment” for PAYE purposes

“Permanent Establishment” for PAYE purposes

Case Study: Diakonie Emergency Aid VS. KRA

DEA is an NGO registered in Kenya

DEA was audited for PAYE for the period 2006-2010

Owing to instability in Southern Sudan and Somalia, DEA was paying DEA-PHC (Southern Sudan) and DBG (Somalia) staff from Kenya.

KRA assessed DEA for KES 27.24m in PAYE for payments made to DBG staff and KES 63.87m for payments made to DEA-PHC employees. The figures were later reduced to KES 2.27m and 15.32m, respectively

DEA appealed to TAT

DEA argued that DEA-PHC and DBG had executed corporation agreements with DEA-Germany, as such DEA merely acted as a post/receiving office for DEA-PHC and DBG in the view of the volatile situation in Southern Sudan and Somalia.

KRA argued that DEA is a permanent establishment for DEA-PHC, DBG, and DEA-Germany.

KRA stated that DEA-PHC and DBG employees were paid by DEA Nairobi office through a bank maintained in Kenya; this implied that DEA had an obligation under Income Tax Act 5(1) (b) to deduct and remit PAYE for non-resident employees.

In its findings, the tribunal stated that:

• DEA-PHC, DBG, and DEA-Germany were registered in different jurisdictions, as such, DEA-PHC and DBG employees were subject to tax within their jurisdiction. Their jurisdiction could not be donated to Kenya
• Control and approval of funds for DEA-PHC and DBG were being carried out in Germany. This does not create a permanent establishment for DEA-PHC and DBG
• While DEA, the principal agent of DEA-Germany, had a permanent establishment in Kenya, the employment of DEA-PHC and DBG employees was done in their respective countries. This does not fall under Income Tax Act Section 5(1) (b)
• DEA had demonstrated that DEA-PHC and DBG employees were paying tax in both Somalia and Southern Sudan.

On 08/06/2016, the tribunal ruled that DEA-PHC and DBG employees were not taxable in Kenya.

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