Reverse VAT, Withholding Tax on Permanent Establishments, Fringe Benefit Tax, Corporate Tax

 KRA carried out a tax compliance check on IEBC’s books and accounts for the period 1st July 2016 – 31st July 2021, and issued its findings to IEBC dated 24th June 2022 in which KRA demanded various taxes totaling Kshs. 577,529,576.00.

During the period under review IEBC was involved in the preparation of the 2022 National General Elections as guided under the Constitution of Kenya and national legislation.

IEBC thereafter provided clarifications to KRA’s letter of findings dated 24th June 2022 vide a meeting held on 23rd March 2022 and 25th October 2022.

KRA reviewed the assessment from the said Kshs. 577,529,576.00, and issued a demand letter dated 26th May 2023 for Kshs. 265,592,122.00.

 On 11th August 2023 KRA issued an objection decision fully rejecting IEBC’s objection and confirmed the assessment in the sum of Kshs. 265,592,122.00

IEBC appealed to the TAT

The case was grounded on the following issues

• Reverse VAT
• Withholding Tax on Permanent Establishments
• Fringe Benefit Tax
• Corporate Tax

Reverse VAT/VAT on Imported Services

IEBC stated that it raised grounds for the objection of VAT on imported services, where KRA sought to charge VAT on imported services for services offered to IEBC by various foreign companies based in France and Netherlands.

IEBC stated that KRA misclassified the importation of the KIEMS gadgets and accessories by segregating the supply, delivery, installation, testing, commissioning, supporting and maintenance and seeking to demand for VAT on the services ancillary to the importation of the KIEMS gadgets.

IEBC stated that the installation, assembly and testing of these kits constitutes part of the supply of kits because these services are ancillary to the supply of goods.

KRA also submitted that since the addendum to the contract awarded clearly indicated that the contract was for; the supply, delivery, installation, testing, commissioning, support, and maintenance of KIEMS and hardware, equipment and accessories, and the cost of these activities was distinctly assigned and priced separately, IEBC is liable to pay VAT.

In its ruling on 01/08/2024, the TAT observed that

• the services rendered by IEBC’s suppliers under the contract, that is the supply, delivery, installation, testing, commissioning, support and maintenance falls squarely within the purview of the provisions of Section 11 (2) of the VAT Act, which provides;

“(2) Unless the context otherwise requires, a supply of services that is ancillary to or incidental to the importation of goods shall be treated as part of the importation.”

As such KRA errored, KRA ought to have treated the said services as part of the importation, and not as separate importation of services.

Withholding Tax on Permanent Establishments

IEBC stated that it raised grounds for the objection of additional assessment on withholding tax on system firewall network security.

IEBC averred that KRA demanded Kshs. 5,580,592.00 being WHT on payments to IBM EA for various services rendered within the period. IEBC averred that the WHT was deducted and remitted and the respective schedule is provided to evidence the fact.

IEBC further averred that IBM EA has a permanent establishment in Kenya for tax purposes. Section 76 (A) of the ITA provides;

“The Commissioner shall not assess any person for a year of income on that portion of income which has been subject to Withholding tax which is also a final tax.”

KRA averred that the services provided by IBM EA were of technical nature and therefore IEBC should have withheld income taxes as outlined by Section 35 of the ITA.

In its ruling on 01/08/2024, the TAT observed that

• Section 76A of the ITA comes to bear. The section provides;

“The Commissioner shall not assess any person for any year of income on that portion of income which has been subject to withholding tax which is a final tax.”.

• The supplier company IBM EA Ltd is a resident company with a permanent establishment in Nairobi as is evident from its contract with IEBC.
• KRA erroneously assessed IEBC for another taxpayer’s (IBM- EA Ltd) final tax, and consequently finds that KRA’s assessment and confirmation of WHT on network security in the sum of Kshs. 6,927,040.00 for the period under review 2017 – 2022 was not justified

Therefore, the company is obliged to file its own returns and account for its final taxes. IEBC was therefore not obliged under Section 35 of ITA to subject the payments to IBM to WHT.

Fringe Benefit Tax

IEBC stated that it raised grounds for the objection of Fringe Benefits Tax on mortgage and car loans extended to members of IEBC, which is operationalized by the National Treasury as guided by the SRC.  The scheme is administered by HFCK, a financial institution.

IEBC stated that it acts as a guarantor for the purpose identifying the staff members who apply for the loans and that they actually work for IEBC, and their terms of service.

IEBC stated that at no time does IEBC provide any car loan or mortgage to its directors or employees and therefore the arrangement between the various members is purely a commercial arrangement

KRA submitted that regarding the issue of car loans and mortgages to staff, IEBC was financing the loans to staff through HFCK as per the agreement between IEBC and HFCK. Therefore, the responsibility of accounting for the fringe benefits fell on IEBC and they failed to. KRA, therefore submitted that it was justified in raising the additional assessment.

In its ruling 01/08/2024, the TAT observed that:

• KRA requested IEBC for further supporting documentation for its objection, to wit; the MOU between IEBC and HFCK Ltd, and a schedule showing how the interest was utilized by HFCK, but IEBC failed to provide the said documentation, thus failed to support its objection adequately.
• the HFCK Ltd disbursed and facilitated the loans to IEBC ‘s staff members in line with the agreement between IEBC and the HFCK, and therefore the responsibility of accounting for the FBT rested with IEBC
• IEBC failed to account and remit FBT on account of car loans and mortgages issued to IEBC’s staff, by virtue of their employment,

As such KRA was justified to charge FBT

Corporate Tax

IEBC stated that it raised grounds for the objection of additional assessment on corporation tax with regard to the interest earned by HFCK, a financial institution, in running the car loan and mortgage scheme.

IEBC stated that the car loan and mortgage scheme does not engage in any revenue generating or any profit-making activities, stating that it was not in a position to establish the interest on loan earned by HFCK which is a legal entity and a registered taxpayer with its own PIN number and as such its records should be with IEBC.

IEBC averred that any income received by it is simply appropriation in aid, which is offset from the budget and any excess is remitted to the National Treasury as per the Public Finance Management Act, 2012, and the Public Finance Management Regulations.

In its ruling 01/08/2024, the TAT observed That:

• KRA submitted that IEBC earned interest income from mortgages fund deposits prior to being appropriated in the next budget. It was also averred that IEBC as an institution is not exempt under the Income Tax Act, and therefore its income is subject to tax.
• IEBC merely made statements and averments without any backing of documentary evidence. It also failed to provide KRA with the critical documents in evidence of its dealings with the financial institutional in regard to its staff car loan and mortgage scheme, which was necessary to support its objection in regard to the instant issue

As such, KRA was justified in issuing and confirming the assessment against IEBC

The TAT made the below final orders:

• The assessment on VAT on imported services in the sum of Kshs. 217,837, 884 was set aside
• The assessment on Withholding tax in the sum of Kshs. 6,027,040.00 was set aside
• The assessment on PAYE on fringe benefits tax in the sum of Kshs. 25,561,406 was upheld
• The assessment on Corporation tax in the sum of Kshs. 16,165,797.00 was upheld.

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