Should Seconded Employees Be Subjected To PAYE Deduction By Their Primary Employer

Case Study: Safaricom PLC v Commissioner of Domestic Taxes (Tax Appeal E826 of 2023) [2024] KETAT 1772 (KLR) (17 December 2024) (Judgment)

The Government of the Republic of Ethiopia awarded a telecommunications license to GPE BV on 24th May 2021 enabling the consortium to provide telecommunications services to Ethiopia. The consortium led by Safaricom PLC established a new operating company in Ethiopia, Safaricom Telecommunications Ethiopia PLC (STEP), which was issued with a license to provide telecommunications services on 9th July 2021.

Saf seconded employees to work in Ethiopia to work under STEP which launched its commercial operations in October 2022. On its part STEP entered into assignment agreement with the secondees.

KRA carried out a review of the offer of employment on assignment, and the assignment agreements between the secondees and issued its findings vide a letter dated 15th December 2022.

Following exchange of correspondence in a bid to resolve the issues highlighted in the Audit Progress report sent to Saf vide email on 20th April 2023, which Saf responded to on 2nd May 2023, KRA stated that Saf should have remitted PAYE on the emoluments paid to the secondees to STEP.

KRA thereafter issued a letter of assessment dated 21st July 2023 with a tax demand of Kshs. 436,056,888.00.

Saf objected to the assessment and demand on 18th August 2023 challenging the assessment in its entirety.

KRA issued its Objection Decision on 13th October 2023 in which it maintained that the secondees remained employees hence Saf had the obligation to deduct and account for PAYE.

Dissatisfied with KRA’s objection decision Saf lodged its Notice of Appeal dated 10th November 2023 . Among the grounds of appeal were:

• KRA erred in law and fact by erroneously concluding the relationship between Saf and employees seconded to Safaricom Telecommunications Ethiopia PLC was an employer employee relationship for tax purposes;
• KRA erred in law and fact by alleging that Saf remunerates the employees seconded to Safaricom Telecommunications Ethiopia PLC ignoring that the full employment costs were recharged to and borne by Safaricom Telecommunications Ethiopia PLC;
• KRA erred in law and fact by demanding taxes on the employment income earned by employees seconded to Safaricom Telecommunications Ethiopia PLC, notwithstanding that the income, and consequently taxes thereon had accrued in and had been paid in Ethiopia;
• KRA erred in law and fact by failing to recognize that Saf had no obligation in law to account for PAYE on the employment income of the secondees;

Saf argued that:

• Saf is a member of a Consortium, Global Partnership for Ethiopia (“GPE”), together with Vodafone Group PLC, Vodacom Group Ltd, British International Investment and Sumitomo Corporation. The Government of Republic of Ethiopia formerly announced the award of a telecommunication license to GPE BV on 24th May 2021 to enable the consortium to provide telecommunication services in Ethiopia.
• The consortium, led by Safaricom, established a new operating company in Ethiopia, Safaricom Telecommunications Ethiopia PLC (“STEP”), which was issued with a telecommunications license on 9th July 2021.
• It was necessary for the consortium to appoint and assign employees to roll out and operate the telecommunications services in Ethiopia, Saf, together with the other consortium members seconded employees (secondees or assignees) to work in Ethiopia under the employment of Safaricom Telecommunications Ethiopia PLC (STEP) which launched its commercial operations in Ethiopia in October 2022.
• The offer of employment on assignment and the assignment agreement established that during the pendency of the assignment, STEP was the substantive  employer. The reason being that the secondees at all times worked under the direct control and supervision of STEP, they provided employment services exclusively to the host employer and they were well integrated into the operations of STEP, while Saf remained the residual employer.
• clause 2 of the Assignment agreement was designed to assure the secondees that at the end of the secondment term, they would return back to the original employer, and their original posts and positions with Saf would still be available at the end of the secondment period. It stated that the very nature of secondment agreements is that secondees remain attached to the home entity whilst on secondment/temporary assignment to another entity and work under the rules, regulations and direct supervision of the other entity which becomes and would be deemed to be their substantive employer during the secondment period.

KRA responded that:

• From the agreements, the seconded employees would remain the employees of Saf and that they would be remunerated by them. Saf would thereafter recharge Safaricom Ethiopia PLC for the expenses incurred on the seconded employees.
• According to the agreement, Saf was to pay the seconded employees emoluments which are taxable under Section 5 of the Income Tax Act (ITA) and was therefore obligated to deduct and account for PAYE from the employees as per Section 37 (1) of the ITA.
• The intention of the parties was that the assignees remain the employees of Saf at all material times. There was never any employer – employee relationship between STEP and the assignees.
• The seconded employees were tax resident in Kenya, and were subject to Section 3 of the ITA, and any income the seconded employees received would be subject to tax in Kenya.
• Saf administers local payments such as pension contributions and loan repayments for the secondees, further cements the argument that the employment relationship and its accompanying tax obligations are rooted in Kenya. Therefore, regardless of STEP’s role, Saf retains the statutory duty to deduct and remit PAYE on behalf of the secondees.
• The other clauses in the contract underscores the fact that Saf retained the disciplinary authority over the secondees, further demonstrating that the employment relationship remained intact, and further indicated that Saf maintained an active role in the performance management of the secondees, notwithstanding their assignment to STEP. The exchange of employment related information, including performance management data, shows that Saf continued to oversee and regulate the work of the secondees, further reinforcing the employer- employee relationship

In its judgment on 17/12/2024, the TAT observed that:

• The very nature of the secondment agreement is that secondees remained attached to the primary entity (Safaricom PLC) whilst on secondment to STEP, under whose rules, regulations and direct supervision the secondees work, and who thus becomes deemed to be their substantive employer during the period of their secondment. The principal relationship with Saf is deemed dormant during the secondment period as the secondees are under active employment of the host employer STEP, though the principal employer -employee relationship between the secondees and Saf was never severed upon being seconded to Saf.
• It is a standard practice for a secondee to retain their contract of employment with their primary employer as the secondment is basically a temporary transfer of an employee to a different employer, or different work station in a related organization.
•  The contracts entered into between the Secondees and STEP , conferring the terms and conditions of service , the duties and responsibilities of the parties , the supervisory control , and the statutory obligations arising out of the contracts , clearly indicate the secondees were in terms of their secondment assignment fully under the control of STEP , who then became their principal employer during the duration of the secondment , including being in control of their statutory obligations , such as tax obligations .
• Saf had no legal obligation to deduct and account for PAYE on employment income for secondees assigned to Safaricom Telecommunications Ethiopia PLC.

As such Saf won

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CPA David Ndiritu Mwangi

Certified Public Accountant, Tax Agent, Tax Advisor, Tax Consultant, Business Advisor, Tax Trainer, Tax Auditor ,Tax Researcher.

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