Case Reference: Docol Construction Rehabilitation & Trading Company Ltd v Commissioner of Domestic Taxes (Tax Appeal E278 of 2025) [2026] KETAT 304 (KLR) (31 July 2026) (Judgment)
Background
Docol Construction Rehabilitation & Trading Company Limited is a company incorporated in Kenya, engaged in the business of construction, logistics and project execution for international organisations. The company described itself as an international company operating in Kenya, with its principal operations in Somalia, where it carried out construction and rehabilitation work under United Nations-funded infrastructure projects. Due to the volatile political situation in Somalia, the United Nations required that payments be routed through the company’s Kenyan bank accounts. The company maintained that its Kenyan role was strictly treasury-related—receiving and disbursing funds—and that it did not conduct any construction or commercial operations in Kenya.
The Kenya Revenue Authority flagged the company for review after noting that it was registered for VAT and in business but was not filing VAT returns. The Commissioner of Domestic Taxes undertook an audit covering the period 2019 to 2023 for Corporation Tax, Withholding Tax, PAYE and VAT. Despite issuing a notice under Section 59 of the Tax Procedures Act on 15 August 2024, a follow-up letter on 23 October 2024, and emails dated 17 September, 2 October and 18 October 2024, the Commissioner was not provided with the requested documents. The company later explained that the documents were held outside Kenya in Somalia, or that some did not exist because no construction contracts had been entered into in Kenya.
The Commissioner proceeded with a banking analysis and turnover test, concluding that the company had underdeclared turnover by KES 621,646,222. The audited financial statements lacked a breakdown of the cost of sales, and no ledgers, invoices or supporting documents were produced to substantiate those costs. Using his best judgment under Section 31 of the Tax Procedures Act, the Commissioner compared the company with four comparable businesses, finding an average gross profit margin of 25% against the company’s declared 2%.
The Commissioner then applied a Country Risk Premium, noting that the company’s projects were mainly in Somalia, a risky and unstable macroeconomic environment. Relying on June 2024 Country Risk Premium data compiled by Professor Aswath Damodaran of New York University, which showed Somalia’s CRP at 17.55% and Kenya’s at 9.51%, the Commissioner added Somalia’s CRP to the 25% gross profit margin, arriving at a gross profit margin of 42.55%. This helped drive additional assessments totalling KES 1,115,718,688, comprising Corporation Tax, Withholding Tax, PAYE and VAT. The company objected on 2 December 2024, but the Commissioner issued an objection decision on 7 March 2025 confirming the assessment. Aggrieved, Docol Construction filed a Notice of Appeal on 19 March 2025.
Docol Construction’s Arguments
Docol Construction presented a multi-faceted appeal before the Tax Appeals Tribunal, raising several key arguments:
First, on Corporation Tax, the company contended that its income was foreign-sourced and not taxable in Kenya. It argued that the contracts were executed, managed and performed entirely in Somalia under United Nations-funded infrastructure projects, and that no income accrued in or was derived from Kenya within the meaning of Section 3(1) of the Income Tax Act. It acknowledged that its initial self-assessment returns were filed in error, inadvertently reporting receipts as Kenyan income, and that the amended assessments were within the statutory five-year period allowed under Section 31 of the Tax Procedures Act.
Second, on Withholding Tax, the company argued that the Commissioner misapplied Section 10 of the Income Tax Act, which requires the person withholding tax to be a resident entity in Kenya or a person with a permanent establishment in Kenya. It maintained that Docol Somalia was a non-resident entity with no permanent establishment in Kenya, as its construction sites and place of effective management were situated in Somalia. The only link to Kenya was the use of a Kenyan bank account for transferring funds, which by itself did not constitute a permanent establishment or create a tax nexus. Consequently, no withholding tax should be deemed to arise on such payments.
Third, on PAYE, the company argued that the Commissioner erred in law and in fact by treating directors’ cash withdrawals as employment income. It stated that the funds withdrawn were used exclusively to pay workers and suppliers in Somalia, where banking facilities are unavailable, and that these withdrawals did not represent remuneration to the directors. The principal contract was executed by a non-resident entity with no place of business or employment presence in Kenya, and the entity could not be deemed an employer within the meaning of the Income Tax Act.
Fourth, on VAT, the company argued that the Commissioner erred in confirming VAT on supplies performed entirely outside Kenya. It posited that the services provided by Docol Somalia and the materials procured for Somali projects did not fall within the ambit of the Kenyan VAT Act, as the place of performance and consumption was Somalia, and that these transactions were not taxable supplies under Section 7 and Paragraph 2 of Part A of the First Schedule to the VAT Act, 2013.
Finally, the company submitted that its role was strictly treasury-related, involving the receipt and disbursement of funds for project implementation in Somalia, and that its arm’s-length remuneration should be 0.41 percent of the funds handled, as supported by a Transfer Pricing Policy and Benchmarking Study. It also sought leave to submit supporting documentation out of time, noting that the delay arose because key records were located in multiple jurisdictions, namely Somalia and Kenya.
KRA’s Arguments
The Kenya Revenue Authority defended its objection decision on several grounds:
First, the KRA explained that the company had failed to comply with the Tribunal’s Orders of 13 February 2026 and with Sections 51(3)(c) and 59(1) of the Tax Procedures Act. The Respondent emphasised that the company chose not to attach any documentary evidence to its objection or to validate the objection as required under Section 51(3) and 51(4) of the TPA. In the letter dated 15 August 2024, the KRA requested documents including signed copies of the audited accounts, bank account statements, general ledgers and any other relevant documents for the period under review, and none was provided.
Second, the KRA maintained that the company is a company incorporated in Kenya and that, for the purposes of Section 3(1) of the Income Tax Act, its income was either derived or accrued in Kenya because the management and control of its affairs were exercised in Kenya during the period under review. The KRA pointed to the company’s audited financial statements, self-assessment returns and trial balances as showing that the company derived its income in Kenya, not Somalia.
Third, on Withholding Tax, the KRA stated that a review of the company’s tax returns and records showed that it did not withhold and pay Withholding Tax despite having sub-contractors’ payments as an expense in its Trial Balance. The KRA invoked Section 10(1)(a) of the Income Tax Act and deemed the payments as income accrued or derived in Kenya. Under Section 35(1) of the Income Tax Act, a person making payment to a non-resident person not having a permanent establishment in Kenya in respect of payments chargeable to tax is required to deduct withholding tax at the appropriate non-resident rate.
Fourth, on PAYE, the KRA interrogated the company’s income tax PAYE returns and the salaries and wages expenses claimed in the financial statements and found variances between the salaries and wages declared in the Corporation Tax Returns and the Audited Financial Statements and the company’s declarations in the Income Tax PAYE returns. The KRA invited the company to explain or reconcile these variances on several occasions, but it did not respond. The directors declared no returns and no income, bonus or dividends.
Fifth, on VAT, the KRA stated that the company failed to submit its VAT self-assessment tax returns for the period under review, and thus the KRA was justified in invoking Section 29(1) of the Tax Procedures Act and issuing a default assessment. The KRA’s review of the company’s Bank Payments/Receipts disclosed that the company made local supplies and received payments from Kenyan companies, which should have been charged to VAT.
Finally, the KRA emphasised that the company was requested to provide various documents to demonstrate that the assessment as issued was erroneous or excessive, but the records were not availed. Accordingly, the Respondent found that Docol did not validate its objection as required by Section 51(3) of the TPA and thus failed to discharge its burden of proof under Section 56(1) of the TPA. The KRA relied on the decision in National Social Security Fund Board of Trustees v Commissioner of Domestic Taxes [2016] eKLR, where the High Court affirmed that “there is a world of difference between assertion and proof,” and on Commissioner of Domestic Taxes v Trical and Hard Limited [2022] KEHC 9927 (KLR), where it was held that the evidential burden of proof rests with the taxpayer to disprove the Commissioner.
TAT Observations
On the Respondent’s Objection Decision
The Tribunal held that the Respondent’s position was that the company’s objection was not supported by documents as required by law to show that it is a non-resident entity that is not taxable in Kenya. The Tribunal noted that the company admitted it did not provide the documents, and that its defence that the said documents were either not available or not in existence in Kenya was not supported by any evidence.
The Tribunal found that this defence appeared to be an afterthought because the company had the chance to provide these explanations at any of the following points but did not do so: when it was served with a notice under Section 59 of the TPA on 15 August 2024; when it was requested to provide documents vide a letter dated 23 October 2024; when it was served with emails dated 17 September, 2 October and 18 October 2024 requesting it to provide documents; and when it filed its objection to the assessment order dated 2 December 2024, wherein it could have explained the absence of the said documents.
The Tribunal held that the company’s current explanation at the appellate stage was not tenable, and that in any event the Tribunal is prohibited from considering explanations that were never provided to the Commissioner at the appellate stage, as was explained in the High Court in Commissioner of Investigation & Enforcement v Wamunyinyi [2026] KEHC 379 (KLR), where it was held that the Tribunal erred in law by admitting and relying on evidence that was not placed before the Commissioner at the objection stage.
On the Admissibility of Additional Documents
The Tribunal found that the company’s application in its submission to be allowed to adduce additional documents under Section 13 of the TPA and Articles 47 and 159 of the Constitution was a misnomer. Submissions are not pleadings and cannot be used to make formal applications which require the Respondent to file its application. The Tribunal held that if the company was in real need to be granted leave to file its appeal out of time, the proper thing would have been to file an Application seeking leave to file additional documents under Section 13(3) of the TAT Act. This was not done, and the Tribunal in the present circumstances could not admit the said documents at this stage.
The Tribunal noted the irony that the company filed an application dated 11 November 2025 to be allowed to amend its appeal, but failed to include the prayer that it currently seeks in the said application.
On the Burden of Proof
The Tribunal applied Section 56(1) of the Tax Procedures Act, which provides that the burden shall be on the taxpayer to prove that a tax decision is incorrect, and Section 30 of the Tax Appeals Tribunal Act, which provides that the appellant has the burden of proving that an assessment is excessive or that a tax decision should not have been made or should have been made differently.
The Tribunal cited Abyssinia Iron and Steel Ltd v Commissioner of Customs and Border Control (TAT No. 435 of 2022), where it was held that once the Appellant has provided evidence that the Respondent’s assessment was wrong, the Respondent must push back and show that its assessment was not arbitrary, capricious or imagined. However, in the instant appeal, the company admitted that it did not provide the said records, and its defence that the said documents were either not available or not in existence in Kenya was not supported by any evidence.
The Tribunal found that the company’s failure to provide relevant and persuasive evidence to make the Respondent reconsider its assessments meant that the Respondent’s assessment, which often has a presumptive notion of correctness, had not been impeached, as was explained in Mugo v Commissioner of Domestic Taxes (TAT E918 of 2024) KETAT 374 (KLR), where it was held that a failure to adduce positive documents to demonstrate that the Respondent’s decision was incorrect means the Respondent’s decision was justified and the Appellant failed to discharge its burden of proof.
Final Orders
After thorough analysis, the Tribunal delivered the following orders on 31 July 2026:
- The Appeal was dismissed in its entirety.
- The Respondent’s objection decision dated 7 March 2025 was upheld.
- Each party was ordered to bear its own costs.
The Tribunal effectively confirmed that Docol Construction remained liable for the tax assessments as confirmed in the objection decision, with the company having failed to discharge its burden of proof under Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act.
Practical Lessons
This judgment offers several valuable lessons for taxpayers and tax practitioners:
Documentation is everything. Docol’s downfall was not that its arguments lacked merit, but that it failed to produce the specific documents requested by the KRA. The Tribunal emphasised that there is a world of difference between assertion and proof. Taxpayers must ensure they can produce invoices, proof of payment, general ledgers, bank statements and all relevant correspondence to support their objections. The company’s explanation that records were in Somalia or did not exist was unsupported and came too late.
The objection stage is not a warm-up. The Tribunal made it clear that the objection stage is the main event. If you do not give the Commissioner the documents and explanations at that stage, the Tribunal may never hear your story, no matter how compelling it might have been. The Tribunal relied on Wamunyinyi for the principle that it cannot admit and rely on evidence that was not placed before the Commissioner at the objection stage.
Procedural applications matter. The company’s attempt to introduce additional documents through submissions was rejected. Submissions are not pleadings. If a taxpayer wants to file additional documents out of time, the proper course is to file a formal application under Section 13(3) of the Tax Appeals Tribunal Act.
The burden of proof is real and unforgiving. Section 56(1) of the TPA places the burden on the taxpayer to prove that a tax decision is incorrect. This burden is not discharged by forceful arguments or compelling narratives; it requires competent and relevant evidence. The Tribunal quoted the NSSF case with approval: “There is a world of difference between assertion and proof.”
The Country Risk Premium question remains open. The Commissioner’s use of a Country Risk Premium to adjust a gross profit margin from 25% to 42.55% is technically questionable. CRP is normally a cost-of-capital concept used in valuation and discount rates, not something added directly to a gross profit margin. However, the Tribunal never reached this issue because the case was decided on procedural grounds. A future taxpayer with better evidence and a properly framed appeal might challenge that methodology head-on.
Conclusion
The Docol Construction case is a sobering reminder that in tax disputes, good stories are not enough. Docol had a compelling narrative: United Nations-funded projects in Somalia, a Kenyan bank account used only for treasury, a non-resident Somali entity, and income that arguably never touched Kenya’s tax base. But when it came time to prove those explanations with hard evidence, the company came up short.
The Tribunal’s judgment affirms that the KRA’s assessments are presumptively correct, and that presumption endures until the taxpayer produces competent and relevant evidence to demolish it. The KRA is not required to accept explanations at face value; it is entitled to demand the underlying documentation. And when that documentation is not forthcoming, the Tribunal will uphold the assessment.
For businesses operating in Kenya, this case underscores the critical importance of maintaining comprehensive, accessible and organised tax records. In the high-stakes world of tax disputes, the difference between victory and defeat often comes down to a single document—a proof of payment, a ledger entry, a contract. Docol Construction learned this lesson the hard way, and the cost was over a billion shillings.
Key takeaway: The burden of proof lies with the taxpayer, and good stories are not enough. Keeping proper tax records is paramount. The burden of proof is provided for specifically by the law to be borne by the taxpayer. There are many cases in support of this. Where the law is grey on matters tax, the same is applied to benefit the taxpayer. The burden of proof is real and is discharged only by credible, relevant evidence.
