[2023] KETAT 584 (KLR)

Aspac International Sprl Limited v Commissioner of Legal Services & Board Coordination (Appeal 203 of 2021) [2023] KETAT 584 (KLR) (Civ) (29 June 2023) (Judgment)

Neutral citation: [2023] KETAT 584 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Appeal 203 of 2021

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, AK Kiprotich & Jephthah Njagi, Members

June 29, 2023

Between

Aspac International Sprl Limited

Appellant

and

Commissioner of Legal Services & Board Coordination

Respondent

Judgment

Background 1. The Appellant is a private limited liability organized and registered under the laws of Belgium.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and KRA is charged with the responsibility of among others, assessment, collection, accounting, and the general administration of tax revenue on behalf of the Government of Kenya.

3. Through a letter dated 19th June 2020, the Respondent issued the Appellant with a tax assessment of Kshs. 1,871,495. 863. 00 for Corporation tax, Withholding tax and Value Added Tax for the years under review. The amount comprised of the principal tax, penalties, and interest.

4. The Appellant replied to the assessment through a letter dated 29th June 2020. Thereafter, the Respondent requested for additional information.

5. Upon receipt of some of the requested information, the Respondent issued assessments on 28th August 2020 to which the Appellant objected on 26th August 2020.

6. The Respondent wrote to the Appellant through a letter dated 16th October 2020 demanding for the payment of the tax arrears within 14 days. The Appellant replied vide a letter dated 27th October 2020 objecting to the tax demand. The Respondent’s Independent Review of Objections Section wrote an email to the Appellant on 21st October 2021 giving the Appellant 21 days to provide documentation to validate its objection.

7. The parties held a meeting with the aim of resolving the matter on 20th January 2021. Vide a letter dated 25th January 2021 the Respondent gave the Appellant 21 days to provide exemption documents failure to which the assessments were to be confirmed.

8. The Respondent subsequently issued its objection decision vide a letter dated 31st March 2021 demanding for principal taxes amounting to Kshs. 1,948,193,149. 00 together with the resultant interest and penalties.

9. The Appellant being dissatisfied with the Respondent’s objection decision filed this Appeal dated 30th April 2021 and filed on 3rd May 2021.

The Appeal 10. The Appeal as stated in the Memorandum of Appeal dated 30th April, 2021 and filed on the 3rd May, 2021 was premised on the following grounds:i.That the Respondent erred in law and fact by making a finding that the Appellant won contracts for supply in Kenya when facts indicated otherwise.ii.The Respondent erred in both fact and law in making a finding that the Appellant owned a building site, a construction or installation project when there was no evidence to support such finding.iii.The Respondent erred in both fact and law by making the finding that the Appellant derived income or profits from the projects allegedly undertaken when there was no evidence to support such finding.iv.That the Respondent erred in law and fact by making a finding that the Appellant was paid or received payments directly from the buyers when there was no evidence to support this finding.v.The Respondent erred in law and in fact by ignoring clear provisions of the contracts signed by the parties that expressly indicated that the Appellant was not liable to payment of any taxes.vi.The Respondent erred in law and fact by introducing its opinion on the clear provisions of the contracts signed between the parties.vii.By seeking to introduce explanations and meanings to clear provisions of the contracts the Respondent fell into error.viii.The Respondent erred in law and fact by ignoring the fact that the respective buyers in the respective contracts were liable to pay the taxes.ix.By seeking to countermand the contents of the legal opinion of the Attorney General of the Republic of Kenya the Respondent fell in error.x.The Respondent erred in law and fact by not finding that the contracts formed part of a single transactions and were thus inseparable.xi.The Respondent erred in law and fact in coming up with a tax liability of Kshs. 1,495,706,135 which was not justified in any form.xii.The Respondent fell into error by making a finding that the Appellant was liable to pay withholding tax when the contracts did not provide for payment of withholding tax.xiii.The Respondent erred in law and fact by finding that the Appellant was liable to pay VAT at Kshs. 370,622,429 which tax was not payable.xiv.The Respondent erred in law and fact in rejecting the Appellant’s objection.xv.The Respondent erred in law and fact by assessing taxes payable at Kshs. 1,402,494,241. 00 and the resultant interest and penalties which assessment is an estimate and not supported by any evidence.

The Appellant’s Case 11. The Appellant’s case is premised on the hereunder filed documents and proceedings before the Tribunal:i.The Appellant’s Statement of Facts dated 30th April 2021 and filed on 3rd May 2021 together with the documents attached thereto.ii.The Appellant’s Further Statement of Facts dated 29th June 2021 and filed on 2nd July 2021. iii.The Appellant’s Bundle of Documents dated 12th May 2021 and filed on 11th June 2021. iv.The Appellant’s Further List and Bundle of Documents dated and filed on 14th February 2022. v.The Appellant’s witness statement of Jacques Massart dated 9th July 2021 and filed on 14th February 2022 that was admitted in evidence on oath on 16th November 2022. vi.The Appellant’s written submissions dated and filed on 2nd December 2022.

Tax Provisions in the Agreements 12. The Appellant submitted that in order to fund infrastructure projects, the Government of Kenya (hereinafter referred to as Kenya) borrowed funds through buyer-credit agreements between Kenya (the borrower) and Belfius Bank SA NV Belgium (the lender). The contracts, it averred, involved provision of clean drinking water in the towns of Mavoko known as Mavoko Drinking Water Supply Project under Tana Athi Water Services Board.

13. As part of the lending contract terms and conditions, the Appellant stated, Kenya being the borrower and the respective water services boards being the buyers, they requested the lender to grant buyer credit through the Appellant as a supplier for the realization of the project.

14. According to the Appellant, Kenya on the one part as a borrower and Belfius Bank SA /NV of the other part as a lender entered into agreements dated 4th October 2013 for a buyer credit facility for execution of additional works in the framework of Iten-Tambach water supply project. It further added that Kenya on one part as a borrower and Belfius Bank SA /NV of the other part as a lender entered into agreements dated 29th May 2017 for a buyer credit facility for realization of the Mavoko drinking water supply project-Component A.

15. The Appellant added that Kenya on the one part as a borrower and Belfius Bank SA /NV of the other part as a lender entered into agreements dated 29th May 2017 for buyer credit facility for realization of the Mavoko drinking water supply project-Component B.

16. It was the Appellant’s assertion that each of the agreements was accompanied by a legal opinion of the Attorney-General of the Republic of Kenya who stated, inter alia, that the borrower could not withhold or deduct any taxes from payments due to be made under the credit agreements.

17. The Appellant stated that the agreements referred to above made reference to the commercial agreements made between the Appellant herein (the supplier) and the respective water services boards (the buyers). These agreements, the Appellant averred, expressly provided that the supplier and its subcontractors would not be liable to any taxes such as but not limited to, Excise Duties, VAT, Income taxes arising in the framework of the execution of the contract.

18. It was the Appellant’s assertion that the parties entered into commercial agreements dated 27th September 2016 and 21st November 2016 between Tana Athi Water Services Board, Kitui and ASPAC Intl (SPRL), Brussels, Belgium. The parties also entered into Agreements dated 17th December 2014 between Rift Valley Water Services Board and ASPAC Intl (SPRL) Brussels Belgium, and on 19th December 2012 between Rift Valley Water Services Board and ASPAC Intl (SPRL) Brussels Belgium.

19. According to the Appellant, the entire contents of the agreements point to the fact that the loans and the disbursements were tax exempt from inception and the parties understood their obligations right from inception. The Appellant stated that the Agreements provided thus:“The borrower hereby acknowledged and agreed that the Supplier and his subcontractors shall not be liable for any taxes arising in the framework of the execution of the contract.”

20. It was further agreed, the Appellant added, that the buyer (in this case the two water companies would seek exemption for any such taxes. If the exemption was not granted, then the buyer (not the supplier) would be liable to pay the tax.

21. It was the Appellant’s submission that the parties are bound by the terms of the contract and the Respondent, being an agency of the Government cannot ask the Tribunal to re-write the contract. To buttress its position, the Appellant cited Pius Kimaiyo Langat v Co-operative Bank of Kenya Limited [2017] eKLR as well as National Bank of Kenya vs Pipeplastic Damkolit (K) Ltd [2002]2 EA 503 where the court held that parties are bound by the terms of the contract unless there is fraud, coercion, and undue influence. Additionally, it is not the business of courts to rewrite contracts.Whether the projects undertaken by the Appellant could be subject to tax and whether the demand for Kshs 1,871,495,863. 00 is justified and payable.

22. The Appellant averred that it was also understood right from inception by the Treasury of the Republic of Kenya, a party to the credit agreement, that the projects were official aid funded projects financed by Belfius Bank SA/NV of Belgium. That by a circular dated 11th December 2019 by the Cabinet Secretary the National Treasury and Planning, at paragraph 3 the issue of taxes was discussed.

23. It was the Appellant’s assertion that the PS National Treasury, through a letter dated 12th March 2020 addressed to the Ambassador, Embassy of Kingdom of Belgium copied to the Appellant confirmed that the official aid funded projects are exempted from payment of all indirect taxes except withholding tax. This, it insists, went against the express provisions of the Agreements signed between the Appellant and the National Treasury.

24. The Appellant argued that notwithstanding the fact that it was understood and agreed that the contracts were tax exempt, the Respondent made a tax demand of Kshs 1,402,494,241. 00 with attendant interests and penalties, arising out of the aforesaid 3 contracts.

25. It was the Appellant’s submission that upon receipt of the demand, it consulted with the Foreign Affairs, Foreign Trade and Development Cooperation of the Kingdom of Belgium who wrote to the Cabinet Secretary for the National Treasury through a letter dated 26th June 2020. The Cabinet Secretary replied through a letter dated 15th July 2020 indicating that the matter was under consideration and the way forward will be communicated.

26. In a demonstration that the transactions were tax exempt, the Appellant argued, the PS National Treasury through a letter dated 25th August, 2020, addressed to the Commissioner General KRA explained the buyer credit contracts and who was to pay tax. The letter, the Appellant added, showed that one of the buyers (Tanathi) had made a payment of Kshs. 63,528,884. 00 as withholding tax. It averred that it never received a reply from the Respondent. That instead, it was served with an outstanding tax demand dated 16th October 2020 which it replied to through a letter dated 27th October 2020.

27. The Appellant stated that following other correspondences, and meetings it wrote a letter dated 1st February 2021 to the National Treasury culminating in a meeting on 12th February 2021. In the meeting it became clear to the Appellant that the National Treasury had changed its position and seemed to side with the Respondent.

28. It contended that in line with the deliberations and in good faith, it prepared letters and contacted Rift Valley Water Works Development Agency and Tanathi Water Works Development Agency with the view of resolving the issue. That it also sent a letter to the PS Ministry of Water and Sanitation and copied the letters to the Respondent. That the respective Government Agencies including PS, did not acknowledge receipt of the letters nor have they made any reply to the letters.

29. The Appellant asserted that the dispute herein arises out of the Respondent’s misunderstanding of the nature of the contracts and the role of the Appellant in the contracts. That the Respondent for reasons known to it had unfairly targeted the Appellant despite the fact that the Appellant dealt with Government agencies who were liable to pay the taxes.

30. It was the Appellant’s assertion that the National Treasury was avoiding its obligations under the contract despite clear provisions leaving the tax authorities which is a function under it to harass the Appellant.

31. The Appellant argued that the Respondent had not addressed any of the letters addressed to the Commissioner General from the National Treasury but seemed determined to bring the operations of the Appellant in the Country to a halt.

32. The Appellant reiterated that it had not filed any nil returns, and at all times relied in the representations given to it by the Cabinet Secretary National Treasury and the Honourable Attorney General of the Republic of Kenya on the issue of the tax-exempt status of the contracts under question.

33. It was the Appellant’s averment that based on the nature of the projects and the intricate nature of the financing arrangements, it was single sourced by the buyers with knowledge of the National Treasury and the parent Ministry to facilitate the undertaking and delivery of the projects.

34. The Appellant insisted that it did not receive any income in Kenya from the contracts that were entered into in Kenya. It averred that it was a supplier through whom the lender provided buyer credit to finance and realize the two projects. The buyer being the water companies that were financed by the lender.

35. The Appellant submitted that the invoicing and payment process in the financial projects was strictly undertaken by its clients (the buyers) in the commercial contracts, who approved the invoices for the works and facilitated the process through the Ministry of Water Resources budgetary process and the National Treasury. That the end process would be a draw down request from the National Treasury to the lender in this case Belfius Bank SA/NV to the Appellant. Thus, the issues that are in contention in this Appeal were squarely in the hands of the buyer, the parent Ministry, and the borrower in this case the National Treasury.

Whether the Appellant has a branch in Kenya and whether the Assessment notices were sent to the proper party 36. On the issue of whether the Appellant had a branch in Kenya it was the Appellant’s submission that it did not have a branch in Kenya called Aspac Intl SPRL Limited Kenya Branch (Aspac SPRL) nor did it have any subsidiary or any fully fledged subsidiary in Kenya called Aspac International East Africa Limited (Aspac EA). That Aspac International East Africa Limited was a separate legal entity and separate taxpayer with no subsidiary relationship at all with the Appellant. It insisted that it only has a certificate of compliance for a foreign company. It argued that it was thus erroneous to contend that it had in existence a fixed place of business that places it in the status of a Permanent Establishment.

37. To support its averment, the Appellant cited Clause 2 of the Buyer Credit Agreement where the Appellant is named as a supplier and described as a limited liability company registered under the laws of Belgium having its offices in Belgium. Further, the commercial agreement executed between the water companies and the Appellant describes the company as ASPAC International (sprl) of Avenue Franklin Roosevelt, 252, B -1050 Brussels Belgium. The audit findings dated 19th June 2020 and the assessment dated 31st March 2021 were both addressed to:The Directors,ASPAC International Sprl Limited (Kenya Branch)O. Box 73146 -00100Nairobi

38. It argued that this is a completely different entity from the party that contracted with the Government and the water companies. It further added that the assessment orders in the Appellant’s bundles refer to ASPAC Intrl Limited of P. O. Box 66060 -00800 Nairobi which is a different entity from the one that contracted the Government.

39. It insisted that Aspac EA was a separate legal entity and duly registered and active taxpayer separate from the Appellant with its own power to enter into contracts with third parties including contractors out of the control of the Appellant with engagement and assumption of risk of its own.

40. It was the Appellant’s assertion that it had no registered offices in Kenya, other than its offices in Belgium. It reiterated that it did not earn any income in Kenya, nor did it derive any income in Kenya. It avers that the payments were made towards the repayment of the loan in Belgium. It insisted that it was not paid any money in Kenya. That the tax claim is in the circumstances not proven and not explained at all.

41. The Appellant argued that the legal opinion of the Honourable Attorney General was binding on the National Treasury under which the Respondent falls and it was incomprehensible that it was the party countermanding the opinion.

42. It was the Appellant’s assertion since the Government through the Ministry of Water and the Treasury paid the Appellant the entire contractual sum, it had a legitimate expectation that the parties would be bound by the provisions of the agreements that were entered into between the parties.

43. The Appellant added that by expressly agreeing that the agreements would be tax exempt and later demanding for taxes after the conclusion of the projects, the Government and by extension, the Respondent, violated the Appellant’s legitimate expectation that the agreements were tax exempt. To support its argument, the Appellant cited Jane Kiongo & 15 others v Laikipia University & 6 others [2019] eKLR where the court stated:“Legitimate expectation is based on legitimate representation made by an authority which has power to make such representation that certain actions will be done in a particular way without any qualification. Such representation gives rise to legitimate expectation and the authority or institution is thus bound by that representation. “

44. There is no doubt, the Appellant averred, that the Government made an express representation through the contracts signed that the Agreements were exempted from taxes. That the contracts therefore gave the Appellant a legitimate expectation that no tax would be demanded. That the Respondent, as an agent of the Government is therefore bound by the representation made in the contract.

45. According to the Appellant, the Respondent acknowledged at Paragraph 41 of its Statement of Facts as to who was obliged to seek exemptions in this case was the buyer and as to who was to make tax payments again the buyer was to make the payments.

46. The Appellant cited Canada (Attorney General) v. Mavi [2011] 2 S.C.R. 504 where the Supreme Court of Canada stated that:“(68)Where a government official makes representations within the scope of his or her authority to an individual about an administrative process that the government will follow, and the representations said to give rise to the legitimate expectation are clear, unambiguous and unqualified, the government may be held to its word, provided the representations are procedural in nature and do not conflict with the decision maker’s statutory duty. Proof of reliance is not a requisite.”

47. It is the Appellant’s assertion that from the terms of the agreements, it was the water companies that benefitted from the contract. The Appellant added that in the commercial contracts, the companies were referred to as the employers. The contracts, which were in conformity with the agreements provided that the employer was to pay the taxes and that it was the employer’s duty and not the Appellant’s to either seek the exemptions or pay the taxes.

48. The Appellant avers that in an acknowledgement of who was liable to pay the taxes due, Tanathi paid to the Respondent Kshs 68,528,884. It adds that this amount is not taken in consideration in the assessment order.

49. With regards to request for documents, the Appellant stated that all documents that were required by the Respondent and were in possession and within the power of the Appellant to provide, were provided to the Respondent. That over and above, the Appellant was available at all times to meet the Respondent’s officers.

The Appellant’s Prayers 50. The Appellant prayed that:a.The Appeal be allowed in its entirety.b.The Objection decision dated 31st March 2021 and the resultant assessment be set aside.c.The Respondent do pay the costs of the Appeal.

The Respondent’s Case 51. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal:i.The Respondent’s Statement of Facts dated 27th May 2021 and filed on 28th May 2021 together with the documents attached thereto.ii.The Respondent’s List of Documents dated 16th August 2021, filed on 17th August 2021iii.The Respondent’s witness statement of Eric Mwangi dated 16th August 2021, filed on 17th August 2021, and admitted in evidence on oath on 16th November 2022. iv.The Respondent’s written submissions dated and filed 30th November 2022.

52. According to the Respondent, it noted that despite being awarded some contracts in Kenya, the Appellant was filing nil Corporation tax returns. It issued the Appellant with a tax assessment of Kshs 1,402,494,241. 00 for Corporation tax, VAT and Withholding tax for the years under review.

53. It was the Respondent’s assertion that it requested for information to enable it attribute profits for the projects in Kenya but only received partial information relating to subcontractors and proceeded to issue assessments. The parties thereafter attempted to resolve the matter amicable but failed resulting in the Respondent issuing an objection decision dated 31st March 2021 for a demand of Kshs 1,948,193,149. 00 inclusive of penalties and interest.

54. According to the Respondent, the Appellant won and was awarded the following contracts in Kenya:a.Sabor-Iten-Tambach Water Supply Project (Keiyo District) (“Iten 1”) worth 15,000,000 Eurosb.Construction of water pipes around Nakuru Town (“Iten 2”) worth 10,000,000 Eurosc.Recycling and supply of water from Athi River (“Mavoko”) worth 25,000,000 Euros

55. The Respondent submitted that two projects namely Iten 1 and Iten 2 had been completed while the third project named Mavoko was 90% complete. It found that Aspac SPRL had been subcontracting the works to various subcontractors to do all works in Kenya.

56. While citing Section 3(1) of the Income Tax Act, the Respondent asserted that the Section allows income tax to be charged on a person whether resident or not on income that has been brought about by any works done in Kenya. The Appellant in this case derived income from contracts entered into in Kenya hence fell within Section 3(1) of the Income Tax Act.

57. According to the Respondent, there is no dispute that the Appellant had an established presence through its Branch called Aspac Intl SPRL Limited Kenya Branch (Aspac SPRL). To support this argument, the Respondent cited Section 2(1) of the Income Tax Act which defines permanent establishment in relation to a person. It also averred that the Appellant also had a fully-fledged subsidiary in Kenya called Aspac International East Africa Limited (Aspac EA).

58. It was the Respondent’s assertion that the existence of a fixed place of business through which Aspac SPRL carries on its business led to its taxation as a PE. In the instant case, each of the projects undertaken by the Aspac SPRL which consist of a building site, a construction or installation project existed for more than six months hence the threshold for existence of a permanent establishment for tax purposes had been met. Further, since Aspac SPRL was a registered branch in Kenya with a fixed place of business. As such, Aspac SPRL was a Permanent Establishment in Kenya.

59. Notably, the Respondent averred, Aspac SPRL had no assets or employees in Kenya but had delegated all functions in Kenya to its subsidiary, Aspac EA, through service agreements.

60. From all the service contracts signed with Aspac SPRL, the Respondent stated, Aspac EA was to organize and supervise the construction of the projects and also construct the pipework, the hydro mechanical and electromechanical works. In particular, Aspac EA was required to provide the following services:a.Design and engineering.b.Installation of equipment and systems and construction of structures, including the technical, administrative, and logistic aspects linked to the execution of the project in conformity with the laws and standards applied in Kenya.c.Perform any other activities or tasks related to the previously mentioned services which were necessary for the proper and timely implementation of the project.d.The support to the Aspac Intl personnel involved in the project. AIEA will have to provide all necessary assistance to the Aspac Intl professionals whilst on mission in Kenya.e.The monitoring of the respect by RVWSB of all the contractual clauses (including possible amendments and additions).f.The follow-up of the invoices transmitted to RVWSB for payment.g.The collection of data and information for Aspac Intl.

61. According to the Respondent, the above functions involve significant people functions relevant to the assumption of risk in relation to the project since they involve active decisions that were binding on Aspac SPRL, and these functions were very critical in the execution of the projects. All these functions were being carried out by Aspac EA at its main office in Westlands, or site offices, which was the same registered office of Aspac SPRL. Furthermore, Aspac EA had been providing services exclusively to Aspac SPRL which makes it a dependent agent PE.

62. It is not in dispute, the Respondent submitted, that Aspac SPRL was a non-resident person. However, it was registered in Kenya under a certificate of compliance. It added that Aspac SPRL derived income in Kenya for the period 2015-2019.

63. The Respondent denied that it ignored or misapprehended the contracts awarded to the Appellant as claimed in the Appellant’s Memorandum of Appeal. It reiterated that Section 3(1) of the Income Tax Act brings to charge for a year of income all income of a person whether resident or non-resident which accrued in or was derived from Kenya.

64. It averred that the Appellant was a non-resident that derived income for the projects that were carried out in Kenya and ought to have paid the corresponding tax. That Section 18(3) read together with the Income Tax (Transfer Pricing) Rules, 2006 requires an arm’s length determination of profits attributable to the Kenyan operations. That further guidance on attribution of profits to a PE is contained in the Organization for Economic Cooperation and Development (OECD) 2010 Report on the Attribution of Profit to Permanent Establishments (OECD 2010 Report). The OECD 2010 report details the Authorized OECD Approach (AOA) which hypothesizes a PE as a functionally separate entity taking into account the functions performed, assets used, and risks assumed by an enterprise through the PE.

65. It was the Respondent’s submission that in assessing the tax liability of the Appellant, it reviewed the financing and commercial agreements and the legal opinion of the Attorney General on the credit agreement for Sabor-Iten-Tambach water supply project Clause 10. 2 of the Financing Agreement for both Mavoko and Sabor-Iten water supply projects states as follows:“the borrower hereby acknowledges and agrees that the supplier and its subcontractors shall not be liable for any taxes (such as but not limited to, excise duties, value added taxes, and income tax) arising in the framework of the execution of the contract.”

66. The Respondent added that in the legal opinion Ref PA 04/12 dated 18th November 2013 on the credit agreement for Sabor-Iten-Tambach water supply project, the Attorney General stated as follows at Paragraph H;“As of the date hereof, Kenyan tax laws and regulations do not require the borrower to withhold or deduct any taxes from payments due to be made by the borrower under the credit agreement.”

67. It was the Respondent’s assertion that the above opinion only related to payments by the Kenyan Government to the lender, Belfius Bank and did not extend to payments made under the commercial agreements between Aspac SPRL and Rift Valley Water Services Board.

68. It averred that liability payment of taxes was placed on the buyer in the financing contract where an exemption was not obtained. However, it added, such commercial agreement can only be enforced by the Appellant for any tax due.

69. According to the Respondent, the Appellant was liable for withholding tax as it made payments to its subcontractors for the execution of various contract works in Kenya amounting to Kshs. 1,870,543,526. 00 but failed to withhold tax in accordance with Section 35(3) of the Income Tax Act. Thus, the Appellant was assessed on the total amount paid to subcontractors and the resulting tax liability due was Kshs. 81,864,584. 00.

70. The Respondent submitted that the provisions of the VAT Act 2013 when the agreements were signed required the Appellant to pay VAT on the Sabor-Iten project. It argued that at that time, the Act did not include a clear provision for tax exemption applicable to Official Aid Funded Projects (OAFPs). Furthermore, the tax exemptions in respect to OAFPs came into effect from June 2015 vide Finance Act 2015. The respective contract was signed on 18th October 2013 which was after the commencement of the VAT Act 2013 and therefore VAT was payable for the period before June 2015.

71. The Respondent insisted that the liability for VAT was clearly communicated to the Appellant by National Treasury through its exemption letters which stated as follows:“The funding agreement was signed on 18th October, 2013; therefore, the VAT Act does not provide for exemption in respect of this project. Accordingly, VAT will be paid by the implementing ministry or agency;”That this therefore means that the Appellant ought to have charged VAT for all supplies made during this period in accordance with Section 5 to the VAT Act 2013. It averred that from the available records, there was no evidence that VAT was paid for this period and the same had not been provided as requested in the Respondent’s preliminary finding letter. That the resultant tax liability was Kshs. 370,622,429. 00.

72. To counter the Appellant’s argument that the agreements between Kenya and Belgium as well as the credit and commercial agreements contained a provision on the exemption of tax, the Respondent argued that Section 13 of the Income Tax Act cannot exempt tax. Rather, an exemption can only be granted upon express action by the Cabinet Secretary making the exemption through a Gazette Notice.

73. According to the Respondent, the contract provided that the tax exemption needed to be sought and was not in fact guaranteed. The Respondent cited Clause 14 of the contract which stated that:“the buyer shall seek exemptions for any such taxes and if exemption would not be granted, the buyer (instead of the supplier) shall be liable to pay such taxes.”

74. It averred that Clause 14. 1 (b) of the commercial agreement between Supplier (Aspac SPRL) and Buyer (Rift Valley Water Services Board and Tanathi Water Services Board), Clause 14. 1 (b) provided as follows:“the contractor shall pay all taxes, duties and fees required to be paid by him under the contract, the contract price shall not be adjusted for any of these costs except as stated in subclause 13. 7 [Adjustment for charges in legislation].”Thus, it argued, the Appellant understood its tax position before signing all the commercial contracts. It added that it was worth noting that all commercial contracts were signed before signing the financial agreements.

75. Regarding the rejection of the Appellant’s objection, the Respondent stated that it wrote to the Appellant indicating that it needed to provide the following documents to support its objection:a.Transfer pricing policy detailing the attribution of profits to the PE in Kenya and Aspac SPRL in Belgium.b.A schedule of all costs and the corresponding verifiable documentary evidence for service provided from Belgium with respect to the Kenyan projects.c.Gazette Notice or letter from National Treasury exempting the income of Aspac SPRL from tax.d.All subcontract agreements and the corresponding invoices received from subcontractors with respect to projects carried out in Kenya.

76. According to the Respondent, the Appellant did not provide the required documents and thus did not discharge the burden of proof as per Section 56 of the Tax Procedures Act. Thus, the Respondent determined the assessment to the best of its judgement as per Section 24 of the Tax Procedures Act.

77. The Respondent argued that whereas the agreements contained a clause that the Appellant was not liable for tax, the Appellant was obligated to obtain the requisite exemptions following the proper channels laid out in law. To support its case, the Appellant cited Leonola, J in Pharmaceutical Manufacturing (K) Co. Ltd & Others vs. Commissioner General of the Kenya Revenue Authority & 2 Others [2014] eKLR where he stated as thus:“exemption from paying taxes may well be there but the same has to be from proper approvals being obtained and it is upon the applicant to show that it has been exempted from payment of taxes since as held in Dileep Manubhai Patel & 3 Others vs. Municipal Council of Nakuru & Another [2014] eKLR as cited in Republic vs Kwale County Government Ex parte Kenya Airports Authority [2016] eKLR:“it is the duty and obligation of every person liable to pay tax to pay that respective tax, for that is the price of modern civilization, and in particular of living in planned urban areas, townships, and cities. It is the price of collective benefits for the provision of clean water, public lighting, roads and ancillary facilities and maintenance thereof…”

78. It was the Respondent’s submission that the Appellant had a duty to ensure that the exemptions had been sought and given since it was a party to the agreements. It added that the Appellant was the party being paid for the contract and therefore deriving an income and was aware of the tax obligations provided for. It added that the onus was on the Appellant to prove that it obtained exemptions.

79. In refuting the Appellant’s claim of legitimate expectation, the Respondent argued that legitimacy of such a claim can only be provided by statute or a legally recognized form of exemption such as a Gazette Notice as required under the Income Tax Act. Thus, it added the Appellant’s expectation was unreasonable since exemptions were a matter of legislative authority which resides in Parliament as provided by the Constitution.

80. The Respondent insisted that the various letters and correspondences between the Appellant, the Government and the Government of Belgium cannot be deemed to constitute an exemption. It adds that the letter from the National Treasury dated 10th January 2019 states that ‘This letter is not an exemption’. The letter went on to state that withholding taxes were due on the contract from the Appellant. That this was followed by a letter dated 11th December 2019 from the National Treasury giving guidelines on the payment of withholding tax on payments made to contractors working on official aid funded projects. In a letter dated 10th January 2019, Treasury lists the customs duties, VAT, import declaration duties and Railway Development Levy on motor vehicles, plant and materials and equipment will be exempt. However, this letter does not exempt Corporation tax, VAT on goods and services not listed and Withholding tax which the Respondent assessed the Appellant. This, it argues, shows that if any exemption existed, it was not blanket and the Respondent only assessed the tax heads that were included in the listed taxes.

81. It was the Respondent’s submission that the National Treasury in a letter dated 12th March 2020 addressed to the Belgian Ambassador was clear that Income tax was not exempted and would be governed by the provisions of the Income Tax Act. In yet another letter dated 15th July 2020, the National Treasury confirmed to the Belgian Government that the issue of taxes was a legislative issue and the same is governed by Kenya’s Income tax laws.

82. The Respondent admitted that the Appellant has Withholding tax credits of Kshs. 68,528,884. 00 from Tanathi as stated in the letter dated 25th August 2020. It however stated that the credit could only be claimed by the Appellant upon filing its returns which the Appellant had failed to do.

83. That the Appellant cannot stop the Respondent from enforcing the law and carrying out its statutory mandate of collection of taxes. To support its assertion, the Respondent cited Henry Muthee Kathurima v Commissioner of Lands & Another, Civil Appeal No. 8 of 2014 where the court stated that:“…estoppel cannot be used to circumvent Constitutional provisions and estoppel cannot override express statutory procedures; there can be no estoppel against a statute. (See Tarmal Industries – v- Commissioner of Customs and Excise, (1968) E.A. 471; see also Maritime Electric Co. Ltd v General Dairies Ltd. (1937) 1 All ER 748).

84. The Respondent insisted that as per Section 56 of the Tax Procedures Act the Appellant bears the burden to prove that it had exemptions. It argued that the Appellant failed to discharge its burden at the assessment stage and during the Appeal. It added that the Appellant derived income in Kenya no matter how minimal and thus was subject to tax in Kenya.

The Respondent’s Prayers 85. Based on the above, the Respondent prayed that the Tribunal:a.Upholds the assessment issued in the objection decision dated 31st March 2021 by the Respondent.b.That this Appeal be dismissed with costs to the Respondent as the same is without merit.

Issues for Determination 86. The Tribunal upon due consideration of the pleadings, documents, evidence adduced by witnesses and the written submissions filed on the part of both parties was of the view that the issues falling for determination were as follows:a.Whether the Appellant was exempted from tax in Kenya.b.Whether the Appellant is liable for the demanded taxes.

Analysis and Determination a. Whether the Appellant was exempt from tax in Kenya 87. The genesis of this dispute was the Respondent’s tax demand and subsequent objection decision dated 31st March 2021 demanding for total taxes amounting to Kshs. 1,948,193,149. 00 inclusive of penalties and interest. The taxes comprised of Kshs. 1,495,706,135. 00 being Corporation tax, Kshs. 81,864,584. 00 being Withholding tax, and Kshs. 370,622,429 being VAT. The taxes arose from the contracts that were undertaken by the Appellant in Kenya.

88. To determine whether the Respondent was justified to demand taxes, the Tribunal first sought to determine if the Appellant was liable to tax in Kenya.

89. The Appellant insisted that the agreements exempted it from tax. It averred that the agreements expressly provided that the supplier and its subcontractors would not be liable to any taxes such as but not limited to, excise duties, VAT, income taxes arising in the framework of the execution of the contract.

90. It further added that each of the agreements entered were accompanied by the legal opinion of the Attorney-General of the Republic of Kenya who stated, inter alia, that the borrower could not withhold or deduct any taxes from payments due to be made under the credit agreements.

91. The Respondent on the other hand denied that it ignored or misapprehended the contracts awarded to the Appellant as claimed by the Appellant and reiterated that Section 3(1) of the ITA brings to charge for a year of income all income of a person whether resident or non-resident which accrued in or was derived from Kenya.

92. It averred that the Appellant was a non-resident that derived income for the projects that were carried out in Kenya and ought to have paid the corresponding tax. That Section 18(3) of the Income Tax Act read together with The Income Tax (Transfer Pricing) Rules, 2006 requires an arm’s length determination of profits attributable to the Kenyan operations.

93. The Tribunal perused through one of the Buyer Credit Agreements dated 29th May 2017 and noted that the Agreement confirms that the Appellant (supplier) had entered into a commercial contract dated 23rd May 2017 with Tanathi Water Services Board (Buyer) for the realization of the Mavoko Drinking Water Supply Project. Clause 10. 2 of this Agreement states as follows regarding taxes related to the execution of the project:“The Borrower hereby acknowledges and agrees that the Supplier and its subcontractors shall not be liable to any taxes (such but not limited to excise duties, value added taxes and income tax) arising in the framework of the execution of the Contract.In accordance with clause 14 of the Contract, the buyer shall seek exemption for any such taxes and if exemption would not be granted, the buyer (instead of the Supplier) shall be liable to pay such taxes.”

94. A reading of the above clause indicates that the Appellant was required to obtain exemptions. Even if it had not mentioned that it was to seek exemptions, can an agreement confer a tax exemption?

95. Article 210(1) of the Kenya Constitution 2010 provides as follows regarding exemptions:“No tax or licensing fee may be imposed, waived, or varied except as provided by legislation.”

96. In addition, various tax legislations provide for procedures for exemption from a tax. Under the Income Tax Act, Section 13(1) & (2) provides as follows regarding exemption from tax;“(1)Notwithstanding anything in Part II, the income specified in Part I of the First Schedule which accrued in or was derived from Kenya shall be exempt from tax to the extent so specified.(2)The Minister may, by notice in the Gazette, provide—(a)that any income or class of income which accrued in or was derived from Kenya shall be exempt from tax to the extent specified in such notice;(b)that any exemption under subsection (1) of this section shall cease to have effect either generally or to the extent specified in the notice.”

97. In the case of the VAT, the VAT Act is an exclusive Act in that it taxes everything except the supplies that are specifically exempted from tax. Thus, for any supply to be exempt, it must be specifically stated to be exempt in the Schedule to the Act.

98. The import of the above provisions is that exemptions can only be granted by Parliament and that the proper procedure must be followed. No evidence has been placed before the Tribunal indicating that Parliament approved the exemption nor was the proedure to obtain the exemptions followed. As such, the Tribunal can only conclude that there was no such exemption.

99. On the question of whether the Appellant had a legitimate expectation, it is well established that legitimate expectation cannot exist where there is a violation of law. The Supreme Court in Communications Commission of Kenya & 5 others V Royal Media Services Limited & 5 others [2014] laid out the principles that govern legitimate expectation. It stated that: -a.There must be an express, clear, and unambiguous promise given by a public authority;b.The expectation itself must be reasonable;c.The representation must be one that was competent and lawful for the decision-maker to make; andd.There cannot be a legitimate expectation against clear provisions of the law or the Constitution.

100. In this case, the representation was not one that could be made by the persons signing the agreement. Further, as stated it goes against the provisions of the Constitution.

101. Consequently, the Tribunal finds that the Appellant was not exempt from tax.

b. Whether the Appellant is liable for the demanded taxes 102. A review of the contracts indicates that the Appellant won a tender in response to a proposal in which it offered to ‘design, execute and complete the works and remedy any defects therein…’ The Appellant was therefore being paid for providing these services.

103. It was the Appellant’s assertion that it did not make any money in Kenya. It insisted that the payments made were made towards the repayment of the loan in Belgium and that the Appellant was not paid any money in Kenya. It further added that it neither had a branch nor a subsidiary in Kenya.

104. The Respondent on its part insisted that the Appellant operated in Kenya and had a permanent establishment in Kenya and was therefore subject to tax under the Kenyan law.

105. Tax liability is governed by various provisions of the various tax laws in Kenya. The Tribunal will address the question of each tax liability under the Income Tax Act and the VAT Act.

i. Corporate Tax 106. Under the Income Tax Act, Section 3(1) of the Income Tax Act provides that:“Subject to, and in accordance with, this Act, a tax to be known as income tax shall be charged for each year of income upon all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya.”

107. Section 10 of the Income Tax Act further provides that:“(1)For the purposes of this Act, where a resident person or a person having a permanent establishment in Kenya makes a payment to any other person in respect of -(a)a management or professional fee or training fee…the amount thereof shall be deemed to be income which accrued in or was derived from Kenya.”

108. The Appellant derived its income from the services it rendered the various employers as outlined in the Agreements. It is the various employers that were making these payments as they were the beneficiaries of the services. It matters not that the amounts were in a bank in Belgium. The essence was that the payments would only be received by the Appellant upon authorisation of the employers. Accordingly, the amounts which were professional fees, were paid by a person resident in Kenya (the employers) and as such the income was derived from Kenya as per Section 10 of the Income Tax Act.

109. Section 34 of the Income Tax Act as read together with the Third Schedule provides for different rates of tax for various entities including the rate of tax for a non-resident company with a permanent establishment in Kenya. Does the Appellant in this case have a permanent establishment?

110. Section 2 of the Income Tax Act (during the period under review) defined PE as:“permanent establishment" in relation to a person means a fixed place of business and includes a place of management, a branch, an office, a factory, a workshop, and a mine, an oil or gas well, a quarry or any other place of extraction of natural resources, a building site, or a construction or installation project which has existed for six months or more where that person wholly or partly carries on business:

111. The Appellant in its submissions as well as witness statement, denied having a branch or a subsidiary but confirmed that it did have a certificate of compliance. The Appellant stated thus in its submissions:“The Appellant does not have a branch in Kenya or a fully fledged subsidiary. The appellant has only a certificate of compliance for a foreign company.”

112. Section 975 of the Companies Act in dealing with registration of foreign companies provides that upon application for registration, a foreign company is issued with a certificate of compliance. This has the effect of registering a branch of the foreign company in Kenya.

113. Since the Appellant had a certificate of compliance, it is clear that if fell within the scope of PE. Accordingly, its income is taxable at the rate of 37. 5% as provided in the Third Schedule as read together with Section 34 of the Income Tax Act.

114. Accordingly, the Tribunal finds that the Appellant was liable for corporate tax during the period under review.

ii. Withholding tax 115. The Appellant avers that it subcontracted the works to other entities in Kenya. Since the Appellant has a PE in Kenya, it finds itself caught by the provisions of Section 35 which require it to withhold on any payments it makes to these subcontractors. In this case, the Appellant failed to do so. Section 39A provides that where a person fails to withhold, that person is liable for the tax that ought to have been withheld. It is, however, instructive that the said Section came into effect in 2019. Prior to this the provision was couched under Section 35(6) of the Income Tax Act which was repealed by the Finance Act 2016. Thus, between the periods 2016 and 2019 the Appellant cannot be held liable for the tax it failed to withhold as the provision imposing the obligation was not in effect.

116. The Tribunal therefore finds that the Appellant was not liable to withhold the taxes for the period during which the provision was deleted.

iii. VAT 117. Whether the Appellant is liable for VAT is determined by the provisions of the VAT Act 2013. Section 34 of the VAT Act provides the threshold for registration for VAT. The Section state as follows:“(1)A person who in the course of a business—(a)has made taxable supplies or expects to make taxable supplies, the value of which is five million shillings or more in any period of twelve months; or(b)is about to commence making taxable supplies the value of which is reasonably expected to exceed five million shillings in any period of twelve months, shall be liable for registration under this Act and shall, within thirty days of becoming so liable, apply to the Commissioner for registration in the prescribed form.”

118. The Agreements placed before the Tribunal indicate that the Appellant met this threshold as it made more than Kshs 5 million in a year and thus was required to register for VAT. The Appellant has not provided any evidence to show why it ought not to have been registered since it was making taxable supplies in Kenya, and yet it met the registration threshold.

119. Section 34(7) of the VAT Act allows the Commissioner to register a person who has met the threshold and such registration is supposed to take effect:…from the beginning of the first tax period after the person is required to apply for registration, or such later period as may be specified in the person’s tax registration certificate.

120. The Tribunal reiterates the holding in Cape Brandy Syndicate V Inland Revenue Commissioners (1920) 1KB as applied in TM Bell V Commissioner of Income Tax (1960) EALR 224 where Roland J stated as thus:“…. In a taxing Act, one has to look at what is clearly said. There is no room for intendment as to a tax, nothing is to be read in, nothing is to be implied. One has look into the language used… If a person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown seeking to recover the tax cannot bring the subject within the letter of the law, the subject is free, however apparently within the law the case may otherwise appear to be…”

121. Accordingly, the Tribunal finds that the Commissioner was justified in registering the Appellant and demanding the VAT that the Appellant ought to have charged.

Final Decision 122. In view of the foregoing analysis, the Tribunal determined that the Appeal is partially allowed and the Orders that accordingly recommend themselves are as follows: -i.The objection decision issued on the 31st March 2021 be and is hereby varied as follows;a.The confirmed demand for Corporate tax and VAT is hereby upheld.b.The confirmed demand for Withholding tax is hereby set asideii.Each party to bear its own costs.

123. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 29TH DAY OF JUNE, 2023………………………ERIC N. WAFULACHAIRMAN………………………………CYNTHIA B. MAYAKAMEMBER………………………………GRACE MUKUHAMEMBER…………………………ABRAHAM KIPROTICHMEMBER………………………………JEPHTHAT NJAGIMEMBER