[2025] KETAT 5 (KLR)

Base Titanium Limited v Commissioner of Domestic Taxes (Tax Appeal E407 of 2024) [2025] KETAT 5 (KLR) (Commercial and Tax) (17 January 2025) (Judgment)

Neutral citation: [2025] KETAT 5 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal E407 of 2024

RM Mutuma, Chair, D.K Ngala, M Makau, T Vikiru & Jephthah Njagi, Members

January 17, 2025

Between

Base Titanium Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya. Its principal activity is mining and sale of mineral sand with the final products being Zircon, Rutile and ilmenite.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act Cap 469 Laws of Kenya under Section 5 (3) the Respondent is an agency of the Government for the collection and receipt of all tax revenue. Further under Section 5 (2) with respect to the performance of its functions under subsection (1), the Respondent is mandated to administer and enforce all provisions of the written laws as set out in Part 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenue in accordance with those laws.

3. The Respondent carried out a return review on the Appellant to verify the validity of withholding tax payments made by the Appellant to its service providers. The Respondent noted during the review exercise that the Appellant had been withholding taxes at a lower rate as compared to the statutory rate provided under the Income Tax Act.

4. Vide a letter dated 19th December 2023 the Respondent issued an additional assessment demanding total tax of Kshs. 90,958,988. 00 which was inclusive of principal tax Kshs. 65,078,948. 00, penalty Kshs. 6,507,895. 00 and interest Kshs. 19,372,145. 00.

5. The Appellant objected to the additional assessment vide its letter dated 17th January 2024.

6. The Respondent reviewed the Appellant’s Objection and the documentation availed and vide its letter dated 15th March 2024 partiality amended the principal tax from Kshs. 65,078,948. 00 to Kshs. 57,270,890. 00.

7. Aggrieved by the Respondent’s Decision the Appellant filed its Notice of Appeal dated 12th April 2024 on even date.

8. By a partial consent of the parties dated 26th August 2024 and filed on 28th August 2024 and which was adopted by the Tribunal on 8th October 2024, other issues were settled save for the issue with respect to WHT assessment payments to Wogen Pacific of Kshs. 23,267,656. 44 which will now be the issue for determination.

The Appeal 9. The Appeal is premised on the following grounds of Appeal as stated in the Appellant’s Memorandum of Appeal dated and filed on 15th April 2024. a.That the Respondent erred in law by demanding WHT in respect of the payments made to Wagon Pacific at the rate of 20% disregarding an approval it had issued for payment of WHT at the rate of 12. 5% which is contrary to legitimate expectation;b.That the Respondent is barred in law from collecting WHT in respect of liabilities relating to Base Resources for the 2021 year of Income; and,c.That the Respondent erred by assessing WHT on sub-contractors of the Appellant at the rate of 20% contrary to the provisions of Paragraph 15 of the Ninth Schedule to the Income Tax Act.

The Appellant’s Case 10. The Appellant’s case was supported by the following;a.Statement of Facts dated and filed on 15th April 2024 together with attached documents thereto; and,b.Written submissions dated 21st October 2024 and filed on 22nd October 2024.

11. The Appellant stated that it entered into an ilmenite sales agreement in 2015 with Wogen Pacific company incorporated in China and that pursuant to the agreement, it made several payments to Wogen Pacific which included inter alia, payment for commissions for distribution, marketing and sales .Further that for the period January 2019 to January 2022, the Appellant applied, WHT at the rate of 5. 625% on the commissions .It later carried out a tax review of its affairs and disclosed unpaid WHT liabilities relating to the commissions at the rate of 12. 55 under the Voluntary Tax Disclosure Programme (VTDP).It stated that the Respondent was departing from the above position and now sought to adjust the WHT rate applicable to specific transactions declared under the VTDP from 12. 5 to 20%.

12. The Appellant asserted that in taking advantage of the VTDP, it disclosed its unpaid tax liabilities relating to WHT on the commission paid to Wagon Pacific to the Respondent under the VTDP as provided for under Section 37D of the Income Tax Act (ITA). It asserted further that guided by the law and the VTDP guidelines it lodged an application for VTDP on its iTax portal which was approved by the Respondent vide an email of 17th May 2023, where the Respondent notified the Appellant that its VTDP had been approved.

13. The Appellant contended that the Respondent had approved the VTDP application on the basis of the Appellant’s workings and that it had expressly indicated to the Respondent that the WHT on the Wagon Pacific payments relating to the commissions had been calculated at the rate of 12. 5% which was informed by the provisions of the ITA. It contended further that in effect, the Respondent approved the WHT rate applied. It asserted that it is questionable that the Respondent is now assessing the payments at the rate of 20% contrary to the Respondent’s earlier approval.

14. The Appellant asserted that the approval of the 12. 5% rate during VTDP gave the Appellant legitimate expectation that the applicable rate of WHT on commissions paid to the Wagon Pacific was 12. 5% and not 20% as now alleged by the Respondent. The Appellant relied on the case of Keroche Industries Limited vs. Kenya Revenue Authority & 5 others Nairobi [2007] eKLR where the court held that:“….stated simply legitimate expectation arises for example where a member of the public as a result of a promise or other conduct expects that he will be treated in one way and the public body wishes to treat him or her in a different way…..public authorities must be held to their practices and promises by the courts and the only exception is where a public authority has sufficient overriding interest to justify a departure from what has been previously promised.”

15. The Appellant averred that legitimate expectation is founded on representation made by an authority, which has power to make such representation that curtain actions will be done in a particular way without any qualifications. It further relied on the case of Republic vs Attorney General & Another Ex-Parte Wagwa & 2 others [2005] IKLR 280 where it was held that;“The principle of a legitimate expectation …should not be confined only to past advantage or benefit but should be extended to a future promise or benefit yet to be enjoyed. It is a principle which should not be restricted because it has its roots in what is gradually becoming a universal but fundamental principle of law namely the rule of law with its offshoot principle of legal certainty if the reason for the principle is for the challenged bodies or decision makers to demonstrate regularity, predictability and certainty in their dealings, this in turn enables the affected parties to plan their affairs lives and business with some measure of regulatory, predictability, certainty in their affairs , lives and business with some measure of regularity , predictability , certainty and confidence.”

16. It was the Appellant’s contention that the question of the applicable rate of WHT on payments made to Wogen Pacific was addressed by the Respondent when it approved the VTDP tax disclosure which had expressly indicated that the payments would be subjected to WHT at the rate of 12. 5%. Further, that if the Respondent had thought otherwise then it should not have approved the disclosures for the unpaid tax liabilities. It stated that the approval created legitimate expectation that for the payments disclosed the applicable rate would be 12. 5%, hence the Respondent cannot turn its back on that representation to the Appellant and now seek to subject the transactions already approved to a new WHT rate.

17. The Appellant stated that the essence of legitimate expectation is to ensure regularity, predictability and certainty in the Respondent’s dealings and it would therefore be contrary to this principle for the Respondent to approve WHT at the rate of 12. 5% and then later change its mind and now collect WHT at 20% from the taxpayer. It stated further that by attempting to set aside the terms agreed under VTDP and ignoring approval to the VTDP terms, the Respondent is attempting to subvert the law and the legitimate expectation that arose. It argued therefore that the assessment should be rendered null and void.

18. On the issue of collecting WHT in respect of liabilities relating to Base Resources for the 2021 year of income, the Respondent had indicated that the Appellant had made several payments relating to management fees to Base Resources on account of intercompany reimbursements and that the WHT on these payments was initially applied at 5. 625% but the Appellant made a voluntary disclosure and paid WHT on the payments at 20%.It was however the Appellant’s position that it carried out a review of its tax records for the periods January 2019 to January 2022 in relation to WHT and noted estimated WHT liabilities amounting to Kshs. 278,294,811. 00. It therefore proceeded to settle the principles WHT of Kshs. 220, 681,478. 00 in two ways:a.Declaration of unpaid WHT for the period January 2019 to June 2020 under the VTDP under Section 37D of the Tax Procedures Act; andb.Voluntary disclosure of the unpaid tax liabilities for the period July 2020 to January 2022.

19. The Appellant stated that the Respondent reviewed the disclosure made by the Appellant for the entire period including the period July 2020 to January 2022 and determined that they represented a true and fair value of the Appellants tax liability for the period before proceeding to generate payment registration numbers to enable the Appellant make payments in respect of the liability for the period. It stated that it subsequently settled the Kshs. 220,681,478. 00 principal tax liability in four instalments of Kshs. 106,847,814. 00, Kshs. 74, 698,028. 00 Kshs. 939,815. 00 and Kshs. 38,195,821. 00.

20. The Appellant therefore argued that the Respondent’s action to confirm and approve the Appellant’s liability and payment thereof for the period July 2020 to January 2022 was an indication that the Respondent was satisfied that the tax liability for the period was properly disclosed. It was the Appellant’s assertion that the Respondent’s Assessment and Objection Decision sought to renege on this position and reopen the period for assessment given that the payments were in respect of the period June and December 2021 and January 2022 which is within the period that had already been audited.

21. The Appellant argued that having settled liability for the period July 2020 to January 2022 under the approval of the Respondent, the Appellant was convinced that in line with principles on finality of administrative actions, the period was closed and the Respondent could not reopen it under any circumstances save for exceptional instances of illegality such as fraud on the part of the Appellant. It argued further that the effect of the Respondent’s actions was a violation of the sanctity of tax procedure by coming back for a second peak on issues that have already been closed either through settlement (such in this case) or the objection and appeal process(generally).

22. The Appellant contended that having previously reviewed WHT transactions for the period July 2020 to January 2022 and approved the payment of liability arising from the period, the Respondent now sought to re-audit the period which was procedurally unfair, unjust, in bad faith, malicious and amounted to violation of the Appellant’s right to fair administrative action as protected under Article 47 of the Constitution of Kenya.

23. The Appellant relied on the Tribunals holding in Mahan Limited vs. Commissioner of Domestic Taxes (TAT No 487 of 2020) where it stated as follows:“The Tribunal further notes that for the first assessment of the same tax period , December 2016,that is the subject of the current appeal, the Respondent closed off the matter and issued a tax decision based on an audit that it undertook .The Tribunal therefore believes that there must have been sufficient documentation provided by the Appellant and reviewed by the Respondent in arriving at its initial final decision dated 20th December 2018. Due to the foregoing, the Tribunal is clear that the Respondent’s actions, in closing this matter in 2018 in the manner it did , created a legitimate expectation which the Appellant relied on in establishing that any tax issue relating to the tax period December 2016 was fully audited and settled. In this regard, the Tribunal has also confirmed from the pleadings that the Appellant settled the taxes demanded by the Respondent in its Objection Decision without further ado”

24. It was the Appellant’s assertion that it provided a list of detailed transactions it had undertaken during the period July 2020 to January 2022 and invited the Respondent who reviewed and audited the transactions and any documents relating to the transaction and that upon being satisfied that the Appellant’s tax affairs were as disclosed, the Respondent approved the liability disclosed for payment. It argued therefore that the Respondent cannot now be allowed to reopen the period July 2020 to January 2022 for audit.

25. On the issue of assessing WHT on the Appellant’s sub- contractors at the rate of 20%, the Appellant asserted that Paragraph 15 (2) of the Ninth Schedule to the ITA provides that the effective WHT on a service fee is 5. 625% for the period prior to July 2021 and 10% for the period after July 2021. It stated that for the provisions of Paragraph 15 (1) of the Ninth Schedule to apply to a payment made to a withholdee, it must meet three conditions: -a.The Withholdee must be non-resident;b.The withholdee must be a sub-contractor; and,c.The withholdee must provide services to a licensee in respect of mining operators.

26. The Appellant asserted that according to Paragraph 15 (a), a non-resident subcontractor is defined as:“a subcontractor that is not a resident and includes a subcontractor that is a government or foreign government body.”

27. It argued therefore that simply put, the subcontractor must not be tax resident in Kenya which was the case with all its withholdees who were non-resident.

28. The Appellant stated that according to Paragraph 1 (I), a subcontractor means:“a person supplying services other than a person supplying services as an employeea.to a licensee in respect of mining operations undertaken by the licensee”

29. It stated that the subcontractor must be providing services to the licensee and that a licensee means a person who has been issued with, or granted, a mining right in this case the Appellant. It argued that by dint of it making payment to the Withholdee and the invoices/agreements demonstrating the nature of the services provided, the Withholdee were indeed subcontractors.

30. The Appellant averred that Paragraph 1 (I) of the Ninth Schedule of the ITA also defines “mining operations” to mean “authorized operations undertaken under a mining right and that a mining right means a prospecting or extraction right”. It was therefore the Appellant’s position that the applicable definition of mining operations is authorized operations undertaken under a mining right or defined in Paragraph 1 (I) of the Ninth Schedule not the imported definition of the Mining Act.

31. It was the Appellant’s assertion that it is not disputed that it holds a mining right and therefore undertaken mining operations whose authorized operations would be contained in the mining license denoting the mining right that the Appellant has and provides that it can sell/dispose of the ilmenite (and other mineral sands).

32. The Appellant argued that the ITA does not provide a list of services that would meet mining operations criteria, therefore, in line with the often-stated principle of tax law interpretation that where a tax law does not define a term/phrase the ordinary meaning of the word applies. The ordinary meaning of the phrase means any services received by the Appellant in the course of affecting the mining right. It stated therefore that the provision of the law as framed does not provide any inclusion other than the service provider must be non-resident. Therefore, the law’s clear reading is that other than resident and proof of service provision, the Respondent should not impose any other restriction.

33. In buttressing its arguement, the Appellant relied on the case of Keroche Industries Limited vs. Kenya Revenue Authority & 5 others [2007] eKLR where the Court stated;“taxation can only be done in clear words and cannot be an intendment. Finally, even where the inclination of the legislative is not clear or where there are two or more possible meanings, the inclination of the court should be against a construction or interpretation which imposes a burden tax or duty on the subject…”

34. The Appellant argued further that the nature of the service to be provided in respect of mining operations is not limited nor specific under the Ninth Schedule, therefore the Respondent cannot adopt a very restrictive approach that does not align with the law to demand taxes. The Appellant further relied on the case of Partington V, AG (1869) LR 4HL where the court stated;“As I understand the principle of all fiscal legislation it is this: if the 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 spirit of the law the case might otherwise appear to be. In other words, if there be admissible in any statute what is called an equitable construction certainly such a construction is not admissible in a taxing statute, where you simply adhere to the words of the statute”

35. It was the Appellant’s argument that if “services provided in respect of mining operations” mean one thing to the Respondent and another to the Appellant, it can only mean that the law is ambiguous. Further that it is trite law that where there is ambiguity in tax legislation, then the matter ought to be determined in favour of the taxpayer.

36. The Appellant associated itself with the case of Primarosa Flowers Limited vs. Commissioner of Domestic Taxes [2019] eKLR where the court relied on Commissioner of Income Tax vs. Vestment Power (K) Limited [2006] eKLR where it was held”“Even though taxation is acceptable and even essential in democratic societies, taxation laws that have the effect of depriving citizens of their property by imposing pecuniary burdens resulting also in pecuniary consequences must be interpreted with great caution. In this respect, it is paramount that their provisions must be express and clear so as to leave no reason for ambiguity. Following the Inland Revenue vs Scottish Central Electricity Company case, any ambiguity in such a law must be resolved in favour of the taxpayer and not the Public Revenue Authorities which are responsible for their implementation”.

37. The Appellant averred that the Withholdees met the three criteria in Paragraph 15 (I) of the Ninth Schedule and were paid a service fee and that they were non- residents who provided services to the Appellant in respect of mining operations. It argued therefore that it had discharged its burden of proof. Further that the Respondent had the responsibility to review the documents shared in the Notice of Objection and inform the Appellant how each of the services provided did not align with the provisions of Paragraph 15 (I) of the Ninth Schedule. It stated that the Respondent did not inform the Appellant of this and the objection Decision made no reference to the services provided by the various Withholdees and their deficiencies.

38. The Appellant questioned how the Respondent reached the decision as stated in its Objection Decision without expounding to the Appellant which it understood by “services in respect of mining operations” given it is not defined in the Act. It asserted that while it has the burden to demonstrate any fact in tax assessment, when this burden is discharged through provision of documents, the burden shifts to the Respondent. It argued further that it was not enough for the Respondent to allege, it had not made any effort to demonstrate how the services provided by the Withholdee fall short of the provisions of Paragraph 15 of the Ninth Schedule and had therefore not discharged its burden.

39. The Appellant relied on the case of Commissioner of Domestic Services vs. Computech Limited [2021] eKLR where the Court stated.“The court finds no fault with the Tribunal on its finding on the said evidence. Having produced the said documents which were prima facie evidence of trading, the evidentiary burden of proof shifted to the appellant. The Appellant did not impeach any of the said documents. Neither did he challenge them. That being the case, the respondent had discharged its burden of proof and the Tribunals decision therein cannot be faulted. The Respondent had discharged its burden under section 56(I) of the Tax Procedures Act”.

40. In its Written submissions the Appellant raised one issue for determination.Whether the Respondent acted contrary to the Appellant’s legitimate expectation by disregarding an approval it had issued for payment of WHT at the rate of 12. 5%.

41. The Appellant stated that it mines and sales ilmenite a mineral mined in Kwale and that it entered into an ilmenite sale agreement with Wogen Pacific (Wogen), a company incorporated in China. It stated further that according to the agreement, Wogen distributed/marketed the ilmenite in the Chinese market and the Appellant would pay commission to Wogen for the distribution/marketing services. It reiterated that the issue of this appeal is whether the Respondent breached the Appellant’s legitimate expectation by initially approving WHT rate of 12. 5% on Commissions paid to Wogen Pacific, then later assessing WHT at a rate of 20% on the same payments.

42. The Appellant rehashed its pleadings as stated in its Statement of Facts and stated further that at paragraph 20-22 of the Respondent’s Statement of Facts it had stated that the VTDP did not provide for the applicable rates of WHT. It submitted that this was not sincere of the Respondent since as provided by law the Respondent was required to approve the amount disclosed and in effect the rate applied by the parties. It submitted further that nothing stopped the Respondent from withholding its approval of the disclosure on the basis that the Appellant had used the wrong provisions of the law for the applicable rate, which it did not.

43. The Appellant submitted that the question of the applicable rate of WHT on payments made to Wogen Pacific was addressed by the Respondent when it approved the disclosure which had expressly indicated that the payments would be subject to WHT at the rate of 12. 5% and further confirmed by it setting aside the assessment it had raised erroneously for the VTDP period. It argued that if the Respondent had thought otherwise, then it should not have approved the disclosure for the unpaid tax liabilities. Further that the Respondent cannot turn its back on that representation to the Appellant and now seek to subject the transactions already approved to a new WHT rate.

44. The Appellant supported its assertion by citing the case of Kenya Revenue Authority vs. Export Trading company Limited (Petition 20 of 2020) [2022] KESC 31 (KLR) (CIV) where the Supreme court held as follows:“...we must agree with the court of appeal that a legitimate expectation arose since the appellant failed to collect duty at the applicable rate, having applied the rate of 35% in their Tradex Simba system. It is also incomprehensible how the appellant, four years after the assessment of duty, demanded for payment of extra duty when it sat on its laurels having itself assessed the duty payable. This act is unreasonable for the reason that, first, it is totally irrational and unreasonable to require the respondent to carry the burden of being aware of any mistakes made by the Trade Simba system, a system run by the appellant. Second, it is also incompressible how the Respondent should be made to suffer the consequences of the actions of the appellant of failing to input the correct rate in a system it had full control over”

45. The Appellant submitted that in the Respondent’s Statement of Facts in paragraph 15-17 it erroneously indicated that the Appellant alluded to an ADR agreement as the basis of the rate applied, which is not factual. It argued that the Respondent had not provided any documentary evidence to support this position other than stating the same in the Notice of Assessment without providing a basis of the same.

46. The Appellant cited Section 107 of the Evidence Act and submitted that the Respondent cannot attempt to prosecute its case through assertions without proof. The Appellant relied on the High Court decision in Trical and Hard Limited vs Commissioner for Domestic Taxes (TAT Appeal No 320 of 2018) where this Tribunal relied on the United Kingdom’s VAT & Duties Tribunals case in Celltell Telecom Ltd vs. HMRC (200) UKVAT vs 202666 and Section 107 of the Evidence Act-Cap 80 Laws of Kenya to hold that the burden of proof was upon the Commissioner to establish that there was fraud and the Respondent knew or ought to have known about it. In the said case, the Tribunal had reiterated that the Commissioner failed to adduce evidence to support its averments of fraud whereas the Respondent in the case produced documents indicating that there was indeed a purchase.

47. The Appellant submitted that the essence of legitimate expectation is to ensure regularity, predictability and certainty in the Respondent’s dealings and it would be contrary to this principle for the Respondent to approve WHT at the rate of 12. 5% and then later change its mind and wish to collect WHT at 20% from the taxpayer for the same payment. It submitted in conclusion that by attempting to set aside the terms agreed under VTDP and ignoring their approval to the VTDP terms, the Respondent is attempting to subvert the law and the legitimate expectation that arose, therefore the assessment should be rendered null and void.

The Appellant’s Prayers 48. The Appellant prayed that: -a.This Appeal be allowedb.The Respondent’s Decision dated 15th May 2024 demanding principal withholding taxes amounting to Kshs 57,270,890. 00 be set aside;c.The costs of and incidental to this appeal be awarded in favour of the Appellant; and,d.Any other orders that the Tax Appeal Tribunal may deem fit.

The Respondent’s Case 49. The Respondent’s case is premised on its: -a.Statement of Facts dated 9th May 2024 and filed on 13th May 2024 together with the documents attached thereto; and,b.Written submissions dated 4th November 2024 and filed an 5th November 2024.

50. In response to ground (a) of the Appeal, the Respondent averred that contrary to the Appellant’s allegations, it was not in dispute that the Appellant remunerated Wogen Pacific for provisions of three broad services as per the contract as follows; Commission for distribution, marketing and sales.

Financing fees on ilmenite purchased under financial arrangement stipulated in the contract.

Logistics and warehousing fees for ilmenite purchased from Base Titanium.

51. The Respondent stated that an analysis of the withholding payment revealed that the Appellant initially withheld the payments as service fees at the rate of 5. 625%. However, upon review under the Voluntary Tax Disclosure Program (VTDP) the rate was adjusted to 12. 5% for the commission fees and 15% for financing fees. A schedule of the adjustments and letter from the Appellant’s representative were provided in support of these adjustments.

52. The Respondent stated that the Appellant had alluded to an ADR agreement executed on 30th March 2022 between Base Titanium Ltd and KRA as the basis of the rate applied. However, a review of the said ADR agreement under clause 102 and 103 specified that the agreement was on without prejudice basis in relation to any future tax disputes and that it was only binding to the parties solely in relation to the respective tax dispute. Further that the ADR agreements are on a case by case basis and that in any event, the agreement could not be used to disregard clear provisions of the law as per the Third Schedule Paragraph 3 to the Income Tax Act which contains the correct rates for withholding tax applicable on payments to Non-resident persons at the rate of 20%.

53. The Respondent averred that contrary to the Appellant’s allegations that there was legitimate expectation when the rate of 12. 5% was approved during the VTDP, the VTDP only allowed the Appellant to disclose the taxes they had not declared and remitted but were due for collection. It averred further that at no point did VTDP provide rates applicable for WHT for payments made to non-resident entities.

54. It was the Respondent’s assertion that the expectation was that any party who took advantage of the VTDP was making full disclosure of the correct taxes due without hiding anything. Further that the approval received by the Appellant on its application was with respect to the taxes and rates they opted to disclose and not conclusive approval that the Respondent would never review the Appellant’s tax affairs.

55. The Respondent averred that it is not estopped from conducting compliance checks to ensure that all the taxes that are supposed to be remitted are actually declared and remitted and that it has the mandate under the Constitution to collect every single tax due whether disclosed or not.

56. On the issue of legitimate expectation, the Respondent averred that legitimate expectations must be within the confines of the law and cannot override the clear provisions of the law, and that in any event, there was nowhere whatsoever where the Respondent gave a representation within its authority that it did not fulfil. It asserted that the Appellant simply made an Application under the VTDP and the same was accepted and approved.

57. On the second ground of Appeal, the Respondent stated that contrary to the Appellant’s allegations, in the period under review, the Appellant made several payments to its mother company Base Resources. The payments were mainly because of intercompany reimbursements for multitude of costs incurred by Base Resources on behalf of its subsidiary and management fees for services rendered. The Respondent averred that the Appellant initially declared these transactions as services fees and withheld them at the rate of 5. 265% however upon review under VTDP, some of the transactions were adjusted and declared correctly and withholding taxes paid.

58. It was the Respondent’s averment that although some transactions were declared and payments made, some payments were not correctly adjusted and these were charged at the rate of 20%.The Respondent averred further that there was a requirement under VTDP for the Respondent to revert to the Applicants who took advantage of the process within 30 days which according to the Respondent was not sufficient to undertake an in-depth audit of the Appellant’s tax affairs and the approval were mainly based on what the Appellant presented for approval.

59. The Respondent argued that if for whatever reason the Appellant chose to adjust some transactions correctly, the law permits the Respondent to review the same provided it was within five years. Further that contrary to the Appellant’s allegations, the VTDP was meant to facilitate the Appellant and other taxpayers who had not been declaring and remitting all the taxes due to ensure compliance but did not in any way bar the Respondent from confirming the accuracy of the declarations.

60. The Respondent averred and maintained that it was within its mandate to review the Appellant’s declarations with a view to confirm that indeed it had declared and remitted all the taxes due. Further that the VTDP does not give the Appellant the right to selectively choose what they went to disclose and hide some in the same breath, but accords the Appellant the avenue to rectify that which it had failed to do under the law in the first instance. It argued that the VTDP program does not in any way close the window for the Respondent to undertake an audit on the tax affairs of the Appellant as alleged by the Appellant.

61. In response to the third ground of appeal, the Respondent averred that during the review process it requested for a listing of all payments made at the rate of 5. 625% which the Appellant provided as well an as explanation on why it adopted the said rate. The Respondent averred that the Appellant had alluded that these service providers were subcontractors and the amounts were correctly withheld at 5. 625%. It subsequently reviewed sample contracts, purchase orders, copies of invoices and service agreements to ascertain whether they qualified to be described as service fees.

62. It was however the Respondents view that the service providers listed under paragraph 45 of the Appellant’s Statement of Facts were not sub-contractors with respect to the mining and extractor activities. It averred that some of the services listed such as those provided by Right Ship PTY Limited, African Human Logistics and Michael Worthington, were remote and the Appellant was unable to demonstrate how the services were related to mining operations. It therefore averred that the Appellant could not have had subcontractors because they themselves were not even contractors.

63. The Respondent asserted that the Income Tax Act under the Ninth Schedule defines contractor as follows;“Contractor-means a person with whom the Government has concluded a petroleum agreement and includes any successor or assignee of the person”It argued therefore that from the above definition, it was clear the Appellant was not a contractor but a license who had been granted mining rights therefore there was no way its suppliers could have been classified as subcontractors under the Ninth Schedule.

64. In its written submissions dated 4th November 2024 and filed on 5th November 2024 the Respondent submitted on one issue.

Whether the Respondent erred in law by demanding WHT in respect of the payments made to Wogen Pacific at the rate of 20% 65. The Respondent stated that the parties recorded a partial consent which was adopted on 8th October 2024 settling two issues that were in contention and that the only outstanding issue was with respect to WHT assessment on payments of commissions of financing fees to Wogen Pacific.

66. The Respondent submitted that it is not in dispute that the Appellant remunerated Wogen Pacific for provisions of three broad services as per the contract and that the disclosure of WHT on payments of Commissions & Financing fees to Wogen Pacific commenced when the Appellant sought assistance in amending their returns from the Respondent since the iTax portal was picking the wrong figures.

67. The Respondent submitted that the parties exchanged a couple of emails in seeking approval settlement of Kshs. 106,847,884. 00 for the period Jan 2019-June 2020 and that vide an email of 17th May 2022 the Respondent through Ms Dorcas Kariuki wrote to the Appellant notifying them that the Approval for the period January 2019-June 2020 had been effected on iTax.

68. The Respondent submitted that vide an email dated 20th May 2022 the Appellant wrote to the Respondent forwarding the PRN for Kshs. 106 million which was for the period Jan 2019-June 2020 and that the email thread and annexure therein clearly demonstrate that the approval was for Kshs 106, 847, 884. 00 for the period Jan 2019-June 2020. It submitted therefore that the Appellant has made several attempts both in the Appeal and submission to mislead the Tribunal that the Approval was for all the undisclosed taxes.

69. The Respondent pointed out that the VTDP was time bound for disclosures starting from 2015 to 2020 which meant anything outside that period was not covered under VTDP. It stated that the dispute before the Tribunal is for the period 2021-2022 which was neither covered under VDTP nor was there an approval by the Respondent. The Respondent maintained that VTDP was used as an incentive to encourage taxpayers to disclose and pay taxes and that the Appellant is forcing the same rate accepted under VTDP which was their own rate to apply for periods outside the VTDP where else there are clear provisions of the law.

70. The Respondent submitted that payments made to non-residents is governed by Section 35 of the Income Tax Act Third Schedule Paragraph 3 of the ITA which provides for the rate applicable for non-resident. It submitted therefore that the rate applied for the period in contention is the rate provided for under the income Tax Act.

71. The Respondent submitted that it usually generates Payment Reference Number (PRN) for any Taxpayer who wants to make a payment to the Commissioner and that it does not matter whether it is a payment arising from self-assessment or assessment/approval by the Commissioner requires a PRN therefore the same cannot be used as the basis for claiming that an approval was granted. The Appellant is therefore attempting to mislead the Tribunal that by virtue of the Respondent issuing a PRN, it was equivalent to an approval.

72. The Respondent submitted further that in the Appellant’s case, it sought the Respondent’s assistance in generating the PRN simply because the rate of penalty and interest had not been amended in the system, otherwise it could have generated it on their own. It reiterated that the PRN was for the approved amount of Kshs. 106 million for the period Jan 2019-June 2020 not July 2021 to Jan 2022 as already stated.

73. The Respondent therefore wondered under which provision of the law did the Appellant wished the Respondent to grant the relief taking into account that VTDP was time bound for the period 2015 to 2020 yet the taxes now in dispute are for the period July 2021-Jan 2022 which is not covered under the VTDP.

74. The Respondent stated that the Appellant had raised issues of legitimate expectation, however it asserted that the same must be within the confines of the law. The Respondent relied on the principles guiding the doctrine of legitimate expectation which were laid out in the case of Communications Commission of Kenya & 5 others vs. Royal Media Services Limited of 5 others [2014] eKLR which held;“(269)The emerging principles may be succinctly set out as follows;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 which it 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”

75. It was the Respondents submission that the Appellant has not demonstrated any provisions made by the Respondent for the period in dispute. Further that there is nowhere whatsoever where the Respondent had approved any amounts with respect to July 2021 to January 2022 as it was clear that the amount approved was for Jan 2019-June 2020. It submitted therefore that the Appellant’s demand was contra-statute as it goes against the grain of Section 35 and Paragraph 3 of the Third Schedule of the Income Tax Act.76. The Respondent reiterated and maintained that there was not any promise with respect to the disputed period and that if at all it accepted a different rate during the VTDP, it was the Appellant who knowingly misled the Respondent, which is not an issue for determination before the Tribunal. It stated that it is obligated under Section 5 (2) of the Kenya Revenue Authority Act to enforce the written provisions of the law.77. In buttressing its argument further, the Respondent relied on the following cases:i.Republic vs. Kenya Revenue Authority Ex-Parte Bata Shoe Company (Kenya) Limited [2014] eKLR;ii.Republic vs. Commissioner of Customs services & 2 others Ex-parte Candy Kenya Limited [2016] eKLR;iii.Niazens (K) Ltd vs. China Roads &Bridges Corporation(K) Civil Appeal No.187 of 1999; and,iv.Republic vs. Kenya Revenue Authority Ex-Parte Aberdare Freight Services Ltd & 2 others [2004] 2 KLR 530. 78. The Respondent submitted that with reference to Tax Law, the rule on burden of proof is governed by Section 56 (1) of the Tax Procedures Act, 2015 which places the burden on the Appellant to demonstrate that the assessment was erroneous or incorrect. It therefore stated that save for the Appellant arm twisting the Respondent to accept an illegality, it doubts whether the Appellant has made any attempt to demonstrate that the WHT assessment on payments to Wogen Pacific were inaccurate.

79. The Respondent submitted that having successfully demonstrated that there was no fault on its part, the Appellant should proceed to settle the taxes due. To buttress its argument the Respondent relied on the case of Doshi Ironmongers vs. Commissioner for Domestic Taxes & Another [2009] eKLR where it was held:“There is no doubt as to the outstanding tax that is due and payable. It is the duty of the Applicant to pay tax because it is not disputed. Besides from an evaluation of what transpired. I find that there is no evidence of the Respondent acting unlawfully or oppressively or unfairly or abused office as alleged. The Applicant should go ahead, pay the tax that is due and if any remission is granted by the Minister, that credit will go on their account or a refund is made. The Applicant has come to a court of equity and cannot be entitled to orders of this court if they do not clean their hands”

80. The Respondent submitted that the Appellant had alluded to an ADR agreement executed on 30th March 2022 between Base Titanium Limited and KRA which has not been produced before this Tribunal. It submitted further that the said ADR agreement was on a “without prejudice” basis in relation to any future tax disputes and that it was only binding to the parties solely in relation to the respective tax dispute. Further, that ADR agreements are on a case by case basis and cannot be transposed in future engagements.

81. The Respondent submitted that though the Appellant has alluded to the fact that the Respondent has not annexed the ADR agreement, the Appellant is well aware that the negotiations are usually on without prejudice basis and the discussions do not form part of any suit or future deliberations. Further that the documents produced are equally private and limited to those discussions hence producing the same would prejudice the Appellant.

The Respondent’s Prayers 82. The Respondent prayed that:a.The Appellant’s Appeal be dismissed with costs; and,b.The Withholding tax assessment of Kshs 57,270,889. 00 raised by the Respondent be confirmed and the principal taxes, interests and penalties be found due and payable as per the objection decision rendered by the Respondent.

Issues For Determination 83. The Tribunal has considered the parties pleadings, documentation and submissions and is of the view that this Appeal raises one issue for determination.Whether the Respondent was justified in demanding Withholding Tax at 20% in respect of payments made to Wogen Pacific.

Analysis And Finding 84. Having identified the single issue for determination, the Tribunal will proceed to analyse it herein under.

85. The Tribunal notes that the Objection Decision dated 15th March 2024 was for Kshs. 57,270,889. 00. However, a partial consent was entered between the parties where some of the issues were resolved save for Withholding Tax assessment on payments made to Wogen Pacific. The bone of contention is therefore whether the Respondent erred in assessing WHT at the rate of 20% on the payments made to Wogen Pacific, a non-resident entity. The payments being for the marketing and distribution of the Appellant’s product in the Chinese Market.

86. The Appellant had stated that it had already settled the assessments by taking advantage of the Voluntary Tax Disclosure Program (VTDP) where it had disclosed unpaid WHT liabilities relating to the Commissioners at the rate of 12. 5% which the Respondent had approved.

87. Section 37D of the Tax Procedures Act governs and stipulates what the Voluntary Tax Disclosure Programme entails. In particular subsections (1) and (3) stipulates the period within which a taxpayer may apply for the program. The subsections provide;“(1)There is established a programme to be known as the Voluntary Tax Disclosure Programme which shall be for a period of three years with effect from the 1st January 2021. (3)A person with a tax liability may apply to the Commissioner for relief in the prescribed form with respect to tax liabilities that accrued within a period of five years prior to the 1st July 2020. ”

88. As provided for in the above subsections of Section 37D the Voluntary Tax Disclosure Programme was time bound. The Tribunal notes that the VTDP was for tax liabilities five years prior to 1st July 2020 which in effect it covered the 2015 July 2020. From the documentation adduced , the Respondents assessment had covered the period July 2019 to April 2022. However in its Objection Decision dated 15th March, 2024 it stated that it had adjusted the assessment to exclude transactions covered under the VDTP being period between 2019 to 2020. The import of this meant that the period 2021 to 2022 was not covered under the VTDP. Indeed, the Tribunal has sighted the Appellant’s letter dated 25th April 2022. The said letter was specific for the application of the VDTP for Kshs. 106,847,884. 00 and was specifically for the period 2019 – 2020.

89. The Appellant had contended that the Respondent had erred by demanding WHT in respect of the payments made to Wogen Pacific at the rate of 20% disregarding an approval it had issued for payments of WHT at the rate of 12. 5%. On its third ground of Appeal, the Appellant had stated that the Respondent had erred by assessing WHT on subcontractors of the Appellant at the rate of 20% contrary to the provisions of Paragraph 15 of the Ninth schedule to the income Tax Act.

90. The Tribunal notes that Paragraph 15 of the Ninth Schedule to the Income Tax Act addresses taxation of sub-contractors. It is the Tribunal’s considered view that for the Appellant to term the non-residents entities as subcontractors, it meant that it is considering itself as a contractor, which it is not. The Appellant had stated that Wogen Pacific, a non-resident company, incorporated in China undertakes distribution, marketing and sales of one of the Appellant’s product, (Ilmenite) and that the Appellant pays Commissioner.

91. Section 35 (1) (o) of the Income tax Act stipulates the services for which tax is withheld. It provides as follows;“Every person shall, upon payment of any amount to any non-resident person not having a permanent established in Kenya in respect of -(o)sales promotion, marketing, advertising services and transportation of goods (excluding air and shipping transport services).Which is chargeable to tax, deduct therefrom tax at the appropriate non-resident withholding tax rate.”

92. Paragraph 3 of the Third Schedule of the Income Tax Act provides for the rate applicable for non-resident entities. It states as follows:“The non-resident tax rates shall be –(9)in the case of sales promotion, marketing, advertising services and transportation of goods (excluding air and shipping transport services) twenty percent of the gross amount.”

93. It is not in dispute that the VTDP was time bound and covered the period 2015-2020. The Respondent’s Assessment being for the period 2019-2022 and the Appellant having taken advantage of the programme, it means therefore the period covered under the program was 2019-2020 which then leaves the disputed period as 2021-2022. Having also confirmed the applicable WHT rate for non-resident entities outside the VDTP period to be 20%, the Appellant cannot assume the programme covered the period up to 2022 and hide behind the Respondent’s approval which according to Section 37D of the TPA is specific.

94. The Tribunal associates itself with the Court decision in Republic vs. Kenya Revenue Authority Exported Bata Shoe Company (Kenya) Limited [2014] eKLR where it was held;“This brings me to the role and interpretation of tax laws. Payment of tax is an obligation imposed by the law. It is not a voluntary activity. That being the case, a taxpayer is not obliged to pay a single coin more that it due to the taxman. The taxman on the other hand is entitled to collect up to the last coin that is due from a taxpayer”

95. The Tribunal notes that where there is clear provision of the law, it should be followed to the later. In this case, the law stipulated the period for the VTDP where the rates at the time were provided in law which stipulated the WHT rate for non-resident entities for specific services for periods outside the VTDP.

96. Consequently, the Tribunal finds that the Respondent was justified in demanding withholding tax at 20% in respect of payments made to Wogen Pacific.

Final Decision 97. The upshot of the foregoing is that the Appeal lacks merit and the Tribunal proceeds to make the following final orders;a.The partial consent signed and dated on August 26, 2024 and adopted on 8th October 2024 be and is hereby confirmed;b.The Respondent’s Objection Decision dated March 15, 2024 be and is hereby upheld; and,c.Each party to bear its own costs.

98. Orders accordingly

DATED AND DELIVERED AT NAIROBI THIS 17TH DAY OF JANUARY 2025ROBERT M. MUTUMA - CHAIRPERSONDELILAH K. NGALA - MEMBERMUTISO MAKAU - MEMBERDR. TIMOTHY B. VIKIRU - MEMBERJEPHTHAH NJAGI - MEMBER