[2023] KETAT 899 (KLR)

Coca-Cola Central East and West Africa v Commissioner of Domestic Taxes (Appeal 1208 of 2022) [2023] KETAT 899 (KLR) (20 December 2023) (Judgment)

Neutral citation: [2023] KETAT 899 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 1208 of 2022

E.N Wafula, Chair, D.K Ngala, CA Muga, GA Kashindi, AM Diriye & SS Ololchike, Members

December 20, 2023

Between

Coca-Cola Central East And West Africa

Appellant

and

Commissioner Of Domestic Taxes

Respondent

(Appeal against the Respondent's objection decision dated 16th September 2022)

Judgment

1. The Appellant is a private limited liability company incorporated and domiciled in Kenya whose principal activity is marketing and promotion of brands marketed under trademarks owned by or licensed to Coca-Cola Company-CCC and its affiliates. CCC manufactures and sell proprietary concentrates across the world through its affiliates, the Appellant is an affiliate of CCC.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of the laws of Kenya. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority 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 revenues in accordance with those laws.

3. The Appellant has service agreement with The Coca-Cola Export Corporation-TCCEC (another affiliate of CCC) to provide marketing and promotion services in Kenya and several Central and East African countries for the benefit of CCC and its foreign affiliates. For these services, the Appellant charges a fee.

4. On diverse dates in the year 2017, the Appellant citing Regulation 13 of VAT Regulations 2017, applied to the Respondent for refund of excess input VAT arising from export services for the 18th April 2017 to 29th August 2018 review period.

5. The Respondent consequently carried out an audit to verify the VAT refund claim and issued its preliminary findings on 8th March 2022.

6. On 28th April 2022, the Appellant rejected the preliminary findings on the basis that the brand marketing and promotion services provided were export services that were zero-rated.

7. On 23rd June 2022, the Respondent issued an assessment of Ksh 502,487,796. 00 being output VAT on the portion of services that the Appellant provided to its foreign affiliates.

8. On 22nd July 2022, the Appellant objected to the assessment, subsequently, on 16th September 2022, the Respondent issued its objection decision confirming the earlier assessment.

9. Aggrieved by the Respondent’s objection decision, the Appellant filed its Notice of Appeal on 3rd October 2022.

The Appeal 10. The Appeal was premised on the following grounds as set-out in the Memorandum of Appeal dated 17th October 2022 and filed on even date;a.That the Respondent erred in law and fact in holding that marketing and promotion services offered by the Appellant were not exported services pursuant to Section 2 of the VAT Act, No. 35 of 2013 (hereinafter ‘VAT Act’).b.That the Respondent erred in law and fact in holding that marketing and promotion services offered by the Appellant were consumed locally yet their benefits accrued to foreign affiliates contrary to Section 8(1) of the VAT Act.c.That the Respondent erred in law and fact by concluding that the VAT Regulations, 2017 had adequately provided clarity on the main legislation, yet the Regulations did not provide clarity on the key issue in the disputes of the taxation of exported services which is “what constitutes use or consumption outside Kenya.”d.That the Respondent erred in law by ignoring international best practices yet precedents were established by the Tribunal and the High Court in similar disputes where both judicial bodies relied on their guidance having taken note of the gaps in local legislation on the taxation of exported services.

Appellant’s Case 11. The Appellant ‘s case is premised on its Statement of Facts dated 17th October 2022 and filed on even date:

12. The Appellant averred that it has a service agreement for marketing and promotion services with TCCEC (which is part of the wider network of CCC). That the purpose of marketing and promotion services was to maintain and grow the image, name and importance of Coca-Cola brands which benefit CCC’s foreign affiliates by enhancing and encouraging sale of concentrate.

13. It was the Appellant’s contention that it has had several disputes with the Respondent related to these services which the Appellant provides to foreign affiliates; disputes that the Tribunal and High Court has ruled in favor of the Appellant. The Appellant asserted that the Respondent failed to appreciate this and chose to ignore the set precedents and opted to dwell on analogies that have no correlation with the Appellant’s business. To buttress this position, the Appellant cited the case of Coca-Cola Central East and West Africa vs Commissioner of Domestic Taxes (TAT No 5 of 2018) that;“…without necessarily stating that there is a lacuna due to absence of definition of the words “use” or “consumption,” the Tribunal is alive to the global practice and the fact that OECD Guidelines are applicable in Kenya. These are International VAT/GST Guidelines developed to address the uncertainty and risks of double taxation and unintended taxation that will result in inconsistencies. It is therefore necessary to seek the aid of the OECD Guidelines to shed more light on cross-border trade, such as is this.”

14. It was the Appellant’s contention that at the period in dispute, Section 2 of the VAT Act had zero-rated export services and did not define what constituted a service exported out of Kenya. That as a result, the Tribunal and High Court relied on international best practice specifically OECD guidelines in determining disputes on exported services.

15. Similarly, the Appellant averred that Paragraph 13(2) of the VAT Regulations 2017 provide that an exportation is a taxable supply and therefore zero-rated where services are provided to recipient outside Kenya for use, consumption or enjoyment. That the said paragraph however excludes “taxable services provided in Kenya but paid for by a person who is not resident in Kenya”. A position the Appellant found ultra vires as it appeared to contradict definition of exported services under Section 2 of the VAT Act.

16. That from the foregoing, the Appellant averred that the only solution available to the Respondent was to adopt international best practices as the Tribunal and the High Court did in its previous decisions on similar matters. To prop up its position, the Appellant cited the case of Unilever Kenya vs Commissioner of Income Tax, Income Appeal No. 753 of 2003 where it was held that OECD Guidelines were applicable when trying to interpret Kenyan tax law since they set forth a tax-neutral, destination-based system where a tax on cross-border supplies is ultimately levied in jurisdiction where consumption occurs.

17. In supporting this neutrality principle, the Appellant cited Paragraph 1. 4 of the 2017 VAT Guidelines which provided this neutrality through the adoption of the destination principle. Similarly, the Appellant firmed up this position by quoting the following 2017 VAT Guidelines;“1. That the burden of VAT should not lie on taxable businesses.

3. That VAT rules should be framed in such a way that they are not the primary influence on business decisions.

5. That adoption of approaches to ensure foreign businesses do not incur irrecoverable VAT.”

18. It was the Appellant’s assertion that the 2017 Guidelines were aimed to reduce uncertainty and double taxation while setting internationally agreed principles and standards for treatment to be accorded cross-border transactions specifically services and intangibles. The Appellant cited Guideline 3. 2 of the 2017 VAT Guidelines as clearly defining the jurisdiction where the customer is located and the taxing rights over internationally traded services. The Appellant asserted that this is the general rule whose variation is only in exceptional and clearly specified circumstances.

19. The Appellant claimed that in the instant appeal, TCCEC was based outside Kenya and therefore the services provided by the Appellant were exported services since their benefits were accrued outside Kenya by a non-resident entity; thus, were zero-rated under the VAT Act 2013.

Appellant’s Prayers 20. The Appellant prayed that the Tribunal;a.Do set aside the objection decision and the assessment of Ksh 502,487,796. 00. b.That the Respondent refunds the VAT amounting to Ksh 669,881,942. 00 together with applicable interest as provided for under the TPA.

The Respondent’s Case 21. The Respondent replied to the Appeal through its Statement of Facts dated 16th November 2022 and filed on even date.

22. The Respondent asserted that it rejected the Appellant’s claim for VAT refund claim because the brand marketing and promotion services provided to TCCEC were locally consumed thus did not qualify as exported services therefore were subject to VAT.

23. In asserting that Regulations adequately provided for exportation of goods or services, the Respondent cited Regulation 13 of VAT 2017 as follows;“13(1) An exportation shall be a taxable supply;In case of services, when the taxable supply involves the services being provided to a recipient outside Kenya provided that the exportation of services shall not include; -a.Taxable services consumed on exportation of goods unless the services are in relation to transportation of goods which terminates outside Kenya.b.Taxable services provided in Kenya but paid for by a person- who is not a resident in Kenya.”

24. The Respondent averred that the purpose of subsidiary legislation is to bring clarity to the main law and that the 2017 VAT Regulations adequately provided on the matter of exported services which was similarly upheld by the High Court when it declared their validity on 14th July 2022 and was approved by the National Assembly.

25. The Respondent also stated that it had appealed against the two rulings cited by the Appellant in its Statement of Facts i.e. TAT No. 5 of 2018 and High Court Income Appeal No. 19 of 2013.

26. It was the Respondent’s assertion that the Appellant’s services qualified for VAT because they were provided and consumed in Kenya and paid for by non-resident person. That the Respondent’s audit established that the Appellant declares 99. 8% of its sales as zero-rated yet it contracts third parties to erect billboards, organize media launches, advertise in local radio stations, TV channels and print media; all of which are meant to influence local consumers. That it was undisputed that these services were performed in Kenya on behalf of TCCEC who is neither the user nor the consumer of Appellant’s services. Similarly, the Respondent also stated that bottling companies benefitted from the Appellant’s services which was undisputed. To firm up this position, the Respondent cited Section 2 of the VAT Act 2013 that;“a service is said to be exported if it is provided for use or consumed outside Kenya.”

27. The Respondent averred that it set-off the assessment amount of Kshs. 502,487,796. 00 against an amount of Kshs. 669,881,942. 00 that was due to the Appellant. The Respondent emphasized that the decision to confirm the assessment was justified and was in conformity with the law pursuant to Sections 47 and 51 of the Tax Procedure Act, No. 29 of 2015 (hereinafter ‘TPA’) and Section 2 of the VAT Act as well as 2017 VAT Regulations.

28. The Respondent on receipt of the objection referred the matter to the Tax Appeals Tribunal in light of changes brought about by Section 47(13) of the TPA.

29. The Respondent averred that on 24th August 2022, the Appellant responded by stating that its refund application and the Respondent’s decision were issued prior to 1st July 2022 before the amended law came into force.

30. The Respondent averred that the location of the payer of the service was not a factor to consider in determining whether the service was supplied in Kenya but rather the place of consumption of that service. That in the instant Appeal, the services were consumed locally in Kenya and paid for by TCCEC thus output VAT was chargeable.

31. The Respondent affirmed that the decision and assessment were procedurally issued and in conformity with the law and the same should be upheld.

Respondent’s Prayers 32. The Respondent prayers to the Tribunal were;a.That the Tribunal upholds the Respondent’s assessment and decision dated 16th September 2022. b.That the Tribunal dismisses the Appeal with costs.

Parties Submissions 33. The Appellant’s written submissions dated and filed on 14th April 2023. The Appellant submitted on two issues as follows;

Are services provided by the Appellant to TCCEC and other non-Kenyan affiliates exported services and has this determination already been made by the High Court? 34. The Appellant submitted that there were two High Court decisions issued by the High Court between the same parties and arising from the same issues as the instant Appeal where it was made clear that the Appellant’s services to TCCEC were indeed exported services. The cited authorities were;a.Coca-Cola Central East and West Africa v Commissioner of Domestic Taxes (ITA No. 19 of 2013).b.Commissioner of Domestic Taxes v Coca-Cola Central East and West Africa (ITA E038 of 2020).

35. The Appellant averred that the High Court on numerous occasions considered international best practices as well as case law from other jurisdictions in rendering its decisions especially OECD Guidelines. That these Guidelines set forth the destination principle which is applied to achieve VAT neutrality in international trade by ensuring that tax on cross-border supply is ultimately levied only in the jurisdiction where the final consumption occurs.

36. It was the Appellant’s assertion that Section 2 of the VAT Act does not define “use” or “consumption.” In similar fashion, the Appellant asserted that if VAT was charged on the services, then the Appellant would be forced to allocate the same to concentrate manufacturers.

37. The Appellant averred TCCEC incorporated the full cost of the business-to-business for services rendered and that if VAT was applied to marketing costs, TCCEC could not recover the VAT since it is a non-registered VAT entity in Kenya.

38. The Appellant relied on Guidelines 3. 2 and 3. 3 of the OECD Guidelines which state as follows;“2. for business-to-business supplies, the jurisdiction in which the customer is located has the taxing rights over internationally traded services or intangibles

3. the identity of the customer is normally determined by reference to the business agreement.”

39. That in view of the above Guidelines, the Appellant’s customer and the jurisdiction that has taxing rights was the United States of America. The Appellant cited the case of Commissioner of Domestic Taxes v Coca-Cola Central East and West Africa (ITA E038 of 2020) where the court held as follows;“In service agreements involving local and foreign entities, the destination principle is key and applies so that even though the service was offered/rendered in Kenya the service would not be necessarily be consumed in Kenya, but by the entity that commissioned the contract, depending on the location of the entity commissioning the marketing and promotion services and not the entity that marketed the services or where marketing and promotion took place...”

40. To buttress this position, the Appellant relied on the following cases:a.Google Kenya Limited v Commissioner of Domestic Taxes (ITA No. E004 of 2021).b.Commissioner of Domestic Taxes v Swift East Africa Limited (Tax Appeal No. E021 of 2021).c.Commissioner of Domestic Taxes v 3M Kenya Limited (ITA E096 of 2021).d.Commissioner of Domestic Taxes v WEC Lines (K) Limited (Tax Appeal No. E084 of 2020) [2022] KEHC 57 KLR.

41. It was the Appellant’s assertion that the cited authorities clearly indicated that the beneficiary and consumer of the exported services was TCCEWA as the purpose was to maintain and grow the value and importance of Coca-Cola brands which resulted in increased sales of concentrate. Thus, the exported services were properly zero-rated for VAT.

42. The Appellant asserted that the target consumers of its services was TCCEC not the Kenyan public contrary to the Respondent’s assertion. The Appellant cited the case of Coca-Cola Central East and West Africa v Commissioner of Domestic Taxes (ITA No. 19 of 2013) where the court observed that;“It is of course true that the target audience for those services is the Kenyan public who are either existing or potential buyers of the Coca cola drinks. But that does not necessarily make the target audience consumers pf the promotional and marketing services? And in posing this question, consumption of the soft drinks must not be confused with consumption of services. Indeed, a promotion or marketing activity may not lead to a sale or consumption of the promoted or marketed product.”

43. The Appellant cited the OECD Guidelines in asserting that it had no business agreement with bottlers in Kenya contrary to Respondent’s assertions. In similar fashion, the Appellant asserted that contrary to the Respondent’s reliance on Regulation 13 which is a subsidiary legislation, Section 2 of the VAT Act which is the principal legislation, addresses the issue of performance and seeks to define exported services out of Kenya. That if the Respondent’s assertions were allowed to stand, the implementation would be exclusion of receipt of payments from non-resident persons effectively eliminating all exports and denying Kenya foreign exchange.

44. It was the Appellant’s assertion that the Respondent cannot attempt to limit the scope of exported services as per a subsidiary legislation yet the principal legislation that is Section 2 of the VAT Act was very clear in definition of exported services. To firm up this position, the Appellant cited the Court ruling in Commissioner of Domestic Taxes v Total Touch Cargo (ITA No. 17 of 2013) when considering conflicting issues between principal legislation and subsidiary legislation.

Applying the doctrine of Stare Decisis, is the Tribunal bound by High Court Decisions? 45. The Appellant submitted that High Court decisions bind the Tribunal pursuant to the doctrine of Stare Decisis since the instant Appeal is based on similar facts and issues as previous two determined cases between the Appellant and Respondent. The Appellant cited several High Court decisions in respect of marketing services where it was held that these services were indeed exported services attracting a zero-rate for VAT.

46. To buttress this position, the Appellant relied on the Supreme Court decision in George Mike Wanjohi v Stephen Kariuki & 2 Others (2014) eKLR where it was held as follows;“this doctrine holds that decisions of a higher Court, unless distinguished or overruled, bear the quality of law, and bind all lower Courts in similar or like cases. The importance of this doctrine was recognized by the British House of Lords in 1966, when Lord Gardiner, LC issued practice directions to guide the court, relaxing the strictures of earlier practice on precedent in the Practice Statement (Judicial precedent) [1966] 1 WLR 1234 (HL)(Practice Statement) the Lord Chancellor extolled the virtues of precedent law, thus;their Lordships regard the use of precedent as an indispensable foundation upon which to decide what is the law and its application to individual cases. It provides at least some degree of certainty upon which individuals can rely in the conduct of their affairs, as well as a basis for orderly development of legal rules.”

47. It was the Appellant’s assertion that applying the principle of stare decisis ensures certainty and consistency, thus, decisions of the High Court are binding upon the Tribunal.

Issues For Determination 48. The Tribunal having considered the parties’ pleadings, documentation and Submissions is of the view that two issues call for its determination:-i.Whether the Appellant’s marketing and promotion services are exported services.ii.Whether the Respondent’s objection decision was justified.

Analysis And Determination 49. The Tribunal proceeds to analyze the facts of the Appeal as follows:

Whether the Appellant’s marketing and promotion services are exported services. 50. The Appellant stated that it is an affiliate of the global Coca-Cola Company with primary business of providing marketing and promotion services to its sister affiliate TCCEC in the Kenyan market.

51. The Appellant averred that for these services it charges a fee which it considers to be an exported service subject to VAT at a zero-rate for which the Appellant demands to claim refund for input VAT from the Respondent.

52. The Respondent on the other hand averred that after receiving the Appellant’s claim for refund and having conducted its own audit to verify the claim, it found that the Appellant’s claim was not merited because the claimed exported services were actually consumed locally but paid for by a non-resident entity.

53. It is apparent that the contentious issue is whether the marketing and promotion services provided by the Appellant are exported services that attract a VAT charge of zero-rate.

54. The Tribunal notes that for traded services, jurisdiction is at the core in conferring the right to tax; locally, this right is defined under Section 8(1) of the VAT Act as:“A supply of services is made in Kenya if the place of business of the supplier from which the services are supplied is in Kenya.”

55. While exported services are defined by Section 2 of the VAT Act as:“…a service is said to be exported if it is provided for use or consumed outside Kenya.”

56. At both levels i.e. local and international, the Tribunal notes that jurisdiction is at the core of defining where taxing rights lie. The Tribunal is also guided by Guideline 3. 2 of the OECD Guidelines which reads as follows:“…for business-to-business supplies, the jurisdiction in which the consumer is located has the taxing rights over internationally traded services and intangibles.”

57. Regarding the jurisdiction right to tax, the Tribunal relies on the Court holding in the case of Total Touch Cargo Holland vs Commissioner of Domestic Taxes [2013] eKLR that:“To our mind, it is immaterial where the place of performance of the service takes place, it can be China, in Latin America, in Ireland, in Mesopotamia, in Asia, in Europe or even here in Kenya; what is material is where the use and consumption of the service takes place, not the place of services.”

58. It is the Tribunal’s view that the Appellant operates locally here in Kenya and offers marketing and promotion services for pay to its affiliate which is a non-resident entity. It is this foreign entity that uses and consumes these services for without it the Appellant would be out of business and all other third-party entities engaged to influence local consumers for the benefit of the foreign entity.

59. The Appellant has pleaded its case through legal provisions, adduced evidence, cited case law and international best practices as to why the services it offers must qualify as exported services. The Respondent on the other hand has offered rebuttals for the same but has failed to demonstrate the specific legal provisions that warrant VAT charge for the Appellant’s services. The Tribunal is aptly guided by the Court holding in the case of Vesty vs Inland Revenue Commissioner [1979] 3 ALL ER at 984 that:“Taxes are imposed on subjects by parliament. A citizen cannot be taxed unless he is designated in clear terms by a taxing Act as taxpayer and the amount of his liability is clearly defined.”

60. It is the Tribunal’s view that the services as offered by the Appellant to its foreign affiliate, even though operating locally, are not within the legal taxing right of the Respondent. Therefore, as obtained from the foregoing, it is apparent that marketing and promotion services provided by the Appellant are exported services and therefore zero-rated.

Whether the Respondent’s objection decision was justified. 61. From the foregoing and having established that indeed the services offered by the Appellant are subject to VAT at zero-rate the Tribunal is convinced that the Respondent’s objection decision was not justified.

Final Decision 62. The upshot of the foregoing is that the Appeal is merited and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 16th September 2022 be and is hereby set aside.c.Each party to bear its own costs.

63. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 20TH DAY OF DECEMBER, 2023ERIC NYONGESA WAFULACHAIRMANDELILAH K. NGALACHRISTINE A. MUGAMEMBERGEORGE KASHINDIMEMBERMOHAMED A. DIRIYEMEMBERSPENCER S. OLOLCHIKEMEMBER