[2024] KETAT 655 (KLR)

Japan Port Consultants Limited v Commissioner of Domestic Tax (Tax Appeal 076 of 2023) [2024] KETAT 655 (KLR) (26 April 2024) (Judgment)

Neutral citation: [2024] KETAT 655 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 076 of 2023

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, T Vikiru & AK Kiprotich, Members

April 26, 2024

Between

Japan Port Consultants Limited

Appellant

and

Commissioner of Domestic Tax

Respondent

Judgment

1. The Appellant is a Kenyan branch of Japan Port Consultants Limited, an engineering company established in Japan. Its principal business is the provision of professional engineering consultancy activities.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act. The Kenya Revenue Authority is an agency of the Government of Kenya mandated with the duty of collection and receipting of all tax revenue, and the administration and enforcement of all tax laws set out in Parts 1& 2 of the First Schedule to the Act, for purposes of assessing, collecting, and accounting for all tax revenues in accordance with those laws.

3. The issue in dispute in this Appeal arose when the Respondent carried out a compliance audit on the Appellant’s tax affairs. The audit resulted in the issuance of an additional assessment on the 26th October 2022 comprising income tax assessed for January to December 2019 of Kshs 111,747,914. 00, Withholding income tax for January to December 2017 of Kshs 21,988,051. 00 and PAYE for January to December 2017 of 48,871,350. 00.

4. The Appellant filed its objection for PAYE and income tax on 23rd February 2022 and a manual objection for income tax on 25th November 2022.

5. The Respondent issued its Objection decision on 27th January 2023 wherein it confirmed the additional assessment amounting to Kshs. 286,289,129. 73 inclusive of penalties and interest.

6. Dissatisfied with the Respondent’s objection decision, the Appellant filed a Notice of Appeal dated 24th February 2023.

The Appeal 7. The Appellant’s Memorandum of Appeal dated 8th March 2023 and filed on 10th March 2023 has set out the following grounds of Appeal:a.That the Respondent erred in law by imposing income tax on an approach that contravenes the applicable sections of the Income Tax Act (ITA).b.That the Respondent erred in law and fact by imposing withholding tax (WHT) on an approach that contravenes the applicable sections of the ITA.c.That the Respondent erred in law by imposing Pay As You Earn (PAYE) on an approach that contravenes the applicable sections of the ITA and the Kenyan jurisprudence.

Appellant’s Case 8. The Appellant laid out its Appeal in its Statement of Facts dated 8th March 2023 and filed on 10th March 2023.

9. The Appellant laid out the background of this dispute as follows;a.That it entered into an agreement with the Government of Kenya on 20th November 2007 for the development of additional infrastructure installations at the Port of Mombasa.b.That the Government of Kenya needed financial and technical assistance with this project, and as a result, a charitable interest rate of 0. 1% per annum and a repayment period of thirty (30) years was agreed upon.c.That the loan was disbursed through the Japan International Corporation Agency (“JICA”)d.That it was also negotiated that the Japanese companies, employees, and consultants engaged in the project would be exempted from taxes as captured in clause 8 of the Exchange Notes signed on 16th January 2015 by the Cabinet Secretary to the National Treasury (“CS”) under letter referenced MOF/ERD/11/79/38/01. e.That the CS went ahead and published Legal Notice No. 15 of 2021 which reaffirmed that: -“Legal Notice 15/2021 (Exemption of Japanese Companies)IN EXERCISE of the powers conferred by section 13(2) of the Income Tax Act, the Cabinet Secretary for National Treasury and Planning directs that the income which accrued in or was derived from Kenya by Japanese companies, Japanese consultants, and Japanese employees involved in the projects under the Financing Agreements specified in the second column of the Schedule that was signed on the corresponding dates specified in the second column of the Schedule shall be exempt from income tax to the extent specified in the Financing Agreements.…11. Mombasa Port Development Project (Phase 1) – 20th November 2007. 12. Mombasa Port Development Project (Phase 2) - 9th March 2015. ”f.That Clause 8. 2 of the Exchange Notes, stated that the Government of Kenya was to exempt VAT as follows: -“Clause 8:The Government of the Republic of Kenya shall assume all value-added taxes imposed in the Republic of Kenya with respect to the products and/or services necessary for the implementation of the project.”

10. The Appellant posited that its head office was appointed by Kenya Ports Authority (“KPA”) to be the supervising consulting engineer and to supervise and certify that the works are undertaken as per specification.

11. That the consulting work was undertaken through a consortium of consultants and employees, some of whom were based in Kenya and others in Japan. That part of the work was undertaken in Japan by the head office and a portion of it was undertaken in Kenya by the branch.

12. The Appellant stated that as an exempt entity the income earned from its activities in Kenya was tax-exempt and the portion related to works undertaken in Japan was also not subject to tax in Kenya.

13. That the head office offered technical services to the project while relying on employees who were exclusively situated in Japan and those who visited Kenya did so for a period of fewer than three months each year amounting to a median of one month per individual.

14. The Appellant identified the following issues for determination in this Appeal:a.Whether the exemptions issued by the CS under Section 13(2) of the Income Tax Act Vide Legal Notice No 15 of 2021 apply only from the date of gazettement or as clearly as specified by the CS in the gazette notice.b.Whether the international treaty signed between the Government of the Republic of Kenya and the Republic of Japan was binding upon the parties.c.Whether the income earned in Kenya by a non-resident company out of consulting activities carried out outside Kenya is subject to Kenyan taxation.d.Whether PAYE was due and payable from payments made to the employees and consultants of JPC.e.Whether transfer pricing methods are used to determine the arm’s length price of a branch based on its activities in Kenya.

15. The identified issues were discussed as hereunder:-

a. Whether the exemptions issued by the CS under Section 13(2) of the Income Tax Act Vide Legal Notice No 15 of 2021 apply only from the date of gazettement or as clearly as specified by the CS in the gazette notice. 16. The Appellant stated that it was exempted from tax under clause 8 of the Treaty Exchange Notes which it states are valid and binding documents as read together with the financing agreement.

17. The Appellant posited that the actions of the Respondent in levying tax against it amounted to making or amending the gazette notice under Section 13 of the Income Tax Act and thereby usurping the powers of the CS.

b. Whether the international treaty signed between the Government of the Republic of Kenya and the Republic of Japan was binding upon the parties. 18. The Appellant stated that the Exchange Notes was the primary international treaty which outlined the agreement between the Government of Kenya and the State of Japan.

19. That Kenya is a signatory of the United Nations Vienna Convention on the Law of Treaties (1969) and as its obligated to honour international agreements regulating treaties between states.

20. That imposing a tax on the Appellant renders the treaty between the Government of Kenya and the State of Japan insignificant in contravention of Articles 7. 18 and 26 of the United Nations Vienna Convention on the Law of Treaties (1969).

c. Whether the income earned in Kenya by a non-resident company out of consulting activities carried out outside /of Kenya is subject to Kenyan taxation. 21. The Appellant averred that the Respondent had brought to charge the income that was earned by Japan Port Consultants Limited's Head Office, which is based in Japan. That its activities, under the contract, were fully undertaken in Japan by its staff and as such its operating expenses could only be claimed in Japan.

22. The Appellant posited that the payment for engineering consulting services is purely based on man hours of specific engineers and technicians carrying out desk work design and coordination from Japan. That the details, names and billable hours are indicated in the contract with KPA which shows the portion undertaken and earned in Japan and which should not be taxed in Kenya.

23. The Appellant was of the view that the only portion of the income of a non-resident person which may be subject to tax in Kenya is the part that is attributed to its permanent establishment (branch) situated in Kenya. That a branch is first of all treated as a distinct and separate entity from its Head Office as if it were an independent sub-contractor and then compensated for its services on an arm’s length basis.

24. That the only circumstances when the "business income” of a non-resident person may be regarded as derived from or accrued in Kenya are prescribed in Section 4(a), of the Income Tax Act. That income from engineering businesses is not indicated in those special categories.

d. Whether transfer pricing methods are used to determine the arm’s length price of a branch based on its activities in Kenya. 25. The Appellant stated that Section 18 of the ITA is the operating Section on cross-border related party transactions. That in particular, Section 18(3) of the ITA outlined the legal approach to be adopted in the event of a transaction between the head office and its branch.

26. That Section 18(3) of the ITA implied that the income of a permanent establishment (PE) is to be determined based on the arm’s length principle as if the activities of the branch were undertaken by an independent entity doing business at arm’s length with its head office.

27. It was the view of the Appellant that Rule 5 of the Transfer Pricing Rules provided that a branch office should be a distinct and separate entity from the head office.

28. That this is determined by undertaking a functional and factual analysis of the functions performed, assets employed, risks assumed and capital employed.

29. The Appellant submitted that the OECD Model Convention is applicable as a binding legal instrument in this dispute as was stated in the cases of Unilever v Kenya Revenue Authority, Appeal No. 753 of 2003 and Civicon v Kenya Revenue Authority, Misc Application No. 1044 of 2006.

e. Whether PAYE was due and payable from payments made to the Employees and Consultants of JPC (head office). 30. The Appellant stated that PAYE only applies to employment services discharged in Kenya or by individuals who exercise their employment activities for an aggregate duration longer than six months in Kenya.

31. That Japanese employees are non-residents who arrive in Kenya on the specified dates and are present in the Country for less than six months and should thus not be taxed.

32. The Appellant took the position that for taxation purposes, the employees ought to be in the Country for the following periods;a.Was present in Kenya for a period or periods amounting in the aggregate to 183 days or more in that year of income; orb.Was present in Kenya in that year of income and in each of the two preceding years of income for periods averaging more than 122 days in each year of income.

33. It is for this reason that the Appellant averred that its income from employment is not taxable.

Appellant’s Prayer 34. In light of the foregoing, the Appellant’s prayer to the Tribunal was for orders that it upholds the Appeal and sets aside the additional assessment raised by the Respondent amounting to Kshs. 286,289,129. 73.

Respondent’s Case 35. The Respondent has set out its defence to this Appeal in its Statement of Facts dated 23rd March 2023 and filed on the same day.

36. The Respondent stated that Schedule 2 of the loan agreement noted items not eligible for financing which included:a.General administration expensesb.Taxes and dutiesc.Purchase of land and other real propertyd.Compensatione.Other indirect items.

37. The Respondent averred that the Appellant wished to shift the tax burden to KPA when the contract agreement was between the Appellant and the Government. And that tax burden cannot be shifted to a party who was not part of a contract agreement.

38. The Respondent stated that the Appellant ought to comply with the provisions of Sections 3 and 35 of the Income Tax Act.

39. That Section 2, subsection 6, clause 6. 2 of the contract agreement provided that the consultant, sub-consultant and experts were liable for their tax liabilities. That additionally Section 3, clause 6. 2 (a) and (b) provided that tax responsibility remained with the client in the absence of exemption certificates to the consultants.

40. The Respondent stated that Section 13 of the Income Tax Act provides for the exemption of certain income from tax by the Minister through a notice in a gazette to be laid before the National Assembly without unreasonable delay. That it was noted that the notice to exempt from income tax Japanese companies’ consultants and Japanese personnel was tabled at the National Assembly on the 9th March 2021 following the gazettement.

41. That the exemption was sought and granted for phase 1 but the Appellant did not follow up to seek an exemption certificate and hence the tax liability.

42. The Respondent argued that the gazette notice dated 26th February 2021 cannot be applied retrospectively as was held in Tax Appeal Tribunal Ruling, Appeal No 105 of 2021, Kenya Ports Authority v Kenya Revenue Authority.

43. That the CS issued the requisite exemption vide Legal Notice No. 15 dated 26th February 2021 to which the Tribunal ruled that exemptions do not apply retrospectively. That based on the above interpretation the Respondent reviewed the Appellant’s records and established that Japanese companies, Japanese Consultants and Japanese employees were omitted from the computation of taxable income.

44. That no decision has been filed against the Tribunal decision and as such the effective date of the exemption under Legal Notice No. 15 of 2021 can only be applied prospectively.

45. It additionally stated that the Court has held as follows regarding Legal Notice No. 15 of 2021 in Constitution Petition No. 280 of 2021, Eliud Karanja Matindi v Kenya Revenue Authority and 4 others”“a.it is hereby declared that the first Respondent violated the Constitution by exempting Japanese companies, Japanese Consultants and Japanese employees as set out in Legal Notice No. 15 of 2021 dated 15/2/2021 published on 26/2/2021 as issue No.17. b.It is hereby declared that Legal Notice No. 15 of 2021 dated 15/2/2021 published on 26/2/2022 as issue No. 17 is unconstitutional by itself and in effect as it is contrary to Articles 27 and 210 of the Constitution and has not been subjected to public participation. The said notice is hereby quashed."

46. The Respondent stated that based on this decision, the Legal Notice that has been relied on by the Appellant is unlawful and thus not applicable to this Appeal.

47. The Respondent identified the following as the issues for determination in this Appeal;a.Whether the Appellant had the obligation to account for taxes in relation to the Japanese companies, Japanese consultants and Japanese employees.b.Whether the Japanese were exempted from paying taxes under the Exchange Notes entered between the Kenyan Government and the Japanese Government under the Legal Notice.

48. The Respondent argued these issues for determination as follows:

a. Whether the Appellant had the obligation to account for taxes in relation to the Japanese companies, Japanese consultants and Japanese employees. 49. The Respondent argued that the contract was performed at the Port of Mombasa but the Appellant opted to account for taxes of local persons and others but not the Japanese entities.

50. That from the Appellant's Statement of Facts, Objection and the Respondent’s Objection decision the following facts are admitted:a.The Appellant engaged Japanese Companies and consultants for the project at the Port of Mombasa and paid them contractual fees for the period January 2017 to December 2021;b.The Appellant engaged the employees of Japanese origin (foreign expatriates) but only levied PAYE on local employees;c.The Appellant did not declare the income derived or accrued in Kenya by the foreign subsidiary.

51. It stated that the incomes having been accrued or derived in Kenya in the course of employment or services rendered or from business performed in Kenya, it followed that they fell under Section 3(2) (a) (i) and (ii) of the Income Tax Act.

52. That for the foreign subsidiary, the income derived in Kenya falls under Section 3(2) (a) (i) of the ITA and the Appellant therefore had the obligation to account for the same.

53. That for the contractual payments made to non-resident companies, the income falls under Section 3(2) (a) and (ii) of the ITA. That the same is recoverable under Section 10 as read with Section 35 of the Income Tax Act wherein they must withhold the taxes at the point of making the payments to the non-residents.

54. In its view, the plain reading of the Income Tax Act and Section 39A of the Tax Procedures Act, 2015 makes it clear that the Appellant was liable to withhold taxes, PAYE and also account for the Income tax with regard to the subsidiary.

55. That Section 10(1) of ITA, provides that income received from contractual payments is income derived in Kenya. That the Appellant was thus obliged under Section 35 (1) of ITA to deduct WHT when making contractual payments.

56. Regarding PAYE, the Respondent posited that Section 5(1) of the ITA required the Appellant to pay tax on income paid to Japanese expatriates for the services rendered.

57. That having failed to withhold taxes when paying the companies and consultants, and further having failed to subject the Japanese employees to tax on their salaries and emoluments, the Appellant was liable for these taxes as provided in Section 39A of the ITA, more so because they were not eligible for exemption.

b. Whether the Japanese were exempted from paying tax by virtue of the Exchange notes entered between the Kenya and Japan Governments. 58. The Respondent stated that Section 13 of the ITA provides for the exemption of certain income from taxation.

59. That the TAT had held in TAT No. 105 of 2021: Kenya Ports Authority v Commissioner of Domestic Taxes that the said Legal Notice of exemption could only be applied prospectively.

60. That it follows that if the Appellant was exempt from any taxes, then the said exemption was only from 9th March 2021, when the Legal Notice was tabled before the National Assembly and not for a period prior.

61. That the said Legal Notice has however been declared unlawful and unconstitutional in the High Court in Constitution Pet No. E280 of 2021: Eliud Karanja Matindi v CS treasury, KRA & Others.

62. That the effect of this unconstitutionality is that the said Legal Notices are inoperative and cannot be used to grant an exemption.

63. The Respondent re-asserted that its decision to apply Corporation tax, PAYE and WHT on income earned by the Appellant and payments made to non-resident entities for the period under consideration was justified because no certificate of exemption was in place.

Respondent's Prayer 64. The Respondent prayed that this Honourable Tribunal finds:-i.The assessment was raised in accordance with the law.ii.The Legal Notice of 25th February 2021 cannot be applied retrospectively or even be applied at all as the same has since been declared unconstitutional.iii.The Respondent’s decision of 27th January 2023 amounting to Kshs 286,289,129. 73 was proper and within the confines of the law.iv.This Appeal be dismissed with costs as it lacks merit.

Issues for Determination 65. The Tribunal having carefully considered the parties’ pleadings, submissions and documents submitted, is of the view that the Appeal herein distils into two issues for determination:a.Whether the Appellant was exempted from payment of tax in Kenya.b)Whether the Respondent was justified in demanding additional tax from the Appellant.

Analysis and Determination a. Whether the Appellant was exempted from payment of tax in Kenya. 66. The Appellant argued that it was exempted from taxation in Kenya by dint of the Exchange Notes signed between itself and the CS on 16th January 2015. That the CS affirmed this position by the publication of Legal Notice No. 15 of 2021 which confirmed its tax-exempt status to the extent specified in the financial agreements that they had signed.

67. The Respondent on its part argued that the said exemption would have only taken effect prospectively from the 9th March 2021 when Legal Notice No. 15 of 2021 was gazetted. That in in any event, the said Legal Notice has been declared unconstitutional and is thus invalid.

68. The Tribunal has read the decision of Justice D.K. Magare in Matindi v CS, National Treasury & Planning & 4 others (Constitutional Petition E280 of 2021) [2023] KEHC 1144 (KLR) (Constitutional and Human Rights) (17 February 2023) (Judgment), and it has confirmed that one of the issues that fell for determination in this case was whether Legal Notice No. 15 of 2021 was unconstitutional for want of public participation. The court answered this issue by pronouncing itself in the final disposition of its judgment as follows:“a.It is hereby declared that the first respondent violated the Constitution by exempting Japanese companies, Japanese consultants and Japanese employees as set out in Legal Notice No 15 of 2021 dated 15/2/2021 published on 26/2/2021 as issue No 17b.It is hereby declared that Legal Notice No. 15 of 2021 dated 15/2/2021 published on 26/2/2021 as issue No. 17 is unconstitutional by itself and in its effect as it is contrary to articles 27 and 210 of the Constitution and had not been subjected to public participation. The said notice is hereby quashed.c.It is hereby declared that section 13(2) of the Income Tax Act is unconstitutional to the extent that it authorizes Income Tax waivers through a notice in the Gazette and for specified persons without regard to the dictates of article 210 of the Constitution. To the extent of the inconsistency, in particular, the use of the Kenya Gazette, instead of legislation, to effect tax waiver, is struck down”

69. The outcome of this Appeal is that Legal Notice No. 15 of 2021 was quashed upon being declared unconstitutional. The Court further stated that a tax exemption should be premised on legislation and not a Kenya Gazette. It proceeded to strike down all exemptions which were premised on Legal Notice No. 15 of 2021.

70. The Court of Appeal explained the consequence of what happens when a court issues a declaration unconstitutionality in Otieno & another v Council of Legal Education (Civil Appeal 38 of 2018) [2021] KECA 349 (KLR) (17 December 2021) (Judgment) when it stated as follows:“However, if a court has declared a piece of legislation or a section of an Act to be unconstitutional, that Act or law became a nullity from the date of inception or enactment and not from the date of the judgment. But it would not apply to actions already crystallized whilst the expunged law was in force.

71. It thus follows that the order by the High Court that Legal Notice No. 15 of 2021 was unconstitutional meant that it was a nullity from 9th March 2021 when it was gazetted and not the date of the judgement. The Appellant had been denied the tax benefit of this unconstitutional Legal Notice No. 15 of 2021 by the Respondent. Therefore, no rights had crystallized by the time the impugned gazette notice was expunged.

72. Accordingly, the Tribunal finds and holds that the Legal Notice No 15 of 2021 did not exempt the Appellant from payment of tax.

b. Whether the Respondent was justified in demanding additional tax from the Appellant. 73. Having held that the Appellant’s transactions were not tax-exempt, the Tribunal shall determine whether the Respondent’s tax assessment was justified under the 3 heads of tax against which additional tax assessment was raised.

I. Whether the income earned in Kenya by a non-resident company out of consulting activities carried out outside Kenya is subject to Kenyan taxation. 74. The point of disagreement under this issue is whether income earned by Japanese entities offering services in Kenya was taxable.

75. The Appellant argued that income earned by Japan Port Consultants Limited Head Office, which is based in Japan was not taxable in Kenya because its activities under the contract, were fully undertaken by its staff in Japan.

76. It stressed that these employees of Japanese entities were based in Japan and they carried out their design work and coordination from their desktops in Japan. That the Appellant should thus be treated as a separate and distinct entity from the Head office.

77. It was also its view that application of the arms-length principle under the OECD Guidelines would affirm that the head office was not liable to pay tax arising from the income of the cited non-residents.

78. The Respondent retorted that the tax issued was derived in Kenya and tax was thus applicable to it. That even foreign companies are required under Section 3(2) (a) (I) of the ITA to account for profits derived in Kenya.

79. It was its view that income received from contractual payments is income derived in Kenya under Section 10(1) of the ITA.

80. The Tribunal is cognisant of the fact that Kenya applies the source-based system of taxation where all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya is taxable. Section 3(1) of the ITA affirms this position wherein it provides as follows:“3. (1)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.”

81. A plain reading of this charging provision makes it apparent that the Respondent can impose a tax on residents like the Japanese entities under this Appeal as long as the income in question accrued or was derived in Kenya.

82. It is agreed that the income in question was obtained from services offered at the Mombasa Port. It hence follows that, in the absence of an exemption, the income in question was derived in Kenya and it is thus taxable in Kenya.

83. Section 3(2) of the ITA provides as follows regarding income upon which tax is chargeable:“(2)Subject to this Act, income upon which tax is chargeable under this Act is income in respect of -(a)gains or profits from –(i)a business, for whatever period of time carried on;(ii)employment or services rendered(iii)a right granted to another person for use or occupation of property;”

84. The Appellant’s Head office in this case obtained a profit from business and or services that it offered in Kenya. This brought it within the jurisdictional tax dragnet of the Republic of Kenya under Section 3(1) as read with 3(2) (a) of the ITA.

85. Based on the above analysis, the Tribunal’s finding is that the Respondent was justified in issuing additional income tax assessment for the period 2017 to 2019

II. On whether PAYE was due and payable from payments made to the Employees and Consultants of JPC. 86. The Appellant opined under this issue that PAYE only applies to employment services discharged in Kenya or by individuals who exercise their employment activities for an aggregate duration longer than six months in Kenya. That its Head office and employees working from the Head office were non-residents who had never been in Kenya for a period over six months and hence the reason why PAYE did not apply to them.

87. The Respondent on its part argued that these Japanese expatriates were employed by the Appellant in the project and consequently the income arising from their services is taxable.

88. Section 5(1)(b) of the ITA provides as follows regarding the taxation of income from employment.“(1)For the purposes of section 3(2)(a)(ii), an amount paid to -(a)…(b)a non-resident person in respect of any employment with or services rendered to an employer who is resident in Kenya or the permanent establishment in Kenya of an employer who is not so resident, shall be deemed to have accrued in or to have been derived from Kenya.”

89. Section 1 of the ITA defines an employer as:“employer" includes any resident person responsible for the payment of, or on account of, emoluments to an employee, and an agent, manager or other representative so responsible in Kenya on behalf of a non-resident employer;

90. Section 1 of the ITA makes it clear that the activities and actions of the Appellant fall within the definition of an employer to the extent that the Appellant was the entity which was responsible for the payment of salaries or emoluments for the non-resident employees on behalf of its non-resident head office.

91. The facts of this Appeal as discerned by the Tribunal is that payments were made to non-residents for services rendered to an employer who is resident in Kenya. The payments were made by the Appellant and KPA who are employers that are residents in Kenya.

92. A plain reading of Section 5(1)(b) of the ITA cited above, accords that a non-resident is required to pay tax regarding any employment or services rendered to an employer who is resident in Kenya.

93. For that reason, the payments made to the employees and consultants of JPC regarding services which were rendered to a Kenyan employer fell within Section 5(1)(b) of the ITA and were thus subject to ITA. This view aligns with the decision in Everret Aviation Limited V Kenya Revenue Authority (Through The Commissioner of Domestic Taxes) [2013] eKLR where the court held as thus:“To that extent, and though not before me on this appeal, the Local Committee would have been entitled to find both non-resident freelance pilots and resident freelance pilots liable to PAYE.”

94. Accordingly, the Respondent did not err in issuing additional PAYE against the Appellant for the periods January 2017 to December 2021.

III. Whether WHT was due and payable 95. The WHT in dispute relates to the period January 2017 to December 2021.

96. The Tribunal has noted that before 2016, Section 35(6) of the ITA provided that the Commissioner could claim taxes from a payer who fails to make a deduction as though the taxes were due from them.

97. However, the amendment introduced by the Finance Act, 2016 deleted the said Section 35(6) of the ITA meaning that the Commissioner could no longer demand taxes not withheld from the person who should have withheld the same. This position remained until the enactment of the Finance Act, 2019 which came into force on 7th November 2019 when the previously deleted provisions of Section 35(6) of the ITA were now reintroduced and reproduced as a new Section 39A under the TPA.

98. Section 39A of the TPA provides as follows regarding WHT:“39A. Penalty for failure to deduct or withhold taxWhere a person who is required under a tax law to deduct or withhold tax and remit the tax to the Commissioner fails to do so, the provisions of this Act relating to the collection and recovery of tax, and the payment of penalties and interest thereon, shall apply to the collection and recovery of that tax not deducted or withheld as if it were tax due and payable by that person and the due date for the payment shall be the date on which the amount of tax should have been remitted to the Commissioner.”

99. Section 39A of the TPA provides that everyone who is required to withhold and remit tax must do so, failure to which it would be liable to pay for the tax that it failed to withhold as if it was a tax that is due and payable by it. Section 39A of the TPA was however only applicable from 7th November 2019 when it came into force.

100. The Respondent could not demand WHT from the Appellant in the period between January 2017 to 6th November 2019 when the law which allowed the Commissioner to demand taxes not withheld from the person who should have withheld the same had been deleted.

101. This position was affirmed in Commissioner of Domestic Taxes v Pevans East Africa Limited & 6 others (Tax Appeal E003 of 2019) [2022] KEHC 10392 (KLR) (Commercial and Tax) (13 May 2022) (Judgment) where the Courts as stated thus:“Consequently, I, therefore, find and hold that during the subject years of 2018 and 2019, the Commissioner could not collect the WHT that ought to have been deducted by the Respondents from the punters and that all the Commissioner could do was seek the same from the punters directly.”

102. For the reasons set out above, the Tribunal finds and holds that the Respondent erred in assessing WHT for the period between January 2017 to 6th November 2019 when the Appellant could not be held liable for failure to withhold and subsequently remit the WHT to the Respondent.

103. Having held that the Appellant was liable to pay income tax and PAYE, it follows that any WHT that was due from these two tax heads have thus become the liability of the Appellant. It shall not matter that it did not collect such taxes as the withholding agent.

104. For the reasons set out above, the Respondent erred when it issued additional WHT assessment for the period January 2017 to 6th November 2019 when the law which allowed the Commissioner to demand taxes not withheld from the person who should have withheld the same had been deleted.

Final Decision 105. Flowing from the above analysis, the Tribunal finds that the Appeal is partially merited and accordingly makes the following Orders: -a.The Appeal is partially allowed.b.The Respondent’s objection decision dated 27th January 2023 is hereby varied by:i.Vacating the WHT for the period from January 2017 to 6th November 2019. ii.Upholding the WHT for the period commencing 7th November 2019 onwards.c.The Respondent’s confirmed assessments regarding PAYE and income tax be and are hereby upheld.d.Each Party is to bear its own costs.

106. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF APRIL, 2024. ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR.RODNEY O. OLUOCH - MEMBERTIMOTHY B. VIKIRU - MEMBERABRAHAM K. KIPROTICH - MEMBER