[2024] KETAT 1298 (KLR)

Kakuzi PLC v Commissioner for Domestic Taxes (Tax Appeal E674 of 2023) [2024] KETAT 1298 (KLR) (Civ) (30 August 2024) (Judgment)

Neutral citation: [2024] KETAT 1298 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tax Appeal E674 of 2023

CA Muga, Chair, BK Terer, D.K Ngala & SS Ololchike, Members

August 30, 2024

Between

Kakuzi PLC

Appellant

and

Commissioner for Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a public limited liability company incorporated in Kenya and whose principal business activity is growing, packaging and selling avocados and macadamia nuts, cultivation and sale of green tea leaf, blueberries, livestock and commercial tree farming.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws. Under Section 5(1), 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 and 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 Appellant was notified through a letter dated 3rd October, 2022, that the Respondent intended to carry out an audit of its tax affairs with the scope including income tax and VAT. After the audit, the Respondent issued its preliminary findings on the audit through a letter dated 17th February, 2023. The Respondent agreed with the Appellant’s explanations save for that on the issue of withholding tax on commissions paid to non-resident marketing agents based in the United Kingdom, France, Spain, The Netherlands and South Africa. The Respondent issued its pre-assessment notice on 14th April, 2023.

4. The Respondent issued its notice of assessment dated 15th June, 2023 in outstanding withholding tax and demanded Kshs. 16,210,896. 00 after deducting the Appellant’s overpaid instalment taxes.

5. The Appellant objected to the assessment on 11th July, 2023 and following a meeting between it and the Respondent on 25th August, 2023, the Respondent issued its objection decision on 5th September, 2023 confirming its assessment of Kshs 16,210,894. 00.

6. Aggrieved by the decision of the Respondent, the Appellant lodged its notice of appeal dated 2nd October, 2023 on even date.

The Appeal 7. The Appeal was predicated on the following grounds of Appeal as stated in the Appellant’s Memorandum of Appeal dated 13th October, 2023 and filed on even date:i.The Respondent erred in law and fact by assessing withholding tax on commissions paid to non-resident marketing agents (George Helfer SA and Halls France (Rungis) based in France.ii.The Respondent erred in law and fact by assessing withholding tax on commissions paid to non-resident marketing agents (Comexa SA and Bella Frutta SA) based in South Africa.iii.The Respondent erred in law in ignoring legal and binding precedents established by the Tribunal.

The Appellant’s Case 8. The Appellant elucidated its grounds of appeal in its statement of facts dated and filed on 13th October, 2023 as follows:

a. Whether the Respondent erred in law and fact by assessing withholding tax on Commissions paid to non-resident marketing agents (George Helfer SA and Halls France (Rungis)) based in France. 9. The Respondent in its objection decision confirmed the withholding tax assessment earlier issued by it amounting to Kshs. 29,705,844. 00 (inclusive of penalties and interest) on commissions paid to third party marketing agents (George Helfer SA and Halls France (Rungis)) based in France on the basis of its interpretation of Article 21 of the Kenya-France Double Tax Agreement (hereinafter “DTA”) dealing with “Other Income” and section 35(1) (a) of the Income Tax Act, CAP 470 of Kenya’s Laws (hereinafter “ITA”).

10. The Appellant averred that the Respondent’s interpretation was grossly erroneous as Article 21 of the DTA only applied where an item of income had not been covered by other provisions of the DTA. In the instant appeal agency fees are substantially dealt with under Article 7 of the DTA and therefore article 21 was irrelevant.

11. The Appellant averred that section 2 of the ITA defines management or professional fees as “a payment made to a person, other than a payment made to an employee by his employer, as consideration for managerial, technical, agency, contractual, professional or consultancy services however calculated.” It was therefore evident that management and professional fees included payment for provision of agency services i.e. agency fees and that was not in contention.

12. Section 35(1) (a) of the ITA provides for the taxation of management or professional fees paid to a non-resident person without a permanent establishment in Kenya as elaborated by the Respondent in its objection decision. However, in view that there was a DTA in force, its provisions took precedence in the taxation of management or professional fees paid to a non-resident based in France in line with section 41(1) of the ITA which provides as follows:“Every special arrangement for relief from double taxation made with the Government of any country outside of the Republic of Kenya with a view of affording relief from double taxation in relation to income tax and any taxes of similar character imposed by the laws of that country shall, subject to subsection (2) but notwithstanding any other provision to the contrary in this Act or in any other written law, have effect in relation to income tax, and every such agreement shall be subject to the provisions of the Treaty Making and Ratification Act, 2012. "

13. The DTA does not have a separate article on management and professional fees and in the absence of such an Article, the Appellant placed reliance on the OECD Model Tax Convention on Income and Capital, 2017 Edition ("OECD MTC") in determining the appropriate article for the taxation of management or professional fees. Specifically, Paragraph 76 and 77 of the OECD MTC Commentaries on Article 7 provide the relevant guidance on the taxation of management or professional fees which had previously been taxed under Article 14 of the OECD MTC prior to the deletion of the Article on 29th April 2000 as highlighted below:“Finally, it should be noted that two categories of profits that were previously covered by other Articles of the Convention are now covered by Article 7. "“……….before 2000, income from professional services and other activities of an independent character was dealt with under a separate Article, i.e., Article 14. The provisions of that Article were similar to those applicable to business profits….""The effect of the deletion of Article 14 is that income derived from professional services or other activities of an independent character is now dealt with under Article 7 as business profits. This was confirmed by the addition, in Article 3, of a definition of the term 'business' which expressly provides that this term includes professional services or other activities of an independent character." [emphasis ours]

14. The Appellant averred that management and professional fees, which included agency fees would be taxable under Article 7 of the DTA in so far as they relate to “income derived from professional services or other activities of an independent character”.

15. The Appellant averred that Article 7 of the said DTA on business profits provides that the profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. This means that the DTA allocates the exclusive taxing rights over business profits to the Contracting state (in this case France), through a prescriptive use of the word "shall". The only exception would be where there is a permanent establishment in the other Contracting state (in this case Kenya), which is not the case herein. Therefore, Kenya lacks taxing rights over the agency fees.

16. The Appellant averred that its position was further supported by Article 21 (2) of the DTA which states as follows:“The provisions of paragraph 1 shall not apply to income, ..., if the recipient of such income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein in such case the provisions of Article 7 or Article 14, as the case may be, shall apply."

17. The Appellant also averred that Article 21 was not meant to apply to every type of income that was not specifically addressed by the DTA. Paragraph 2 of the Commentary to Article 21 of the United Nations Model Double Taxation Convention, 2017 Edition (hereinafter "UN MTC") provides relevant guidance on the types of incomes that would ideally be dealt with under Article 21 as highlighted below:“The Article covers income of a class not expressly dealt with in the preceding articles (e.g., an alimony or a lottery income) as well as income from sources not expressly referred to therein (e.g., a rent paid by a resident of a Contracting State for the use of immovable property situated in a third State). The Article covers income arising in third States as well as income from a Contracting State."

18. The Appellant submitted that in addition, Paragraph 9 of the Commentary to Article 21 of the OECD MTC demonstrates the Article was envisaged to apply to payments relating to non-traditional financial instruments as highlighted below:“Although the restriction could apply to any income otherwise subject to Article 21, it is not envisaged that in practice it is likely to be applied to payments such as alimony payments or social security payments but rather that it is likely to be most relevant where certain non-traditional financial instruments are entered into ..."

19. The Appellant averred that the Respondent in its objection decision quoted paragraph 3 of Article 21 of the UN MTC Commentary and used it as a basis to argue that both Kenya and France have rights to tax agency fees and the instance of double taxation ought to be dealt with through granting tax credits under Article 23. Paragraph 3 of Article 21 of the UN MTC provides as follows: -“Notwithstanding the provisions of paragraphs 1 and 2, items of income of a resident of a Contracting State not dealt with in the foregoing Articles of this Convention and arising in the other Contracting State may also be taxed in that other State.""This paragraph constitutes an addition to Article 21 of the OECD Model Convention. It allows the State in which the income arises to tax such income if its law so provides while the provisions of paragraph 1 allows exclusive taxation in the State of residence. The concurrent application of the provisions of the two paragraphs may result in double taxation. In such a situation, the provisions of Article 23A or 23B as appropriate are applicable, as in other cases of double taxation. In some cases, paragraphs 2 and 3 may overlap; they would then produce the same result."

20. The Appellant averred that in order for a situation to arise as envisaged by Paragraph 3 of Article 21 of the UN MTC where both the source state and the residence state tax the same income, the item of income should not have been dealt with under Article 7 of the Agreement which provides that the entity must have a permanent establishment in the contracting state. From the analysis above, it was evident that agency fees are dealt with by Article 7 of the DTA, which precedes Article 21. Therefore, the question of the income being taxed by both the source state and the residence state as envisaged by Paragraph 3 of Article 21 could not arise.

21. The Respondent’s reliance on Article 21(4) of the DTA as well as Paragraph 5 of the Commentaries to Article 21(3) of the UN MTC in asserting its taxing rights over agency fee as indicated in the objection decision was grossly erroneous.

22. The Appellant averred that the Respondent quoted Paragraph 74 of the OECD MTC Commentary to Article 7 and used it as a basis for arguing the prioritization of Article 21(4) of the DTA over Article 7 with regards to the taxation of the agency fees.Paragraph 74 of the OECD MTC Commentary to Article 7 provides as follows:“The question, however, could arise with respect to other types of income and it has therefore been decided to include a rule of interpretation that ensures that Articles applicable to specific categories of income will have priority over Article 7. "

23. The Appellant averred that it noted that the import of Paragraph 74 of the OECD MTC Commentary was to ensure that items of income explicitly provided under a separate Article of the DTA were not brought to tax under Article 7. Management or professional fees are not explicitly provided for under a separate Article in the DTA and therefore are taxable under Article 7 as highlighted in the following extract contained under Paragraph 74 of the OECD MTC Commentary to Article 7:“It follows from this rule that Article 7 will be applicable to business profits which do not belong to categories of income covered by these other Articles”

24. The Appellant also averred that UN MTC provides for similar treatment on Technical Fees and other Income and contains separate articles on Technical Fees and Other Income. Paragraph 1 of Article 12A (Fees for Technical Services) of the UN MTC provides that "fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State" while Paragraph 1 of Article 21 (Other Income) of the UN MTC provides that "Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that State."

25. The Appellant noted that additionally, the United Nations Handbook on selected issues in protecting the Tax Base of Developing Countries, Second Edition states as follows when discussing the appropriate article for the taxation of technical/professional services:“As long as the non-resident service provider does not have a PE or fixed base in the source country or stay in the source country for 183 days or more, the income is not taxable by the source country under Article 7 or 14. The income might be covered by Article 21 if it is not considered to be dealt with by Article 7 or 14; however, in most situations income from technical services would be considered to be business profits or income from professional or independent services so that Article 21 would not apply."

26. The Appellant averred that its position is in line with recent cases determined by the Tribunal as well as Indian case laws and that in Total Kenya Limited v Commissioner of Domestic Taxes (TAT No.151 of 2016) the Appellant in this case had entered into an agreement with Total Outré Mer ("TOM"), a company incorporated in France, for the provision of general management and other professional services. TOM did not have a permanent establishment ("PE") in Kenya. The Respondent raised an assessment demanding withholding tax on professional fees paid to TOM by the Appellant. In support of its assessment, the Respondent argued that Article 7 of the DTA did not provide for management or professional fees. As such, in the absence of an article specific to management or professional fees, Kenya had taxing rights over such payments on the premise that they constitute "other incomes" under Article 21 of the DTA hence subject to withholding tax in Kenya.

27. The Appellant stated that the Tribunal whilst relying on the commentaries to the OECD and UN MTCs held that management or professional fees qualified as business profits and the definition of business under Section 2 of the ITA (pursuant to Article 3(2) of the DTA) read together with Article 7 of the DTA places the income from management or professional fees squarely under business profits. Therefore, in the absence of a permanent establishment, no withholding tax was due and payable in Kenya on the management and professional fees. The following was the holding of the Tribunal in that case:“The supremacy of Article 7 of the DTA in relation to business profits is evident where income is not expressly provided for. A reading of the definition of business under the Kenyan Income Tax Act against Article 7 places the income from management fees and professional fees squarely under business profits.The services rendered by TOM include technical and general services such as corporate affairs, general management, strategy development, human resource, logistics supply and commercial development. The Tribunal is of the view that the said services fall under professional services and as such within the definition of a business.The application of Article 21 is guided by the UN and OECD Commentaries on which confirms that the Article was intended for ‘miscellaneous’ income. As such, the Respondent has no justifiable ground whatsoever to categorize ‘professional fees and management’ under ‘other income’. The examples of ‘other income’ such as alimony, lottery income and traditional income gives a clear picture of the envisioned income that would fall under Article 21. ”

28. The Appellant averred that in McKinsey and Company Inc. Africa Proprietary Ltd ("McKinsey") v Kenya Revenue Authority (Tax Appeal No 199 of 2020) the Tribunal also took a similar view. The Appellant had challenged the tax assessment raised by the Respondent demanding withholding tax on professional fees paid to its related South African entity for consultancy services rendered.

29. The Respondent was of the view that Kenyan withholding tax was applicable on the professional fees paid to the related South African entity on the grounds that the Kenya-South Africa DTA (hereinafter “KS-DTA”) did not contain an article specifically addressing management or professional fees. The Respondent was of the view that such income should be taxed under Article 22 (3) of the KS-DTA, which provides that items of income of a South African resident not specifically addressed under other Articles of the DTA may also be taxed in Kenya. The Respondent further argued that Article 7(7) of the KS-DTA gives precedence to all other Articles within it, which have provided for the item of income in question. The Respondent's argument was that, as consultancy services would be covered under Article 22 (Other income) of the DTA, then Article 7 (Business profits) would not apply to the income earned from the consultancy services.

30. The Appellant averred that in delivering its judgment, the Tribunal placed reliance on the Commentaries to the OECD and UN MTCs when interpreting the KS-DTA and established that the fees paid to the South African entity fell within the ambit of business profits and was not attributable to a permanent establishment of the South African entity in Kenya. Having determined that the services constitute a business, the Tribunal agreed that Article 7 (Business Profits) of the KS-DTA was the appropriate Article to determine whether Kenya or South Africa had taxing rights over such income and in this case, it was held that South Africa had the right to tax the professional fees and not Kenya as provided in the verbatim quote from the judgment below:“Thus, Article 7 determines who has a right to allocate it (business profits). This Article stipulates that the income is taxable in the country where the enterprise is resident (in this case South Africa) unless it has a permanent establishment in Kenya. The Respondent has not established that the South African enterprise has a permanent establishment in Kenya. Thus, the right to tax as provided under the terms of the DTA falls with South Africa.”

31. The Appellant stated that in the Indian case of Bangkok Glass Industry Co. Ltd-vs-Assistant Commissioner of Income Tax 120131 215 Taxman 116 (Mad)) the Indian High Court dealt with the issue of taxation of technical services under the India-Thailand Double Tax Agreement (hereinafter “India-Thailand DTA”), which also did not have a separate Article for taxation of professional services. The High court in this case found that in the absence of a permanent establishment in India, technical fees earned by a company resident in Thailand were not taxable in India. The court also held that technical fees could not be classified under Article 22 of the India-Thailand DTA which covered "Other income.”

32. Similarly, the Ahmedabad Bench of India's Income-Tax Appellate Tribunal ("ITAT") in the case of DCIT vs Welspun Corporation Limited (ITA No. 48/Rit/2015) held that export commission paid to non-resident agents was not taxable in India since there was no specific Technical Services article in the respective tax treaties (India- UAE and India-Thailand). The ITAT observed that the income earned by the UAE and Thailand-based agents was in the regular course of their business and therefore fell under the scope of business profits. In the absence of a PE, the business profits were not taxable in India in line with Article 7 of the Double Tax Agreements. The ITAT also held that the 'Other Income' Article did not apply to items of income which were taxable under any other article of the respective Double Tax Agreements whether or not such incomes were actually taxed under these articles.

b. Whether the Respondent erred in law and fact by assessing withholding tax on Commissions paid to non-resident marketing agents (Comexa SA and Bella Frutta SA) based in South Africa. 33. In its objection decision, the Respondent further confirmed a withholding tax assessment amounting to Kshs.196,025. 00 (inclusive of penalties and interest) on commissions paid to third party marketing agents (Comexa SA and Bella Frutta SA) based in South Africa on the basis of its interpretation of Article 22 of the KS-DTA dealing with "Other Income" and Section 35(1) of the ITA.

34. Given the similarity between the DTA and the KS-DTA with regards to the lack of a separate Article on management or professional fees, this approach is grossly erroneous for the reason that Article 22 only comes into play where an item of income has not been dealt with by preceding articles of the Double Tax Agreements. In the case at hand, agency fees are substantially dealt with under Article 7 (Business Profits) of the KS-DTA and therefore Article 22 is not relevant. This is in light of the agency fees being earned in the ordinary course of the business of the South Africa agents and therefore being their business income.

35. This position was upheld in the McKinsey and Company Inc. Africa Proprietary Ltd ("McKinsey") vs Kenya Revenue Authority (Tax Appeal No 199 of 2020) TAT ruling as highlighted above. The Appellant averred that the only exception pursuant to Article 7 and Article 22 of the KS-DTA is where a permanent establishment has been created in the source state in which case the source state would have taxing rights.

36. The Appellant averred that the South Africa agents did not have a permanent establishment in Kenya and therefore Kenya does not have taxing rights over their income.c.Whether the Respondent erred in law in ignoring legal and binding precedents established by this Tribunal.

37. In its notice of objection, the Appellant cited the McKinsey and Company Inc. Africa Proprietary Ltd ("McKinsey") supra and Total Kenya Limited (Supra) in which the Tribunal held that in the absence of a separate management or professional fees article in the Double Tax Agreement, management or professional fees would be classified as business profits and only taxable in accordance with Article 7 and not Article 21 in the respective Double Tax Agreements.

38. The Appellant noted the Respondent’s assertion that “the Commisisoner acknowledges that the issue is in the High Court pending determination, therefore the objection will be rejected as per the earlier decision of the Commissioner as discussed above.” The Appellant averred that the Respondent ignoring binding decisions of the Tribunal was legally untenable.

39. The Appellant cited the decision of the High Court in Commissioner of Domestic Taxes v Bank of Africa Kenya Limited (Tax Appeal of 2023) [2023] KEHC 18719 (KLR) (Commercial and Tax) (12 June 2023) (Judgment) where the learned judge stated as follows in the Respondent’s contention that since a decision had been appealed against, the Respondent had no obligation to apply it:“I would be remiss not to comment on a statement made by the Commissioner in the Objection Decision that since it has appealed against certain decisions to this court to the Court of Appeal hence none of the said decisions can be executed or applied against it. This position is without precedent and suggests that the Commissioner is entitled to ignore binding decisions of the High Court merely on the grounds that it has expressed its intention to appeal or that its appeal on similar issues has not been determined. I reject this contention. A decision of the High Court on a point of law is binding on the parties and remain valid, is to be complied with until it is set aside by the higher court.”

40. The Appellant averred that the Respondent chose to ignore the decisions of the Tribunal in Mckinsey and Company Inc Africa Proprietary Ltd (“Mckinsey”) supra and Total Kenya Limited (supra) as it had appealed the decisions. The Appellant took the view that even though the Respondent had appealed the decisions the appeals had not been determined and therefore the decisions remained binding on the Respondent. The fact that the decisions were the subject of an appeal did not justify the Respondent’s failure to consider and apply them as determined by the High Court in Bank of Africa Kenya Limited(supra).

41. The Appellant further relied on the decision of the Court of Appeal in Florence Nyaboke Machani v Mogere Amosi Ombui & 2 others [2014] eKLR, where the court stated as follows:“It is trite law that a valid judgment of a court unless overturned by an appellate court remains a judgment of court and is enforceable, the issue of jurisdiction notwithstanding.” [Emphasis added]

42. The Appellant averred that the Tribunal has already pronounced itself on the taxation of professional and management fees under the DTA and KS-DTA. The two decisions of the Tribunal have not been overturned by an appellate court and therefore remain valid and enforceable against the Respondent. The Appellant stated that in view of the two decisions by this Tribunal, the Respondent’s assessment lacked legal merit and only created uncertainty and distress for taxpayers including the Appellant.

43. The Appellant made the following prayers:a.That the Appeal be allowed;b.That the Respondent’s decision dated 5th September,2023 be set aside and annulled;c.That the costs of and incidental to this Appeal be awarded in favour of the Appellant; andd.Any other orders that the Tribunal may deem fit.

Respondent’s Case 44. The Respondent addressed the Appellant’s grounds of appeal through its statement of facts dated 10th November, 2023 and filed on 14th November 2023 wherein in it stated as follows:

45. That contrary to the Appellant’s allegations, the Respondent averred that Section 35(1)(a)(i) of the ITA addresses withholding tax on commissions paid to a non- resident agent in respect of flowers, fruits or vegetables exported from Kenya and auctioned in any market outside Kenya. The Respondent averred and maintained that the sales with respect to Kakuzi products are concluded on private treaty basis and not through auction and as such that category of commission does not benefit from the above exemption.

46. The Respondent averred that the marketing fee paid to the agents in Europe fell within the meaning of management fees attracting withholding tax under Section 35(1)(a) of the ITA as further expounded below. The Appellant entered into marketing agreements with George Helfer SA France (George Helfer). The agent was to provide marketing services to the Appellant. Through the agreements, the Appellant granted the marketing agent the right to market, promote and sell the products using their best endeavours to obtain the best possible terms for the products from buyers each time they negotiated the sale of the product. In consideration for provision of the marketing services, the service provider was entitled to a marketing fee of 8% of gross price received from the buyer of the products sold by the agents on behalf of the Appellant.

47. The Respondent averred that the marketing fees paid to the non-resident agents, has the meaning of agency fees as defined under Section 2 of the ITA herein re-produced for ease of reference:“agency fees" means payments made to a person for acting on behalf of any other person or group of persons, or on behalf of the Government and excludes any payments made by an agent on behalf of a principal when such payments are recoverable".

48. The ITA also defines management and professional fees as;“management or professional fee" means a payment made to a person, other than a payment made to an employee by his employer, as consideration for managerial, technical, agency, contractual, professional or consultancy services however calculated".

49. The Respondent averred that marketing fees paid to non-resident agents for marketing services fell under management fees chargeable to withholding tax under Section 35(1)(a) of the ITA that stated as follows:''A person shall, upon payment of an amount to a non-resident person (not having a permanent establishment in Kenya in respect of - (a) a management or professional fee or training fee which is chargeable to tax, deduct therefrom tax at the appropriate resident withholding tax".

50. The marketing fees was subject to withholding tax under the domestic law. Therefore, the withholding was due as communicated in its objection decision. The Respondent averred that the above position was communicated to the Appellant when it was informed through the audit findings, that the Appellant was in withholding tax arrears due to failure to operate withholding income tax on account of the marketing fees paid to marketing agents in Europe.

51. The Respondent averred that contrary to the Appellant’s allegations that subject to the DTA, Kenya does not have taxing rights with respect to marketing fees paid to Georges Helfer SA France and therefore withholding tax is not due and further that subject to Section 35(1)(a)(i) of the ITA, withholding tax is not applicable on commissions paid to non-resident agents in respect of flowers, fruits or vegetables.

52. The Respondent held that Section 35(1)(a)(i) of the ITA addresses withholding tax on commissions paid to a non-resident agent in respect of flowers, fruits or vegetables exported from Kenya and auctioned in any market outside Kenya. Information with the Respondent indicated that the sales with respect to Kakuzi products were concluded on private treaty basis and not through auction and as such that category of commission does not benefit from the above exemption.

53. The Respondent averred that the above position was replicated in Comexa SA and Bella Frutta SA based in South Africa where there was no clause on treatment of agency fees and the same fell under section 35(1) of the ITA. The Respondent maintained that the marketing fee paid to the agents in Europe and South Africa fall within the meaning of management fees attracting withholding tax under Section 35(1)(a) of the ITA as further expounded below.

54. The Respondent averred that the allegations of the Appellant as laid out in its memorandum of appeal and statement of facts unless where in agreement by the Respondent were unfounded in law and not supported by evidence.

55. The Respondent prayed that the Appeal be dismissed with costs and that the withholding tax assessment and income tax assessment of Kshs. 16,210,898. 00 raised by it be confirmed and the principal taxes, interests and penalties be found due and payable as per the objection decision rendered by the Respondent.

Parties’ Submissions 56. The Appellant’s filed written submissions dated 20th February, 2024 and filed on 21st February 2024. The Respondent, on the other hand had been directed to file submissions on or before 19th March, 2024 and failed to do so. On 16th May 2024, the day of the hearing, the Respondent sought to be allowed to file its submissions out of time and its application was dismissed. Accordingly, the Respondent’s submissions were expunged from the record.

57. The Appellant’s submissions were a reiteration of its statement of facts and the Tribunal will not rehash the same. The Tribunal notes that the issues identified for determination in its submissions were similar in title to the grounds of its Appeal. However, the Appellant cited the following case in its submissions, which it had not analysed in its statement of facts:

58. The Appellant in its submissions cited the case of Coca-Cola Central East and West Africa Limited v Commissioner of Domestic Taxes [2020] eKLR, the High Court held the same position as set out above, stating as follows:“...Put another way, when a service is exported out of Kenya, it does not a local supply because it is provided for use or consumption outside Kenya, hence it is not physically consumed or used in Kenya and therefore Regulation 20 cannot apply. Conversely, if a service supplied by a person with a fixed place of business in Kenya has been physically consumed or used in Kenya, the issue of exported service does not arise because it is not provided for use or consumption outside Kenya and the issue of Regulation 20(1)(a) then is applicable. A service cannot be physically consumed in Kenya if it’s an exported service...”

Issues For Determination 59. The Tribunal has considered the parties’ pleadings, documentation and Appellant’s submissions and is of the view that this appeal raises the following two issues for determination;i.Whether the Appellant should have withheld tax on the payments it made to its marketing agents.ii.Whether the objection decision dated 5th September 2023 was justified.

Analysis And Findings 60. Having identified the two issues for determination, the Tribunal will proceed to analyse them as follows:

i. Whether the Appellant should have withheld tax on the payments it made to its marketing agents. 61. The dispute between the parties arose when the Respondent, upon carrying out an audit of the Appellant’s tax affairs noted that it had entered into marketing Agreements with two entities based in South Africa and France so that it could advertise its products abroad and get more business. The role of the agents was to market, promote and sell products and to obtain the best possible terms of the products from buyers upon negotiating the sale of the same. The consideration under the arrangement was payment to the marketing agents of 8% of the gross price received from the purchaser of the products sold by the agents on behalf of the Appellant.

62. The Respondent having classified the payments as agency fees and management and professional fees under the following provisions of section 2 of the ITA was of the firm view that the payments made to the marketing agents were subject to withholding tax as provided by the additional outlined provisions of section 35 (1)(a) (i) of the ITA:“Section 2"agency fees" means payments made to a person for acting on behalf of anyother person or group of persons, or on behalf of the Government and excludes any payments made by an agent on behalf of a principal when such payments are recoverable;”"management or professional fee" means any payment made to any person,other than a payment made to an employee by his employer, as consideration for any managerial, technical, agency, contractual, professional or consultancy services however calculated;”“35. Deduction of tax from certain incomeEvery person shall, upon payment of any amount to any non-resident person not having a permanent establishment in Kenya in respect of—(a)a management or professional fee or training fee except—(i)a commission paid to a non-resident agent in respect of flowers, fruits or vegetables exported from Kenya and auctioned in any market outside Kenya and audit fees for analysis of maximum residue limits paid to a non-resident laboratory or auditor; or…..”

63. The Tribunal further notes the view of the Respondent that the DTA did not apply since the payment to the marketing agents was not included in any category of the DTA and therefore article 21 applied to it thereby bringing the payment to the marketing agents under the ambit of the ITA and accordingly, tax was deductible from the payments. The Appellant disputed this position in stating that the income or payment made to the marketing agents was recognised as business income under Article 7 of the DTA and that accordingly the same was taxable in the state where the marketing agents had a permanent establishment.

64. In Total Kenya Limited v Commissioner of Domestic Taxes [TAT Appeal No. 151 of 2016] and Mckinsey and Company Inc. Africa Proprietary Limited vs. Commissioner of Legal Services and Board Co-ordination [TAT Appeal No. 199 of 2020] the Tribunal decided on this very issue that is before it. The Tribunal will not depart from its findings in the two mentioned Appeals due to their similarity to the instant Appeal.

65. The Tribunal’s basis for allowing the Appeals in both the stated cases was that the payments made to the marketing agents were subject to the DTA pursuant to Section 41 of the ITA. Section 41 of the ITA provides as follows regarding such arrangements:“41. Special arrangements for relief from double taxation(1)Every special arrangement for relief from double taxation made with the Government of any country outside of the Republic of Kenya with a view of affording relief from double taxation in relation to income tax and any taxes of similar character imposed by the laws of that country shall, subject to subsection (2) but notwithstanding any other provision to the contrary in this Act or in any other written law, have effect in relation to income tax, and every such agreement shall be subject to the provisions of the Treaty Making and Ratification Act, 2012. ”

66. The Tribunal allowed the Appeals in both instances because in both the stated Appeals, the payments were made to persons who did not have a permanent establishment in Kenya and under Article 7 of the DTA Kenya had no taxing rights to the income they received. The Tribunal in both instances also upheld the fact that Article 21 of the DTA did not apply since the income or agency and management and professional fees were included under “business profits” following the deletion of Article 14 in the OECD Model tax treaty. The following are the provisions of the said Articles 7 and 21 of the DTA:“Article 7The profits of an enterprise of a Contracting State shall be taxable in that State unless the enterprise carried on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carried on business as aforesaid, the profits of the enterprise may be taxed in the other Contracting State but only so much of them as is attributable to that permanent establishment”“Article 211. Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that State.2. The provisions of paragraph 1 shall not apply to income, other than income from immovable property as defined in paragraph 2 of Article 6, if the recipient of such income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply.’

67. The Tribunal notes that under Article 14 of the DTA is not deleted but it does not apply because the services provided by the marketing agents were not independent personal services of a professional nature as outlined in the said Article which provides as follows:“Article 14 Independent Personal Services1. Income derived by a resident of a Contracting State in respect of professional services or other activities of an independent character shall be taxable only in that State except in the following circumstances, when such income may also be taxed in the other Contracting State:(a)if he has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities; in that case, only so much of the income is attributable to that fixed base may be taxed in that other Contracting State; or (b) if his stay in the other Contracting State is for a period or periods amounting to or exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the fiscal year concerned; in that case, only so much of the income as is derived from his activities performed in that other State may be taxed in that other State.2. The term "professional services" includes especially independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants.”

68. In view of the foregoing the Tribunal makes a finding as it has done before, that payment to the marketing agents falls under Article 7 of the DTA and that neither Article 14 nor Article 21 of the DTA apply in this instance. The Respondent neither has taxing rights on the agency fees or management and professional fees payable to Comexa SA and Bella Frutta both of which are based in South Africa pursuant to the KS-DTA nor taxing rights over the payment made or income earned by George Helfer SA France under the DTA.

69. Accordingly, the Tribunal finds that the Appellant was not required to withhold taxes on the payments it made to its marketing agents. Having made this determination, the Tribunal will not delve into the second issue for determination as the same has been rendered moot.

Final Decision 70. The upshot of the above is that the Appeal succeeds and the Tribunal will proceed to make the following final Orders:a.The Appeal be and is hereby allowed.b.The objection decision dated 5th September, 2023 be and is hereby set aside.c.Each party to bear its own costs.

71. It is so Ordered.

DATED AND DELIVERED AT NAIROBI THIS 30TH DAY OF AUGUST, 2024. CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERDELILAH K. NGALA - MEMBEROLOLCHIKE S. SPENCER - MEMBER