[2024] KETAT 1312 (KLR)

Kilimapesa Gold (PTY) Ltd v Commissioner for Domestic Taxes (Tax Appeal E390 of 2023) [2024] KETAT 1312 (KLR) (Civ) (26 July 2024) (Judgment)

Neutral citation: [2024] KETAT 1312 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tax Appeal E390 of 2023

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

July 26, 2024

Between

Kilimapesa Gold (PTY) Ltd

Appellant

and

Commissioner for Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited liability company incorporated in Kenya and whose principal business activity includes mining.

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 granted a Special mining Lease no. 27 pursuant to section 55 of the Mining Act, CAP 306 of Kenya’s Laws (hereinafter “Mining Act”) to explore, develop and mine gold resources on an area of land measuring 81. 38 hectares, situated in Lolgorian, Transmara District Narok County of the Rift Valley, sometime in the year 2011.

4. According to the terms of the Lease, the fixed royalty payable was 5% of the gross sales value of the gold extracted from the said area in addition to an annual rental sum for the special mining lease of Kshs. 500,000. 00. The Appellant purchased some parcels in the area and leased others so as to carry out one of its principal activities. In addition, the Appellant had a prospecting licence PL/2018/0189 (hereinafter “PL189”).

5. The area as outlined in paragraph 3 above was identified by the Appellant as having a total resource of 8. 72 million tonnes of ore as outlined in a valuation report of 2014 which indicated that the Kilimapesa Gold project, a project of the Appellant’s, was valued at US$ 7,759,222. 00.

6. The Appellant had an issued share capital of Kshs. 600,000,000. 00 consisting of 600,000 shares of Kshs. 1,000. 00 each. The registered shareholders in the Appellant were Gold Mineral Resources Limited (hereinafter “GMR) which held 599,999 shares in the Appellant and Goldplat Limited (hereinafter “GL”) held 1 share in the Appellant. GMR is a Company registered in Guernsey and it sold its entire shareholding in the Appellant to Mayflower Gold Investments Limited (hereinafter “MGIL”) which is a non- resident company as it is registered in the United Kingdom.

7. Both GMR and MGIL entered into a Share Purchase Agreement to facilitate the purchase of the shareholding of GMR in the Appellant by MGIL. It was agreed that the purchase price for the shares would be in both cash and kind. The consideration that was to be paid in kind would be satisfied by allotment of shares in Caracal Gold Limited (formerly known as Papillion Holdings Limited) [hereinafter “CGP”] a company that was trading on the London Stock Exchange [hereinafter “LSE”]. The transactions were to be carried out in phases.

8. The Appellant was on 6th April, 2023 assessed for a tax amounting to Kshs. 10,856,756,988. 00 as a result of the outlined transactions. The tax due was a result of the first 2 phases of the outlined transactions namely transaction 1 and transaction 2. The Appellant objected to the assessment on 13th April, 2023.

9. The objection was reviewed by the Respondent who proceeded to confirm it by issuing its objection decision on 9th June, 2023. Aggrieved by the Respondent’s decision, the Appellant filed its Notice of Appeal dated 30th June, 2023 on even date.

The Appeal 10. The Appeal was predicated on the following grounds of Appeal as stated in the Appellant’s Memorandum of Appeal dated 13th July, 2023 and filed on 17th July, 2023:i.The Respondent erred in law and fact and misdirected itself by failing to consider the overwhelming evidence tabled by the Appellant before the dispute resolution and the tax assessment team including a letter to one Dorcas Kariuki showing they were willing to pay any tax due to the Authority as is required under Part IV paragraph 14 (1) and (2) of income Tax Act, CAP 470 of Kenya’s Laws (hereinafter “ITA”).ii.The Respondent erred in law and fact and misdirected itself by erroneously applying a wrong price on the shares transferred from the Appellant and GMR to MGIL in the 1st transaction considering the Share Purchase Agreement (hereinafter “SPA”) drawn by Memery Crystal LLP.iii.The Respondent erred in law and fact and misdirected itself by erroneously applying a wrong principle regarding the sale and purchase of the share capital in relation to MGIL, Mayflower Capital Investments (PTY) Ltd (hereinafter “MCI”), and CGP which was trading in and wherein there was no direct link with the activities of the Appellant in Kenya. The Ninth Schedule of the ITA was therefore not applicable in the 2nd transaction.iv.The Respondent erred in law and fact and misdirected itself by using a wrong rate of GPB (sic) 0. 9 instead of GPB (sic) 0. 01 which was the correct rate as on 31st August 2021, more particularly in relation to Papillon Holdings PLC (hereinafter “CGP”), the price of shares paid to CGP as at that date.v.The Respondent erred in law and fact and misdirected itself by failing to consider the expenses incurred while computing the tax payable. The gross proceeds were way below GPB (sic) 5,000,000. 00 through the issue of about 638,000,000 shares at the rate of GPB (sic) 0. 01. The Respondent ignored the actual computation and used assumption arriving at an erroneous calculation and figures.vi.The Respondent erred in law and fact and misdirected itself by imposing corporate tax at 37. 5% as per the Ninth Schedule without considering the input or the investment drivers as was stipulated on the prospectus.vii.The Respondent erred in law and fact and misdirected itself by failing to consider that the Appellant’s Goldmine was valued at USD 7,759,222. 00 as at 26th June 2014 as a benchmark in determining the cost for consideration for the underlying interest.viii.The Respondent erred in law and fact and misdirected itself by failing to consider that there was the cost of the underlying interest which ought to have been factored in when determining the net gain or loss in the transfer of an interest.ix.The Respondent erred in law and fact and misdirected itself by failing to consider that the tax due should have been borne by Goldplat which took 100% holding in the Appellant.x.The Respondent erred in law and fact and misdirected itself by failing to consider the involvement of MCI and its shareholders and related parties, more particularly whether they were liable to any taxation.xi.The Respondent erred in law and fact and misdirected itself by failing to consider the locked in shareholders and shared based payments resulting in less shares traded, some shares having been given in lieu to compensate directors, employees and some to cater for legal fee, legal consultancies, brokers the same amounting to allowable expenditure which ought to have been considered before tabulating taxable income.xii.The Respondent erred in law and fact and misdirected itself by failing to consider that from the ledger report dated 31st August 2021 there was the element of convertible shares to loan offsetting the loan outstanding from CGP to the Appellant.xiii.The Respondent erred in law and fact and misdirected itself by upholding that the fair market price was GBP 0. 9 per share as opposed to the actual and available evidence from the CGP prospectus provided by the Appellant showing the said market price was GBP 0. 01. The source of the Respondent’s figure was blurred and obscure as the same was not disclosed.xiv.The Respondent erred in law and fact and misdirected itself in the sense that even after their own finding that the objection succeeded partially but it totally failed to put that consideration in their final determination.xv.The Respondent erred in law and fact and misdirected itself by failing to consider that it never gave the Appellant sufficient time to collect and submit all the necessary documents before giving the final assessment considering that they were dealing with foreign companies. The Preliminary Assessment was given vide a letter dated the 14th March 2023 and the Final Assessment communicated vide a letter dated 6th April 2023, less than a month.

The Appellant’s Case 11. The Appellant stated as follows in its Statement of Facts dated 3rd June, 2024 and filed on even date:

12. The Respondent failed to consider the overwhelming evidence tabled by the Appellant before! the dispute resolution and the tax assessment team. The bench ignored the fact evident that it is the Appellant that moved them first by writing a letter to Respondent (Domestic tax division), through a letter written to madam Dorcas O. Kariuki, inquiring if there were taxes to be paid from the acquisition of underlined interest in the Appellant to actually (sic) this clearly showed that the Appellant was willing to declare taxes and to eventually pay if any, in line with the provisions of Part IV Common rules applicable to mining and petroleum operations pursuant to paragraph (14) 1 and 2 of the ITA.

13. The Appellant's core ground before the Tribunal revolved around the price of share transferred from it and GMR to MGI in the 1st transaction. As per the SPA drawn by Memery Crystal LLP and the workings and rates of the Appellant were flawed and or erroneous.

14. The Second transaction involved companies that were foreign, it was therefore inconceivable that the transaction for the sale and purchase of the entire issued share capital of MGI, MCI and CGP would be subject to tax under the Ninth Schedule of the ITA as was held by the Respondent.

15. In exchange for the acquisition of Mayflower's shares in MGIL and with it, the Kilimapesa Gold mine and the option to enter into a joint venture with CGL (sic). CGP agreed to provide MCI with the following consideration:“(1)issuing £3. 250 million to Mayflower and its nominees, to be satisfied by Papillon's issue of 325,000,000 Ordinary Shares in the capital of the Company ("Mayflower Consideration Shares" and, together with the GMRL Consideration Shares, the "Consideration Shares");(2)issuing up to £2. 350 million to Mayflower, to be be satisfied by Papillon's issue of additional Ordinary Shares in the capital of the Company (the "Deferred Consideration Shares'). The precise amount of Deferred Consideration Shares to be issued will depend on the stage of Kilimapesa development and the level of success of the Kilimapesa gold mine. Specifically, Papillon will issue (a) shares worth £1 million to Mayflower on the recommencement of gold that is commercially produced and sold."

16. That under the Prospectus relating to CGP, the price of shares paid to Goldplast (sic) [CGP] during the first day (31st August 2021) of dealing in the LSE was GPB (sic) 0. 01 which was the correct and appropriate rate to be used in tax tabulation and not the assumed current fair market rate, there was no basis of assuming the fair market rate when there were actual amounts clearly stated in the prospectus, the prevailing market rate per share, which was GPB (sic)0. 01.

17. That during the first day of dealings and as part of the re-admission -process the Appellant raised gross proceeds of GPB (sic) 5,493,885. 00 (Gross of expenses) through the issue of 638,951,276 Placing shares completed in two rounds (£2,686,885 and £2,807,000) at a Placing price of GPB (sic) 0. 01 per share. Further details of the Placing as well as the anticipated use of the proceeds as set out on page 124 Part VII of the Prospectus under the heading "Use of Proceeds". If the Placing and therefore the aquisition, did not complete, the suspension on the existing ordinary shares was expected to be lifted and trading in the existing ordinary shares was expected to recommence (minus £253,885. 00 broker's fee, minus commission of approximately £250,000. 00, minus estimated professional fees of £350,000. 00, equalling to approximately £4,489,000. 00), a fact which the assessment team and the Respondent ignored, and instead used assumption.

18. The Appellant averred that the Respondent erred by imposing corporate tax at 37. 5% as per the Ninth schedule of the ITA without considering the input or the investment drivers as was stipulated on the Prospectus. The Appellant cited Part II Mining operations paragraph (3) of the ITA which provides as follows:“(3)The corporate rate specified under paragraph 2 of Head B of the Third Schedule shall be the rate of income tax applicable to a licensee that is a company.(1)Subject to subparagraph (5), a deduction for expenditure to the extent incurred by a licensee when undertaking mining operations in a licence area during a year of income shall only be allowed against the income derived by the licensee from the mining operations in the licence area during that year.(2)It a licensee suffers a loss in respect of mining operations in a licence area for a year of income, the amount of the loss shall be carried forward and allowed as a deduction against the income of the licensee derived from mining operations in the licence area in the next following year of income of the licensee.(3)The amount of a loss for a year of income that is not deducted under subparagraph (2) shall be carried forward by the licensee to the next following year of income and be deductible in that year in accordance with subparagraph (2), and so on until the loss is fully deducted or the mining operations in the licence area cease.(4)If a licensee has carried forward a loss for a licence area under subparagraph (2) for more than one year of income, the loss of the earliest year of income shall be allowed as a deduction first.”

19. That the Appellant’s CEO’s maiden speech on the due day for re-admission said that they were delighted to commence trading on both the LSE and Frankfurt stock exchange, and with the net proceeds from the Placing, he went ahead to say that the amount was to be used to advance the development strategy of the Appellant and applied to pay professional fees incurred in relation to transactions and for general working capital purposes. This meant that the Appellant incurred expenditure which according to its tax agent are allowable deductions under the Ninth Schedule as per the Tax Procedure Act CAP 469B of the Laws of Kenya (hereinafter “TPA”) which the assessment team entirely ignored.

20. Part II Mining Operations paragraph (5) page 143 of ITA provides as follows:“(1)Subject to subparagraphs (2) and (3), a licensee shall be allowed expenditure.deduction for extraction expenditure in the year of income in which the licensee incurred the expenditure and in the following years of income until the expenditure has been fully deducted and the deduction for each year of income is twenty per cent of the amount of the expenditure.(2)If a licensee incurs extraction expenditure before the commencement of commercial production, subparagraph (1) shall apply on the basis that the expenditure was incurred at the commencement of commercial production.(3)The amount of the deduction allowed under subparagraph (1) for the year of income in which the commencement of commercial production occurs is computed according to the following formula—A*BIC”..

21. That before the due date for take over as outlined in the Prospectus, the valuation of Kilimapesa Goldmine was conducted on 26th June, 2014, which gave the value at US$ 7,759,222. 00 and this ought to have been considered as the benchmark in determining the cost for consideration for the underlying interest, even if this amount was not to be taken entirely as a cost for consideration, but some element within the component of valuation ought to have been considered as allowable deductions before tabulating taxable income as per the Ninth Schedule of ITA “[(2) If a licensee incurs extraction expenditure before the commencement of commercial production, subparagraph (1) shall apply on the basis that the expenditure was incurred at the commencement of commercial production.]”as such some cost incurred from the valuation report should be allowed.

22. The Respondent also disregarded the cost of the underlying interest which was factored in when determining the net gain or loss in the transfer of an interest in a person between GMR and MGIL.This was erroneous as the acquisition cost of the interest was US$ 400,000. 00 as the cost of GL acquiring 50% share interest in the Appellant in the JV with IGE and US$ 2,700,000. 00 being GL's cost of acquiring the remaining 50% interest in the Appellant from IGE which was not captured in Respondent computation, thereby overstating the net gain, in accordance with sections 3(3) (c) and 15 (5A) and the Ninth Schedule of the ITA.

23. The stated fair market value of GPB (sic) 1. 35 per share, prevailing at the LSE on the 3rd November 2021, is erroneous since the value per share was clearly spelled out as US$ 0. 01 in the disclosure document, and if for sure the Appellant was dealing with the transactions 1 and 2 why should they have captured the share value prevailing on 3rd November 2021, when the transaction of issuance of 32,878,000 shares in CGP to GMR valued at US$ 450,000 revalue date was 31st August 2021.

24. The total consideration for the sale of the shares was "(a) the sum of US$1,750,000. 00 ("purchase Price"), which shall be paid by (or on behalf of) the buyer or the guarantor to the seller in accordance with the clause. "Meaning the transaction was on cash basis and not on share basis.

25. It was noted that transaction costs that had not been considered at the point of assessment namely; the GL costs in the JV with IGE and the purchase of the remaining 50% of IGE shareholding in the Appellant were supported and thereby allowable as costs for transaction 1. Further, it was confirmed that, from GL’s Annual report dated 30th June 2021, that the sum of US$ 2,750,000. 00 in consideration of shares was paid.

26. Upon the commencement of CGP 's ordinary shares trading on the main market for listed securities of the LSE, GMR received 103,846,153 shares in CGP on 31st August,2021. The value of these shares amounted to US$ 1,050,000. 00 representing 70% of an initial consideration of the sale of the Appellant to MCI of US$ 1,500,000. 00. This denoted that the shares were issued at a rounded off value of US$ 0. 01 per share.

27. On 3rd November 2021, GMR received a further 32,8718,000 shares in lieu of a cash payment of US$450,000. 00. This denotes that the shares were issued at a rounded off figure of US$ 0. 014 per share, (US$450,000/32,870,000=0. 0136).

28. The Appellant’s financial position as at 31st August 2021, in its audited accounts of both for and that of and CGP during the year 2021, CGP’s interim result for the 12 months ending 31st December 2021 up from January 2021, the shares issued for acquisition of subsidiary was at share value of GPB (sic) of 0. 01 (the issued capital of the group for the period to 31st August 2021 is that of Appellant which had 600,000 shares in issues of Kshs.1,000. 00 each).

29. Upon completion of the acquisition the share capital of the Appellant was transferred to the reverse acquisition reserve and the share capital of CGP was brought to account at share value GPB (sic) 0. 01 per share. That within the Prospectus there were issues to deal with warrants, locked-in shareholders, and shared based payments, this means that the total shares that were trading some were given in lieu to compensate directors, employees, legal fee, legal consultants, brokers fee. As such, distribution of shares ought to have constituted allowable expenditure before tabulating taxable income and this plan was set out in more detail in the Prospectus. A share base payment charge of GPB (sic) 322,000 was provided for and was captured.

30. The Appellant asserted that the earning per share is actually determined by the basic and dilute loss per share, and is calculated by dividing the earning attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. The weighted average number of ordinary shares had only been calculated since the reverse acquisition date of 31st August 2021, and the prior period earnings per share is calculated using the 600,000 shares held by the Appellant prior to the acquisition which were the shares that were available in the country [sic].

31. According to the Appellant, the value of the shares were not comparable and should not have been compared and the issue of premium share which were given or converted to the Directors and other interested parties to compensate for outstanding debts, and other fees to raise the share value, the value of GPB(sic) 0. 95 should not have been used in a business that is of a going concern, without considering the cost attributed to raising the share value by restricting the Appellant to paragraph 14 of the Ninth Schedule of the ITA.

32. The general ledger report for CGP from 1st January 2021 to 30th June 2022 analysed on the 31st August 2021 showed the listing cost of GPB(sic) 1,146,412. 94 was actually incurred in transaction 2 and should have been allowed as deductible expenditure in the cost of acquisition, if transaction 2 was to be considered, but the Appellant maintained that transaction 2 ought not to have been taxed by the Respondent.

33. The Appellant stated that from the ledger report as at 31st August 2021 the total cost of investment to the Appellant totalled GPB (sic) 4,764,211. 53, which amount was almost neck to neck with the total consideration received during acquisition. Not even a fraction of this amount was admitted as the cost or/ acquisition in the second transaction. The Appellant contended that the assessment team were ultra vires, by allowing cost deduction in transaction 1 and disallowing total cost in consideration[sic] 2.

34. The Appellant stated that the Respondent should not have assumed these companies were related and that in fact, some were to be subsidiaries to others. (Like in the case of MGIL, MCI and Mayflower Investments Ltd which is registered in Kenya). That from the ledger report dated 31st August 2021 there was the element of convertible shares to loan to actually offset some of the loan outstanding from CGP to the Appellant and this supported the Appellant’s argument in the objection letter dated 13th April 2023 and supported with documents as received by 27th April 2023 by the Respondent and it was from this loan payable to GMR that it had been deducting and paying withholding taxes from the interest received as income to GMR.

35. That inconsistent with the extract from the General ledger Report for CGP, it was evident that share issue of 177,048,592 was actually the number of Placing shares that were trading as at 31st August 2021 at a price placing value of GPB (sic) 0. 01 and not GPB (sic) 0. 9, to demonstrate this the Appellant took the posted amount as per the general ledger report of GPB (sic) 1,504,913. 03 and divide by the number of issued share which was 177,048. 592 equal to GPB (sic) 0. 0085 which when rounded off you get GPB (sic) 0. 01 as applied in a Prospectus, the objection letter and now the memorandum of appeal.

36. For the reasons stated the Appellant was of the view that it was clear to it that the decision arrived at by the Respondent was flawed, inaccurate and therefore ought not to have been a basis for taxing the Appellant. The decision of the Respondent was tantamount to punishing it and it wanted to pay what was due and not the exaggerated amounts as is in this case.

37. The Appellant made the following prayers:a.That the Appeal be allowed;b.That the objection decision on tax assessment on disposal of participating interest by the Respondent dated and delivered on 9th June 2023 be set aside and the Appellant’s objection be upheld.c.That in the alternative, the Appellant be allowed to pursue Alternative Dispute Resolution (ADR) with the Respondent to amicably determine the tax payable.d.The costs of the Appeal be awarded to the Appellant.

The Respondent’s Case 38. The Respondent addressed the Appellant’s grounds of Appeal through its Statement of Facts dated 14th August, 2023 and filed on 24th August 2023 wherein in it stated as follows:

39. On 5th June 2007, IGE and GL through its subsidiary GMR entered into a joint venture to form the Appellant. Each company was to hold 50% interest in the Appellant. After review of the information provided by the Appellant, the Respondent noted that two transactions had taken place involving the disposal of the underlying participating interest in the Appellant. In what the Respondent classified as transaction 1, MGIL acquired 100% of the share capital of the Appellant from GMR, the disposal of underlying participating interest was covered under a SPA between MGIL MCI and GMR.

40. The Respondent then also classified transaction 2 as the one carried out in 2021 and in that in which CGP acquired 100% of the share capital of MGL from Mayflower as well as the rights that that MGIL held to acquire the Appellant. The disposal of the underlying participating interest was covered under the signed Heads of Agreement between Papillon (CGP) and Mayflower signed on 17th August 2020, amended on 19th December 2020 and further amended on 6 January 2021.

41. The Respondent proceeded to analyse the two transactions under 2 headings as outlined in the following paragraphs:Analysis and determination of a net gain or loss in the transfer of underlying interest between GMR and MGIL (transaction 1).

42. According to the Respondent, net gain is the difference between the ‘consideration’ and ‘cost’ of the underlying interest which is the subject of transfer the definition of ‘consideration’ and ‘cost’ under the Ninth Schedule to the ITA envisages the disposed or disposable parameters to be interest in a person, a mining or petroleum right, or mining or petroleum information. This means that the net gain can be calculated for any of the parameters when the values in amounts are ascertainable.

43. Determining consideration with the available informationThe Respondent proceeded to outline the fact that to determine the consideration for purposes of calculating net gain or loss from the disposal of the underlying interest was as agreed by the parties in the SPA. Pursuant to clause 4 of the SPA ‘consideration’ encompassed: BULLETS

The sum of US$ 1,750,000. 00 which was to be paid in consideration shares defined in the SPA subject to fulfilment of conditionalities as set out in Clause 4. 5 of the said SPA.

Execution of the Royalty Agreement; and

Execution of the Deed of Novation.

44. The Respondent ascertained, from GL’s annual report dated 30th June, 2021, that the sum of US$ 1,750,000. 00 in consideration shares was paid out gradually. The Respondent averred that upon the commencement of CGP’s ordinary shares trading on the main market for listed securities of the LSE, GMR received 103,846,153 shares in CGP on 31st August 2021. The value of these shares amounted to US$ 1,050,000. 00 representing 70% of an initial consideration of the sale of the Appellant to Mayflower of US$ 1,500,000. 00 this denoted that the shares were issued at a rounded off value of US$ 0. 01 per share.

45. The Respondent stated that on 3rd November 2021, GMR received a further 32,878,000 shares in lieu of a cash payment of US$ 450,000. 00 denoting that the shares were issued at a rounded off value of US$0. 014 per share.

46. In view of the foregoing paragraphs, the Respondent stated that the two-separate issuance of shares in CGP to GMR amounted to the initial consideration of US$ 1,500,000. 00. However, the value of consideration shares in the SPA was US$ 1,750,000. 00. The Respondent took the difference in value of US$ 250,000. 00 as a cash consideration for purposes of that transaction.

47. The Respondent cited the clause 4. 5 (b) of the SPA where it was agreed as follows by the parties in the SPA:“that the consideration shares will rank pari passu in all respects with the existing ordinary shares in the capital of the Issuer ……..”

48. The Respondent stated that CGP issued 32,878,000 shares to GMR on 3rd November, 2021. On that date, CGP’s share price was trading at GBP 1. 35 per share at the LSE and not US$ 0. 014 per share. Pursuant to the Ninth Schedule of the ITA, “Consideration” includes the fair value market value of any amount in in kind.

49. The Respondent further stated that in view of the foregoing it concluded that the issuance of 32,878,000 shares in CGP to GMR valued at US$ 450,000. 00 was not a fair market value and that the fair market value as calculated by it was based on the market price of GBP 1. 35 per share as prevailed on 3rd November, 2021 in the LSE. The Respondent determined that the total value of first consideration for the shares was Kshs. 6,864,728,718. 00.

50. The second consideration item was based on the execution of a Royalty Agreement. The Appellant did not avail the Royalty Agreement for the Respondent’s review. However, under the SPA, the Royalty Agreement was defined as follows:“Royalty agreement between the buyer the company and the seller providing A 1% gross net smelter return royalty subject to a maximum of US$ 1,500,000. 00 on:(a)all gold produced and sold by the company or any other production related to the mining licences; and(b)all gold processed as the companies processing ore smelting plants on the gold on the mineral licence areas irrespective of where raw material was mined or obtained.”

51. The Respondent stated that it made various observations. First, that a Net Smelter Return (hereinafter “NSR”) is a kind of consideration that is futuristic and is determined as a percentage of the value received from the sale and processing of the product produced at the mine site. The Respondent further stated that during the sale and purchase of an interest in a person, a mining or petroleum right, or mining or petroleum information, NSR is usually factored in the consideration amount. In essence, an NSR creates a liability or an asset and an obligation or a right respectively with regard to a particular transaction, therefore an obligation exists and an asset is created.

52. The Respondent stated that in determining the 1% NSR it obtained information that the total Joint Ore Reserves Committee (hereinafter “JORC”) compliant Resource estimate for the Appellant’s License area is 671,446 oz of 2. 4g/t with gold prices expected to be upwards of U.S. dollars 2000 per oz and given an average life of the mine of 7 years the calculated NSR is above the capped US$ 1,500,000. 00 in the SPA. This notwithstanding the Respondent considered that the capped amount of US$ 1,500,000. 00 would suffice as NSR consideration for purposes of the transaction.

53. The Respondent stated that the 3rd consideration item as noted under Clause 4 of the SPA was based on the execution of a Deed of Novation which the Appellant did not provide. The Respondent averred that Clause 1. 1 of the SPA interprets the Deed of Novation as follows:“Deed of Novation- assignment of the loan agreement dated 2nd July 2015 between the Company and the Seller to the Buyer”

54. The Prospectus gave insight into the contents of the Deed of Novation where it was stated as follows:“On 22nd February 2021 KPGL, GMRL and MGIL entered into a Deed of Novation plus one to which the parties agreed that conditional on the completion of the acquisition MGL would replace GRL's lender under an unsecured loan (the “KPGL Loan”) in the principal amount of US$150,000. 00 that GMRL made to KPGL on 2nd July 2015….”

55. The Respondent included the Appellants loan amount of US$ 150,000. 00 as part of the consideration. Accordingly, the Respondent calculated the “Consideration” as Kshs. 7,073,668,718. 00 in respect of transaction 1.

56. Determining the cost with the available information for transaction 1In determining the Net Gain, the Respondent compared like for like parameters interest in a person in terms of consideration and cost. The purchase price of shares (interest in a person) in an Acquisition Agreement would form the “Cost”. From available information, the Respondent noted that GL through its subsidiary GMR, incurred a cost of US$ 400,000. 00 for a 50% ownership of the Appellant in the joint venture with IGE in the year 2007. This translated into GMR owning 40,000 shares in the Appellant. In 2009, GL through its subsidiary GMR incurred an additional US$ 2,700,000. 00 in its acquisition of full ownership of the Appellant from IGE.

57. The Respondent stated that having calculated the total costs incurred by GMR in purchasing all the issued and paid up shares in the Appellant's at US$ 3,100,000. 00 which was converted to Kshs. 233,700,000. 00 at the prevailing exchange rates.

58. The Net Gain.Based on the provisions of section 24(2) of the TPA the Respondent computed the Net Gain based on the information available as the difference between the aggregate consideration and cost (being Kshs.7,073,668,718. 00 less Kshs. 233,700,000. 00). The net gain was calculated by the Respondent as being equal to Kshs. 6,839,968,718. 00. The tax arising out of the transaction being inclusive of penalties and interest was Kshs. 2,821,487,096. 00.

Analysis and determination of net gain or loss in the transfer of underlying interest between Mayflower and CGP (transaction 2). 59. Determining consideration with the available informationThe Respondent, in its Prospectus highlighted the details of a binding Heads of Agreement between Mayflower and CGP dated 17th August, 2020 and amended on 6th January, 2021. In the said Agreement:“Caracal agreed to buy and Mayflower agreed to sell:(a)Mayflower’s right to acquire 100% of the share capital of KPGL via KPGL’s holding company, GMR, and thus a 100% direct interest in Kilimapesa and(b)Mayflower’s right to establish a joint venture with Congo Gold limited (CGL) and hold a 70% interest in Kakamoeka”.

60. Pages 36 and 37 of the Prospectus “Consideration” encompassed the following:“(i)issuing £3,250,000. 00 to Mayflower and its nominees to be satisfied by Caracal’s issue of 325 million ordinary shares in the capital of Caracal (Mayflower consideration shares and together with GMRL “Consideration shares”)(ii)Issuing up to £2. 350 million to Mayflower to be satisfied by Caracal’s issue of additional ordinary shares in the capital of Caracal (the “Deferred Consideration Shares”). The precise amount of Deferred Consideration shares to be issued will depend on the stage of KPG's development in the level of success of the KPG gold mine. Specifically, Caracal will issue:(a)shares worth £1 million to Mayflower on the recommencement of gold that is commercially produced and sold by KPG.(b)shares worth £500,000 upon the achievement of the first 5000 ounces of gold commercially produced and sold by KPG;(c)…………………………….., and(d)………………………………..(iii)Obtaining secured debt or equity commitments for caracal in a minimum amount of USD 4 million; and(iv)Grant Mayflower the right to appoint two executive directors, one executive director and a non-executive chairman to Caracal’s board of directors, with Caracal reserving the right to appoint two non-executive directors.”

61. The Respondent stated that the issuance of the 325,000,000 shares in CGP was an aggregate of Mayflower consideration shares and GMR consideration shares. For purposes of transaction 2, the Respondent further stated that for purposes of transaction 2 the Respondent only considered the Mayflower consideration shares as part of the consideration ie; 325,000,000 minus 136,724,150 = 188,275,847.

62. The Respondent stated that it noted that the issuance consideration as envisioned under the Ninth Schedule to the ITA includes “the fair market value of any amount in kind”. The Respondent stated that it therefore valued the 188, 275,847 shares at the market price of GBP 0. 9 per share which was the price prevailing on 31st August 2021 in the LSE. The value of the Mayflower consideration shares was Kshs. 25,608,715,881. 00 in accordance with its calculations.

63. The Respondent observed that as at the completion date of the transaction, MGIL only held a right to establish a joint venture with CGL and hold a 70% interest in Kakamoeka. That right had not yet been exercised at the time of disposal of MGIL shares.

64. The Respondent averred that further, the Prospectus on page 36, stated that CGP had no intention of exercising its option over CGL on re- admission. Therefore, in line with section 15 (5A) of the ITA the Respondent concluded that the shares in MGIL derived 100% of their value from the Appellant’s active goldmine.

65. The Respondent also averred that it concluded that the second consideration item was futuristic and contingent on the fulfilment of certain obligations. Consideration as envisioned under the Ninth Schedule to the ITA includes the “total amount received or receivable”. For transaction 2 the Respondent concluded the £1,500,000. 00 pertaining to fulfilment of such conditionality by the Appellant as part of the consideration.

66. The Respondent stated that from the 3rd consideration item its observation was that from available information CGP met the requisite US$4 million funding commitment through equity commitments and that this cash was utilised in recapitalizing the Appellant’s goldmine. The Respondent included the amount as part of the consideration for transaction 2.

67. The Respondent having made the analysis stated that the “Consideration” for the disposal of interest in a person at the aggregate sum of Kshs.26,319,410,881. 00.

68. Determining the cost of acquiring MGL in transaction 2To determine Net gain the Respondent compared like for like parameters (interest in a person) in the SPA in transaction 1 formed the “Cost” for transaction 2 and concluded that it was Kshs. 7,073,668,718. 00. Based on the provisions of section 24 (2) of the TPA, the Respondent computed the net gain as the difference between the aggregate Consideration and Cost (ie; Kshs. 26,319,410,881 minus Kshs. 7,073,668,718. 00) as 19,245,742,163. 00.

69. The Respondent stated that the total tax arising out of transaction 2 amounted to Kshs.7,938,868,642. 00 and when added to the tax due from transaction 1 resulted in a total of Kshs. 10,760,355,739. 00.

70. The Respondent also identified 4 issues for determination in its statement of facts which were analysed in the following paragraphs:

(i) Whether the transactions attracted tax. 71. Section 3 of the ITA provides as follows:“(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.”In this regard the Respondent asserted that income accrued in or derived from Kenya by any person whether resident or non-resident is subject to tax.

72. Section 3 (2) (g) of the ITA provides as follows:“subject to section 15(5A), the net gain derived on the disposal of an interest in a person, if the interest derives twenty per cent or more of its value, directly or indirectly, from immovable property in Kenya;”The Respondent contended that taxes were payable on net gain in disposal of an interest in a person if the interest whether directly or indirectly derives 20% or more of its value from immovable property in Kenya.

73. Section 15 (5A) of the ITA provides as follows:“For the purpose of section 3 (2) (g) income chargeable to tax is —(a)………………………………….(b)the amount computed according to the following formula —A x B/CWhere—A is the amount of the net gain;B is the value of the interest derived, directly or indirectly, from immovable property in Kenya; andC is the total value of the interest.”The Respondent contended that transaction 1 involved the transfer of an interest in the Appellant and that the value of the interest derived 100% of its value directly from immovable property in Kenya. Further the Respondent contended that transaction 2 involved the transfer of an interest in a person and that the value of the interest derived 100% of its value indirectly from an immovable property.

74. Section 3(3)(c) of the ITA provides as follows:“for the purposes of subsection (2)(g) and section 15(5A) —(i)"immovable property" means a mining right, an interest in a petroleum agreement, mining information or petroleum information;(ii)"net gain" in relation to the disposal of an interest in a person,means the consideration for the disposal reduced by the cost of the interest; and(iii)the terms "consideration", "cost", "disposal", "interest in a person", "mining information", "mining right", "person", "petroleum agreement", and "petroleum information"..The Respondent contended that the transactions in issue were therefore transfers of interest in a person and that the interests “derive 20% or more of their value directly or indirectly from immovable property in Kenya”and in the event of a net gain as envisaged by section 3(2) g of the ITA the same should be brought to charge.

75. The net gain for purposes of taxes in transaction 1 and 2 is the difference between consideration and cost of the disposal of interest in a person. Paragraph 1(1) of the Ninth Schedule of the ITA provides as follows:“"consideration", in relation to the disposal of an interest in a person, a miningor petroleum right, or mining or petroleum information, means the total amount received or receivable for the disposal, including the fair market value of any amount in kind determined at the time of the disposal;"cost", in relation to an interest in a person, a mining or petroleum right, or mining or petroleum information, means the total consideration given for the acquisition of the interest, right, or information, including the fair market value of any amount given in kind determined at the time the amount is given;”

76. The Respondent asserted that the definition of “consideration” and “cost” envisages the disposal of disposable parameters to be interest in a person, a mining or petroleum right, or mining or petroleum information. It followed therefore that the net gain can be calculated for any of the parameters when the values and amounts are ascertainable. The Respondent for purposes of transaction 1 and 2 contended that consideration and cost relate to the disposal of interest in a person.

77. The Respondent further contended that consideration as defined under the Ninth Schedule to the ITA includes amounts received and any amount receivable in the future including the fair market value of any amount in kind. In addition, the Respondent contended that cost was defined under the Ninth schedule to the ITA and included the total consideration given including the fair market value of any amount given in kind.

78. The Respondent stated that it calculated consideration and cost for transaction 1 and 2 on the basis of any amounts received or receivable including the fair market value of any amounts given in kind in accordance with the provisions of the ITA highlighted above.

(ii) What amount attracts tax and what is the tax payable. 79. The Respondent contended that transactions 1 and 2 fell under the Ninth Schedule of the ITA and resulted in a net gain as defined by the ITA and are subject to income tax. The Respondent stated that transaction 1 and 2 were subject to tax amounting to Kshs. 10,760,355,738. 00.

(iii) Whether the Respondent was justified in issuing the assessment. 80. Section 24 (2) of the TPA provides as follows:“1. A person required to submit a tax return under a tax law shall submit the return in the approved form and in the manner prescribed by the Commissioner.2. The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner may assess a taxpayer's tax liability using any information available to the Commissioner.”The Respondent stated that the Appellant has the responsibility of filing returns. However, it is not bound by the returns or information provided by the Appellant in this case, the Appellant. The Respondent stated that it had established that the Appellant and/or any of its related companies had not declared and/or paid any taxes on transaction 1 and 2.

81. Section 29 (1) of the TPA provides as follows:“(1)Where a taxpayer has failed to submit a tax return for a reporting period in accordance with the provisions of a tax law, the Commissioner may, based on such information as may be available and to the best of his or her judgement, make an assessment (referred to as a "default assessment") of—(a)the amount of the deficit in the case of a deficit carried forward under the Income Tax Act (Cap. 470) for the period;(b)the amount of the excess in the case of an excess of input tax carried forward under the Value Added Tax Act, 2013 (No. 35 of 2013), for the period; or(c)the tax (including a nil amount) payable by the taxpayer for the period in any other case.”

82. Section 31 of the TPA provides as follows:“(1)Subject to this section, the Commissioner may amend an assessment (referred to in this section as the “original assessment") by making alterations or additions, from the available information and to the best of the Commissioner's judgement, to the original assessment of a taxpayer for a reporting period to ensure that—(a)in the case of a deficit carried forward under the Income Tax Act (Cap. 470), the taxpayer is assessed in respect of the correct amount of the deficit carried forward for the reporting period;(b)in the case of an excess amount of input tax under the Value Added Tax Act, 2013 (No. 35 of 2013), the taxpayer is assessed in respect of the correct amount of the excess input tax carried forward for the reporting period; or(c)in any other case, the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to which the original assessment relates.”The Respondent in exercise of the abovementioned mandate charged the net gain in transaction 1 and 2 to tax and issued a notice of assessment and contended that it acted within the law and cannot be faulted for want of compliance with the law in carrying out its mandate.

(iv) Whether the Respondent was justified in issuing the assessment against the Appellant. 83. Paragraph 14 (1) of the Ninth Schedule to the ITA provides as follows:“(1)A licensee or a contractor shall immediately notify the Commissioner, in writing, if there is a ten per cent or more change in the underlying ownership of a licensee or contractor.”

84. The Respondent averred that in transaction 1, GMR sold 100% of its shares in the Appellant to MGIL and there was a 100% change in the underlying ownership of the Appellant. The Respondent further averred that in transaction 2, Mayflower sold 100% of its shares in MGIL to CGP and there was therefore a 100% change in the underlying ownership of the Appellant.

85. The Respondent contended that in both transactions there was a change in more than 10% of the underlying ownership in the Appellant and there was therefore an obligation of the Licensee and/or Contractor to notify the Respondent of the said change.

86. Paragraph 14 (2) of the Ninth Schedule to the ITA provides as follows:“(2)If the person disposing of the interest to which the notice under subparagraph (1) relates is a non-resident person, the licensee or contractor shall be liable, as agent of the non-resident person, for any tax payable under this Act by the non-resident person in respect of the disposal.”

87. Paragraph 14 (1) of the Ninth Schedule to the ITA provides as follows regarding the definition of a contractor and licensee:“contractor" means a person with whom the Government has concluded a petroleum agreement and includes any successor or assignee of the person;"licensee" means a person who has been issued with, or granted, a miningright;

88. The Respondent contended that the Appellant was issued with or granted a mining right by the Government (of Kenya) and is therefore the licensee for purposes of transaction 1 and 2. The Respondent further contended that GMR and MGIL are non-resident persons and that therefore, the Appellant is liable as an agent for any tax payable arising from the disposal under paragraph 14 (2) of the Ninth Schedule to the ITA.

89. Section 15 (1) (j) of the TPA provides us follows:“(1)A person is the tax representative of another person for the purposes of this Act or a tax law, in the case of—j.any person (including a person referred to in paragraphs (a) to (j)), if that person is the agent or representative of the person as provided for under a tax law or specified by the Commissioner, by notice in writing to the agent or representative.”

90. The Respondent contended that GMR and Mayflower were taxpayers for purposes of transaction 1 and 2 and that the Appellant being an agent of GMR and MGIL is therefore their tax representative. The Respondent stated that it was therefore justified in law in issuing the assessment against the Appellant as the agent of GMR and MGIL for failure to declare and pay tax on the net gain in the disposal of an interest in a person in transaction 1 and 2 respectively. The Respondent averred that the Appeal was incompetent and bad in law.

91. The Respondent prayed that the Tribunal would dismiss the Appeal with costs to it and uphold its assessment of 10,760,355,738. 00.

Parties’ Submissions 92. The Appellant’s filed written submissions dated 6th February, 2024 and filed on 8th February 2024 together with its supplementary submissions dated and filed on 22nd April, 2024. The Appellant did not adduce evidence through a witness. The Respondent, on the other hand, adduced evidence through its witness Ms. Caroline Mbiriri whose witness statement was dated and filed on 21st March, 2024. The witness statement of the Respondent was admitted as evidence in chief on 27th March, 2024. The Respondent’s submissions were dated 22nd April, 2024 and filed on 24th April, 2024.

93. The Tribunal notes that largely, the Appellant repeated its statement of facts in its submissions and will proceed to summarise the same hereinunder:

94. The Appellant submitted that NSR is futuristic and the calculation by the Respondent was based on assumptions and speculations and the figures arrived at in transaction 2 were therefore inaccurate and based on non-existent figures.

95. That in accordance with the Prospectus relating to Papillon Holdings PLC [CGP], the price of shares paid to Goldplast[sic] (Caracal Gold PLC) during the first day (31st August 2021) of dealing in the LSE was GPB (sic) 0. 01 which was the correct and appropriate rate to be used in tax tabulation, in any applicable taxable income, and not the assumed current fair market rate. The Appellant submitted that there was no basis of assuming the fair market rate when there were actual amounts clearly stated in the Prospectus, the prevailing market rate per share, which was GPB(sic) 0. 01. It is noteworthy that the transactions were also at different months.

96. In its supplementary submissions, the Appellant submitted that on 12th April, 2024 when the matter came up for hearing, the Respondent’s witness arrived at an erroneous and grossly exaggerated amount due to wrong calculations arrived at by using a wrong multiplier and that the correct rate of 0. 01 ought to have been used and that the tax payable would have been much lower than what was arrived at.

97. The Appellant submitted that whilst on oath the Respondent confirmed that there were on going negotiations on the amount payable which was at the tail end, but of interest was the admission by the Respondent that the calculations were based on the wrong percentage. " ... . the issues he is highlighting of the rate that we applied, we are now getting the clarification on how the reading of the stock exchange prices is done. From the first question he asked about the GBX and the GBP, that clarification has since come and is how we are resolving the case, the rate is the issue and that is what we are working on" the witness did not end at the above, she further stated as follows, "I have just indicated that the rate is the whole contention here, and once you divide GBX by 100 to arrive at the GBP then the assessment figure will drastically go down".

98. The Appellant further submitted that by the admission by the Respondent, the figure initially awarded by the Respondent could not stand as it was based on erroneous calculations and was therefore an arbitral figure. The witness clearly admitted the amounts would drastically come down if the correct calculations are done. The Appellant submitted that based on their preceding paragraphs, that the Respondent's findings were in error and they erred in arriving at the figure they arrived at the subject of this Appeal.

99. The Appellant further submitted that the Respondent did not base its calculations on the rates at LSE as it initially stated, its calculations were based on information they retrieved from the Wall Street Journal (hereinafter “WSJ”).WSJ is an American business and economic focused international daily newspaper based in New York. The Appellant was of the opinion that the information from the WSJ would not be reliable and could not be used to calculate the trading and listings on the LSE.

100. The Respondent, according to the Appellant, tried to run away from the fact that they used WSJ instead of LSE but their own document KRA2 as it came out in Re-examination clearly showed that they used WSJ instead of the LSE. The Appellant avowed that this fundamentally affected the outcome in terms of the calculation of the amount demanded and/or payable to the Respondent. The Respondent was in error and therefore the figures they arrived at are erroneous and could not stand.

101. The Appellant further submitted that the Respondent through its witness conceded in re-examination as follows firstly that the rate they applied was from WSJ as she stated thus. " ... from our statement of facts KRA2, in the source of information, the rate that was applied in transaction 2 and the source was the Wall Street Journal" she went further to state on the shares trading at the LSE "As I stated there in clarification that we got the ...... the prices of shares in the LSE ... was indicated that the price as 0. 9 is in pence and not pounds and so you have to convert that into pounds so that you can apply the foreign rate applicable at that time to arrive at the adjustment. That is a clarification we have gotten later".

102. The Appellant submitted that it was the duty of the party computing the amounts payable to do that on an accurate and credible information and if the information was not accurate or credible the outcome could not be accurate. The Respondent failed in obtaining the accurate and credible information and therefore its findings could not stand. It arrived at an erroneous finding which should be set aside by the Tribunal.

103. The Appellant reiterated its submissions earlier filed and submitted further that as it had clearly demonstrated, the erroneous figure of Kshs. 10,760,355,738. 00 had ‘no legs to stand on’ and should therefore be set aside. The Appellant also averred that the the basis upon which it was arrived at was manifestly flawed and that the Tribunal had the duty to bring the Respondent to order and save it from suffering in the hands of the Respondent.

104. In its submissions the Respondent reiterated the facts in paragraphs 3-45 of its statement of facts and decided not rehash them. The Respondent in its submissions raised two issues for determination one of which was a reiteration of the issues raised in its statement of facts. The Tribunal will not rehash this issue for determination. The Tribunal notes that it will not re-state the witness statement of Ms. Caroline Mbiriri as the same was a regurgitation of the Respondent’s statement of facts.

105. The second issue raised by the Respondent in its submissions was whether the Appellant discharged its burden of proof and it proceeded to analyse this issue as follows:

Whether the Appellant discharged its burden of proof: 106. The Respondent submitted that Section 59 of the TPA provides for the production of documents to the Commissioner for inspection at the request of the Commissioner. The Respondent submitted that section 30 of the Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”) provides as follows regarding the issue of the burden of proof:“In a proceeding before the Tribunal, the appellant has the burden of proving- (a) where an appeal relates to an assessment, that the assessment is excessive; or (b) in any other case, that the tax decision should not have been made or should have been mode differently".

107. In Pearson v Belcher CH.M Inspector of Taxes) Tax Cases Volume 38 referred to by Justice D.S. Majanja in PZ Cussons East Africa Limited v Kenya Revenue Authority [2013] eKLR, it was held as follows:“where there is an assessment made by the Additional Commissioner upon the Appellant; it is perfectly settled by cases such as Norman Vs. Galder 267C 293, that the onus is upon the Appellant to show that the assessment made upon him is excessive and incorrect and of course he has completely failed to do. That is sufficient to dispose of the appeal, which I accordingly dismiss with costs." 57 .. ...... .the Appellant in the present appeal has manifestly failed to discharge such an onerous burden of proof placed squarely on it ..”

108. The Respondent submitted that in the instant case, it issued additional assessments based on information that there was change in 100% of the Appellant's interest in two transactions. The Appellant was given an opportunity to object to the assessments however failed to prove that the Respondent's assessments were erroneous.

109. The Respondent submitted that the objection decision was given after review of the supporting documents provided by the Appellant. The Respondent cited the case of TAT No. 70 of 2017 -Afya X-ray Centre Limited v Commissioner of Domestic Taxes in which it was held as follows:"From the foregoing chain of events, it is our understanding that the Appellant failed in its duty in providing these documents, in order that a comprehensive audit of its affairs be done. Accordingly, the Respondent can hardly be faulted for raising the assessment in accordance with the availed documents. Moreover, the Appellant had an opportunity to counter the Respondent's finding after the preliminary finding and offer the confirmation of the assessment. Both ore instances, where the Appellant could have produced its books of accounts to counter the Respondent's assessment after all the Appellant by law bears the burden of proof ....... "

110. The Respondent submitted that the assessment was based on the available information provided by the Appellant and the best judgment by the Respondent.

Issues For Determination 111. The Tribunal has considered the parties’ pleadings, documentation and submissions and is of the view that this appeal raises four issues for determination:(a)Whether the application of the Ninth Schedule of the ITA in computation of the taxes due on the net gain arising from the sale of shares in the Appellant was justified.(b)Whether the Respondent erred in determining the fair market value of the consideration paid in kind.(c)Whether the Respondent erred in determining the acquisition costs.(d)Whether the Respondent’s objection decision dated 9th June, 2023 was justified.

Analysis And Findings 112. Having identified the issues for determination, the Tribunal will proceed to analyse them as follows:

(a) Whether the application of the Ninth Schedule of the ITA in computation of the taxes due on the net gain arising from transaction 2 was justified. 113. The origin of this dispute was how the taxation of the net gains on the sale of the shares in the Appellant to non- resident entities in exchange for consideration in cash and kind was to be determined. The consideration in kind was payment made by the issuance of shares, to the sellers of the said shares, in an entity that was trading in the LSE. The Appellant had an asset, an immovable property, a gold mine referred to as the Kilimapesa Gold Project. The Appellant did not concur with the Respondent’s tax computation and it therefore objected to the assessment and was issued with an objection decision which it appealed against.

114. A perusal by the Tribunal of the documents adduced as evidence by the Appellant indicated that there were two transactions involving the sale of shares in the Appellant directly and indirectly. The Tribunal notes that in the transaction 1, the shares held by GMR in the Appellant were sold to MGIL and the consideration for the shares was partly in kind by the issuance of shares in CGP to GMR. The Tribunal notes that the Appellant did not dispute the application of the Ninth Schedule of the ITA in the calculation of the taxes on the net gains arising out of transaction 1 save for the fact that the Respondent applied a wrong price/rate in calculating of the value of the consideration in kind.

115. The Tribunal, having perused the SPA notes that the Appellant had an issued share capital of Kshs. 600,000,000. 00 made up of 600,000 shares having a nominal value of Kshs. 1,000. 00 each. The Tribunal notes that pursuant to the SPA, 599,999 shares in the Appellant were held by GMR, a company registered in Guernsey. The remaining share was held by GL whose registration details were neither provided nor disclosed. The Tribunal however notes that the shareholding of GL in the Appellant was insignificant as it only held a single share in the Appellant.

116. The Tribunal notes that the Appellant, disputed the use of the Ninth Schedule of the ITA in computing the taxes due on the net gains from transaction 2 on the basis that there was no direct link between MGIL and MCI and the activities of the Appellant in Kenya. Hence the Tribunal’s observation is that whereas the Appellant accepted the use of the Ninth Schedule of the ITA in the computation of the tax on the net gains in respect of transaction 1, it decried its application in the computation of tax due in transaction 2.

117. The Tribunal observed that transaction 2 involved the issuance of £3,250,000. 00 to MGIL and this was to be satisfied by the issuance of 325,000,000 shares in CGP to MGIL. The 325,000,000 shares constituted both the “Mayflower consideration shares” and the “GMR Consideration shares”. The Respondent only took into consideration the “Mayflower consideration shares” which were 188,275,847 shares.

118. Section 3 (2) (g) of the ITA provides as follows:“subject to section 15(5A), the net gain derived on the disposal of an interest in a person, if the interest derives twenty per cent or more of its value, directly or indirectly, from immovable property in Kenya;”

119. The Tribunal notes that the principal activity of the Appellant is mining and that it has the licence to carry out this activity in Kenya. This licence grants the Appellant rights to property or the right to carry out its principal activity of mining. Accordingly, when the Appellant’s shares were purchased by MGIL in exchange for issuance of shares in CGL, a company listed in the LSE, the tax on the net gains from the transaction would be computed as outlined by the provisions of the Ninth Scheduled to the ITA. The Tribunal notes the definition of “interest in a person” and “disposal” is that as outlined in paragraph 1(1) of the said schedule which stipulates as follows:“interest in a person" includes a share or other membership interest in a company, an interest in a partnership or trust, or any other ownership interest in a person…”"disposal" in—(a)relation to an interest in a person, a mining or petroleum right, or mining or petroleum information, means any change in the ownership of the interest, right, or information, including by way of sale, transfer, assignment, or exchange;(b)the case of an interest in a person, includes the cancellation or redemption of the interest;”

120. The Tribunal also notes the following provisions of paragraph 2 (3) of Part II of the Ninth Schedule of the ITA which stipulates that the rate of taxation to be applied in taxation of licences for Mining Operations is 37. 5%:“(3)The corporate rate specified under paragraph 2 of Head B of the Third Schedule shall be the rate of income tax applicable to a licensee that is a company.”

121. The term ‘underlying ownership’ is defined in paragraph 1(1) of the Ninth Schedule to the ITA as follows:“"underlying ownership"[emphasis ours], in relation to a person, means an interest in the person held directly, or indirectly [emphasis ours] through an interposed person or persons, by an individual or by a person not ultimately owned by the individuals.”

122. The Tribunal also notes the following provision of paragraph 14, Part IV of the Ninth Schedule of the ITA regarding indirect transfers of interest:“14. Indirect transfers of interest(1)A licensee or a contractor shall immediately notify the Commissioner, in writing, if there is a ten per cent or more change in the underlying ownership of a licensee or contractor.(2)If the person disposing of the interest to which the notice under subparagraph (1) relates is a non-resident person, the licensee or contractor shall be liable, as agent of the non-resident person, for any tax payable under this Act by the non-resident person in respect of the disposal.”

123. The opinion of the Tribunal, is that first, the Appellant was the wholly owned subsidiary of GMR which is a non-resident company. Second, GMR sold its shares in the Appellant to MGIL in exchange for issuance of share in CGP an entity which was also non-resident and which is listed in the LSE. This transaction occurred in 2 phases namely transaction 1 and 2. Transaction 1 involved the transfer of shares from GMR to MGIL. Whilst transaction 2 involved the exchange of the rights or interest of MGIL in the Appellant, for the issuance of shares to MGIL of shares in CGP which is listed in the LSE. The Tribunal is of the view that the nature of the transaction was one involving the sale and purchase of “derivatives” which is defined under Appendix A of International Financial Reporting Standard (hereinafter “IFRS”) Number 9 as follows:“A financial instrument or other contract within the scope of this Standard with all three of the following characteristics:a.its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided in the case of a non‑financial variable that the variable is not specific to a party to the contract (sometimes called the ‘underlying’).b.it requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors.c.it is settled at a future date….”

124. The Tribunal having perused the Financial statements of the Appellant which were adduced as evidence, notes that the Appellant applied IFRS 9 in its financial statements but only in so far as hedging for foreign exchange losses was concerned. It is evident that the value of the shares of the Appellant would be derived from the value of its underlying asset which was the Kilimapesa gold project/ mine. The Tribunal also notes that the said value of the shares was sensitive to the changes in the gold commodity market and infact derived its value from the mine and the mined gold (the commodity). The guidance on the computation of tax net gains arising from such transactions, that involve such financial instruments referred to as derivatives is anchored in the ITA and more specifically in the Ninth Schedule of the said ITA.

125. The Tribunal further notes that the SPA was the financial instrument which the Appellant entered into that outlined how much consideration its shareholders would receive in exchange for their respective shares and also the mode of payment of such consideration, whether in cash or in kind. The effect is that the derivative could be said to be embedded in the SPA since the consideration value or purchase price of the shares was derived from the value of the gold mine and to some extent the gold that was mined and which were the underlying the asset and commodities, respectively, of the Appellant.

126. The further view of the Tribunal is that transaction 2 also fell under the ambit of the Ninth Schedule of the ITA since in effect, MGIL was given an option to future rights through further Agreements or “Heads of Terms”, to the shares it acquired at future dates and hence the sale of shares was carried out in phases and consideration paid for in kind and the sellers of the shares were issued with shares in CGP which is listed in the LSE. The options, futures and all rights to the shares derived their value from the commodity, which was gold being mined at the mine owned by the Appellant.

127. The finding of the Tribunal is that the application of the Ninth Schedule of the ITA in computation of the taxes due on the net gain arising from the sale of shares in the Appellant was justified.

(b) Whether the Respondent erred in determining the fair market value of the consideration paid in kind. 128. The Appellant raised as one of its grounds the fact that the Respondent mis-directed itself in using the wrong rate of £ 0. 9 in determining how to calculate the fair market value of the underlying interest.

129. The meaning of “consideration” under paragraph 1(1) of Part 1 of the Ninth Schedule is as follows:“Consideration in relation to the disposal of an interest in a person, a mining or petroleum right or mining or petroleum information means the total amount received or receivable for the disposal, including the fair market value of any amount in kind [emphasis ours] determined at the time of the disposal.”

130. The meaning of “fair market value” is not outlined in the Ninth schedule of the ITA and accordingly the Tribunal will rely the definition as provided by IFRS 13 as to the meaning of “Fair Market Value” and the same states as follows in this regard:“Fair value is a market-based measurement, not an entity-specific measurement. For some assets and liabilities, observable market transactions or market information might be available. For other assets and liabilities, observable market transactions and market information might not be available. However, the objective of a fair value measurement in both cases is the same—to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions [emphasis ours](ie an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability).

131. The Tribunal notes that in view of the preceding paragraph, the market that would be relevant would be the LSE. Further, it is noteworthy that the “market rate” in this regard is that which would prevail at LSE on the dates of the transactions or the date when the consideration in kind is settled by issuance of shares in CGP to the seller. The Appellant was apprehensive about the fact that the Respondent obtained the rate of £0. 9 from the “WSJ”. The Tribunal has perused the evidence adduced by the Respondent in this regard and it is clear that the website which it relied upon was “wsj.com” and that was the source of the data on the activities at LSE. The Appellant attempted to controvert the evidence of the Respondent through mere assertions rather than adduce evidence to prove that the database that the Respondent erroneously relied on WSJ for information regarding the LSE.

132. The Tribunal notes that in respect transaction 1 the value of 103,846,153 shares was US$ 0. 01 per share on the basis that in respect of these shares, the Appellant received a cash consideration of US$ 1,050,000. 00 on 31st. August, 2021. Since the amount of US$ was not in kind, there was no requirement to consider the fair market value of the consideration. However, on or about 3rd November, 2021 when GMR received a further 32,878,000 shares in CGP it would be construed that the issuance of those shares was payment in kind and therefore the determination of the value of that consideration would be based on the fair market value which was £1. 35 for CGP shares listed on the LSE on 3rd November, 2021.

133. The Tribunal notes that in respect of transaction 2, the shares of MGIL in the Appellant were also sold in exchange for consideration in kind by the issuance of shares in CGP to MGIL. As outlined in the foregoing paragraphs, consideration in kind is based on “the fair market value of the consideration in kind at the time of disposal”. The disposal occurred on 31st August, 2021 and since consideration was in kind, the market value of the shares of CGP on that date was £0. 9.

134. The finding of the Tribunal is that the Respondent did not err in determining the fair market value of the consideration paid in kind.

(c) Whether the Respondent erred in its computation of the acquisition costs. 135. The Tribunal notes the assertion of the Appellant that the Respondent had misdirected itself by failing to consider the costs of the underlying interest which ought to have been factored when determining the net gain or loss on the transfer of an interest. The Appellant did not adduce evidence to buttress its assertion that the Respondent did not consider the costs on acquisition of the underlying interest.

136. The Tribunal notes that the Respondent demonstrated how it determined the costs of acquisition in the interest of a person pursuant to the provisions of Paragraph 1 (1) of Part 1 to the Ninth Schedule of the ITA which defines cost as follows:“"cost", in relation to an interest in a person, a mining or petroleum right, or mining or petroleum information, means the total consideration given for the acquisition of the interest, right, or information, including the fair market value of any amount given in kind determined at the time the amount is given;”

137. The Tribunal is of the view that the Respondent demonstrated how it calculated the costs on acquisition of the underlying interest. The Respondent computed the cost on acquisition strictly in accordance with the provisions of the Ninth Schedule of the ITA.

138. The Tribunal however notes that the Appellant did not adduce any evidence to disprove the computation of the costs of acquisition by the Respondent and merely made assertions about the fact that the computations were incorrect. Section 56(1) of the TPA and Section 30 of the TATA require the Appellant to discharge its burden of proving that a tax decision of the Respondent is incorrect by providing as follows:“56. General provisions relating to objections and appeals(1)In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect……”“30. Burden of proofIn a proceeding before the Tribunal, the appellant has the burden of proving—(a)where an appeal relates to an assessment, that the assessment is excessive; or(b)in any other case, that the tax decision should not have been made or should have been made differently.”

139. The Tribunal relies on the case of Commissioner of Domestic Taxes v Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR) (Commercial and Tax) (8 July 2022) (Judgment) Justice Majanja held as follows:“While the general rule or requirement under the sections 107 and 108 of the Evidence Act is he who asserts must prove, it must also be remembered that a person has the burden of proving facts that are peculiarly within its knowledge as provided by section 112 of the Evidence Act which states that, “In civil proceedings, when any fact is especially within the knowledge of any party to those proceedings, the burden of proving or disproving that fact is upon him.”

140. The Tribunal notes that the Appellant did not provide evidence to controvert the application of the Ninth Schedule of ITA computing the cost of acquisition and accordingly, it did not discharge of burden of proving that the tax decision of the Respondent was incorrect.

141. The Tribunal has established that the Respondent did not err in its computation of the acquisition costs.

(d) Whether the Respondent’s objection decision dated 9th June, 2023 was justified. 142. The Tribunal having found that the Respondent correctly applied the Ninth Schedule of the ITA in determining the value of the consideration, the value of the costs of acquisition, the gains and correct tax rate in computing the taxation on the net gains of the transactions that took place, further finds that the Respondent’s objection decision dated 9th June, 2023 was justified and that the taxes demanded are due and payable.

Final Decision 143. The upshot of the above is that the Appeal fails and the Tribunal will proceed to make the following final Orders:a.The Appeal be and is hereby dismissed.b.The objection decision dated 9th June, 2023 be and is hereby upheld.c.Each party to bear its own costs.

144. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF JULY 2024. ............................................CHRISTINE A. MUGACHAIRPERSON............................................BONIFACE K. TERER DELILAH K. NGALAMEMBER MEMBER............................................GEPORGE KASHINDI OLOLCHIKE S. SANKALEMEMBER MEMBER