[2024] KETAT 1238 (KLR)

M-Kopa Holdings c/o Morre, Director, Mkopa Kenya Limited LLC v Commissioner of Legal Services and Board Coordination (Tax Appeal E899 of 2023) [2024] KETAT 1238 (KLR) (9 August 2024) (Judgment)

Neutral citation: [2024] KETAT 1238 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E899 of 2023

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

August 9, 2024

Between

M-Kopa Holdings c/o Jesse Morre, Director, Mkopa Kenya Limited LLC

Appellant

and

Commissioner of Legal Services and Board Coordination

Respondent

Judgment

1. The Appellant, M-kopa Holdings, is a company incorporated on 31st July 2017 under the United Kingdom Companies Act, 2006. It is a private company limited by shares with its registered office in England and Wales.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act and is mandated with the responsibility for the assessment, collection, receipting and accounting for all tax revenue as an agent of the Government of Kenya. The Respondent is also mandated with the responsibility for the administration and enforcement of the statutes set out in the Schedule of the Act.

3. The Respondent undertook an audit of the Appellant’s operations for the years 2018, 2019 and 2020 which resulted in WHT and PAYE assessments which were communicated to the Appellant vide a letter dated 31st July 2023. The summary of the taxes is tabulated below:-Description Principal tax (Kshs) Penalty and Interest (Kshs) Total (Kshs)

WHT 608,186,503 255,625,297 863,811,800

Pay As You Earn (PAYE) 14,080,185 7,982,413 22,062,598

Total 622,266,688 263,606,710 885,874,398

4. Being dissatisfied with the Respondent’s assessment, the Appellant lodged a notice of objection to the assessment vide a letter dated 25rd August 2023.

5. The Respondent issued an objection decision by confirming the various assessments vide the letter dated 23rd October 2023.

6. The Appellant aggrieved by the Respondent’s Objection decision filed its Notice of Appeal dated 25th August 2023.

The Appeal 7. The Appellant’s Memorandum of Appeal dated and filed 6th December 2023 raised the following grounds of appeal;a.The Respondent erred in law and fact by appointing Jesse Moore, a director for M-KOPA Kenya Limited as the tax representative of the Appellant.b.The Respondent erred in law and fact by deeming the Appellant tax resident in Kenya.c.The Respondent erred in law and fact by proceeding to:i.Assess WHT consists of principal tax Kshs. 608,186,503. 00 and interest and penalties of Kshs. 273,870,892. 00; andii.Assess PAYE of Kshs. 22,485,003. 00 comprising of principal tax of Kshs. 14,080,185. 00. Penalties and interest of Kshs. 8,404,819. 00 on the employees of the Appellant’s subsidiaries received in the form of stock options.

Appellant’s Case 8. The Appellant laid out its Appeal in its Statement of Facts dated and filed 6th December 2023 and written submissions dated 29th May 2024.

9. The Appellant argued its case under the following sub-headlines:

i.Tax Residence of the Appellant 10. The Appellant contended that its place of management and control was not in Kenya considering that it is a private company limited by shares and was incorporated on 31st July 2017 under the United Kingdom Companies Act, 2006. That it also had its registered office in England and Wales as indicated in its certificate of incorporation.

11. The Appellant provided its story when it stated that it was initially incorporated by Nicholas Hughes as a sole shareholder and sole director before it undertook a corporate restructure on 26th April 2018 which resulted in the Appellant becoming the ultimate parent company M-KOPA LLC, a company incorporated in the United States of America ceased to be the ultimate parent company.

12. That subsequently, Nicholas Hughes ceased to be a person with significant control over the Appellant on 26th April 2018, as evidenced by the notice of ceasing to be a person with significant control filed with the United Kingdom’s Company House (Company House”). That further to this, no person had significant control over the Appellant with effect from 26th April 2018 as evidenced by the notice of a person with significant control filed with the Company House on 23rd July 2018.

13. The Appellant averred that the Respondent failed to consider the nature of its operations. That it instead based its findings on the case of Malayan Shipping Company Ltd Vs Federal Commissioner of Taxation, 1946 where the court held that the company was resident in Australia since the managing director exercised complete management and control over the company’s operation through the trading operations conducted abroad.

14. The Appellant maintained that in the Malayan Shipping Company case that was relied on by the Respondent, the complete managerial and shareholder control of the company was under one individual who was a resident in Australia while the Appellant’s principal activity was to act as a holding company under the management and control of non-Kenyan shareholder.

15. The Appellant averred that it served as a holding company without any business or trading operations. That its operations were primarily to exercise independent oversight and governance of its subsidiaries on behalf of M-KOPA’s shareholders.

16. That considering that it was a company incorporated in England, it relied on the the Kenya-United Kingdom Double Taxation Treaty (the DTT) under which Article 4 of the DTT provides that:“where by reason of the provisions of paragraph (1) of this article a person other than an individual is a resident of both Contracting States in which its place of effective management is situated.”

17. That this position is replicated in the Organization for Economic Cooperation and Development Model Tax Convention on Income and on Capital (the OECD Model Tax Convention) which guides the concept of management of an enterprise and states that:“Where by reason of the provision 1, a person other than an individual is a resident of both contracting states, then it shall be deemed to be a resident only of the state in which its place of effective management is situated.”

18. That accordingly, the test of management of control under the DTT is the place of effective management of a company.

19. The Appellant averred that in light of the above, the key factors that the Respondent ought to have considered on whether a person is managed and controlled in Kenya were:-a.The place where the person’s board of directors or equivalent body holds their meetings:b.Where the senior day-to-day management of the person is carried on;c.Where the person’s headquarters are located;d.Which country’s laws govern the legal status of the person; ande.Where the person’s accounting records are kept.

20. The Appellant provided its board composition to be as follows:The Appellant’s Board Composition 2018 to 2020

Name of the Director Period of being a director Country of residency for tax purposes Class of shares represented

Jesse Moore 3 years Kenya Voting Ordinary

Nick Hughes 3 years United Kingdom Voting Ordinary

Mugo Kibati Resigned in November 2018 Kenya Independent director

Arun Gore Appointed in April 2018 United States Series A, B and C Preferred Members

Oliver Karius Resigned in December 2019 Switzerland Series D preferred member

Collin Le Duc Resigned in October 2019 United States Series E preferred member

Susan Githuku 3 years Kenya Independent director

Elizabeth Littlefield 3 years United States Independent director

Dave Easton 3 years United Kingdom Series F-2 Preferred Members

Ian Mccaig 3 years United Kingdom Independent director

Maria Largey Appointed in October 2019 United Kingdom Series F-2 Preferred Members

Shakir Merali Appointed in December 2019 Kenya Series E Preferred Members

Maxillian Biswanger Appointed in September 2020 United Kingdom Series F-2 Preferred Members

Yesse Oenga Appointed in November 2020 Kenya Independent director

21. Its analysis was that the board’s composition showed that 5 of the 14 directors were Kenyan tax residents. That other tax residents represented in the board are 5 directors from the United Kingdom who are tax residents in the United Kingdom, 3 United States directors who are tax residents in the United States and 1 Switzerland director who was a tax resident in Switzerland.

22. That it was thus not clear how the Respondent concluded that the Appellant is a tax resident in Kenya, even though the United Kingdom has 5 tax residents who serve as board directors.

23. The Appellant averred that the management and control of its affairs was vested in the board as provided for under Articles 11. 1.1 and 11. 2.1 of the Appellant’s Articles of Association(AoA).

24. The Appellant posited that any other person who was present during the board meetings, who was not a director only did so at the invitation of the board or as a board observer and did not participate in decision-making or voting in line with the Articles of Association. Accordingly, the senior managers of M-KOPA only appeared in the meetings upon the invitation by the Board, as they do not constitute members of the Board as stipulated by the AoA.

25. The Appellant submitted that the shareholders appointed board members were based outside Kenya and were not residents of Kenya for tax purposes.

26. That the role of senior managers is to report to the board on various key strategic decisions being undertaken by the group during the board meetings. That the role of making key strategic decisions on the affairs of the Appellant is with the board and the role of the board committees is to assist the board in fulfilling its oversight responsibilities.

27. That any decisions made by the board committees are on behalf of the board and senior management is not involved in decision-making.

ii.Appointment of Jessee Moore as a Tax Representative of the Appellant. 28. The Appellant stated that it was not a tax resident in Kenya during the audit period and as such the appointment of Jesse Moore as its tax representative in Kenya during the audit period was not justified.

29. That Section 15(1)(i) of the TPA requires the appointment of a tax representative of a non-resident person if that person is controlling the non-resident person’s affairs in Kenya, including a manager of a business of that non-resident person. That the management and control of affairs of the Appellant was vested on the entire Board and not an individual and therefore the Respondent erred in fact and law by appointing Jesse Moore as its tax representative in Kenya.

iii. Withholding Tax a.Withholding Tax on Deemed Interest on Redeemable Preferred Shares 30. The Appellant submitted that it proved beyond reasonable doubt that it was not a tax resident in Kenya in the audit period and as such the Respondent lacked the mandate to demand WHT from a non-resident company.

31. That WHT was not payable under Section 35(6) of the ITA which had been repealed under the Finance Act 2016 effective from 9th June 2016.

32. That Section 35(6) of the ITA was substantive and did not deal only with issues of collection and recovery of the tax and penalty.

33. The Appellant contended that the Respondent erred in assessing WHT on the preferred shares because the rights of the preferred shares were an obligation to the Appellant or the debt owing to the holders of the preferred shares. That the provisions of deemed interest are only applicable in line with Section 10(c) and 35(1)(e) of the ITA.

34. The Appellant asserted that it received funding in the form of preferred shares that were unsecured, without a fixed financial charge and with no fixed repayment plans with the expectation that all the preferred units would ultimately be converted to common equity. That the preferred shares did not meet the definition of a loan and therefore deemed interest was not applicable.

b.WHT on interest 35. The Appellant submitted that it was not a tax resident in Kenya in the 2018, 2019 and 2020 years of income and as such the Respondent did not have a mandate within the confines of the ITA to demand WHT on interest paid by the Appellant on non-resident third party investor loans.

iv.PAYE 36. The Appellant averred that it was not a tax resident in Kenya in the 2017, 2018, and 2020 years of income and as such the remuneration of its employees, senior executives and its employees’ stock options could not be taxed. That the shares were issued at market value as evidenced in the valuation report, option agreement and purchase agreement.

37. The Appellant identified the following issues for determination in this Appeal:a.Whether the Appellant is a tax resident in Kenya; andb.Whether the withholding tax and pay-as-you-earn (PAYE) assessments are valid.

38. Its submission on the identified issues was thus:

a. Whether the Appellant is a tax resident in Kenya 39. It was its submission that it was not a resident of Kenya as envisaged in Section 2 of the ITA and the pronouncement of the Tribunal that defined PEM in the case of Judgment TAT No. 65 of 2023, MkopaLLC (C/o M-kopaKenya Limited) versus Commissioner of Domestic Taxes,

40. That its key decision-making body was the board as evidenced by Articles 11. 1.1 and 11. 2.1 of its Article of Association which vests exclusive management and control of the Company on the board.

41. That the board operates through its committees which are attended by senior management to provide operational updates and insights.

42. It stated that only one (1) meeting out of its thirteen (13) meetings was physically held in Kenya on 19th November 2019 and no formal decisions were made in this meeting.

43. That the holders of its shares which control 7 out of 10 board seats are entities outside of Kenya and it cannot thus be a resident of Kenya.

b. On appointment of Mr Moore as a tax representative 44. On this issue, the Appellant stated that the said appointment contravened Section 15(1)(i) of the TPA because the management and control of affairs of the Appellant was vested in the entire board and not an individual.

c. Whether the withholding tax and pay-as-you-earn (PAYE) assessments were valid. 45. On withholding tax, the Appellant stated that under Section 10(1) of the ITA, withholding tax is only applicable where:-“a resident person or a person having a permanent establishment in Kenya makes a payment to any other person in respect of…”

46. That it was neither a resident in Kenya nor did it have a permanent establishment in Kenya and hence withholding tax did not apply to it.

47. On WHT on redeemable preference shares, the Appellant submitted that the assessment was not grounded on the law because the Finance Act 2016, which was effective 9th June 2016 had repealed section 35 (6) of the Income Tax Act.

48. That the implication of the deletion of Section 35(6) of the ITA is that the withholding tax obligations on a person making a payment were done away with and therefore Respondent was not allowed to recover withholding tax from a person who had failed to deduct withholding tax.

49. That this responsibility was re-introduced in the Finance Act 2019 which amended the Tax Procedure Act effective 7th November 2019.

50. That accordingly, between 9th June 2016 and 7th November 2019, the Respondent had no power to collect withholding tax from a person making a payment including the Appellant as was held in the case of M-kopa LLC (C/O M-kopa Kenya Limited) versus Commissioner of Domestic taxes.

51. In the period post 7th November 2019, the Appellant submitted that it received funding in the form of preferred shares that was unsecured, without a fixed financial charge and with no fixed repayment plans with the expectation that all preferred units will ultimately be converted to common equity.

52. That it thus correctly classified the preferred shares as equity in line with the provisions of International Accounting Standards (IAS) 32 which provides that a financial instrument is considered equity when it does not have a fixed maturity date and when the issuer does not have a contractual obligation to make any payment.

53. That on the other hand preference shares are considered a liability if there is a fixed rate of dividend and that have a mandatory redemption future date.

54. On WHT on interest on shareholder loans the Appellant reiterated that the Respondent’s assessment was not based on law.

55. On PAYE, the Appellant averred that it was not a tax resident in Kenya in 2018, 2019 and 2020 years of income and as such the Respondent did not have any mandate to tax the remuneration of its employees and senior executives for what they received in the form of stock options.

56. That even if the PAYE was payable, provisions of the Income Tax Act (repealed) which provide for the taxation of remuneration of employees paid through stock options would add up to a tax liability of zero.

Appellant’s Prayer 57. The Appellant prayed for orders that:a.The Respondent’s Objection decision contained in the letter dated 23rd October 2023 confirming that the Appellant is a tax resident in Kenya and subsequently assessing WHT and PAYE amounting to Kshs. 882,057,395. 00 and Kshs. 22,485,003. 00 respectively, be set aside in its entirety;b.The Appellant sufficiently supported, evidenced and demonstrated full tax compliance with its operations;c.The Appeal be allowed; andd.Any other remedies that the Honourable Tribunal deems just and reasonable.

Respondent’s Case 58. The Respondent defended this Appeal while relying on its:a.Statements of Facts dated 5th January 2024 and filed on 9th January 2024. b.Written Submissions dated and filed on 11th March 2023.

59. The Respondent averred that before April 2018, M-Kopa LLC, a company incorporated in the US was the holding company for the M-Kopa entities. That subsequently the preferred shareholders and common shareholders transitioned from M-Kopa LLC to the Appellant on a one unit for one share basis thereby maintaining the original structure.

60. The Respondent stated that the Appellant’s policy statement gave the board of the Appellant discretion to manage and control its business affairs and also explained the scope of the board’s delegation of the powers and limits of the authority of the various committees.

61. The Respondent stated that it reviewed the minutes shared by the Appellant and several things became evident including the fact that:-a.The minutes defined management as one or more of Messrs. Moore and Hughes and other members of the management in their capacities as officers of the Appellant rather than as members of the board.b.The Chief Executive Officer Jesse Moore and the General Counsel & Secretary Jesse Zigmund as well as other senior management were in attendance during the Appellant’s board and committee meetings on invitation.c.The management led discussions and floated several proposals which were approved in the committee meetings like the Audit & Risk Committee meeting held on 21st April 2020. d.The management would review the deliberations of the various committees, and the proposals adopted by the committee meetings were then approved by the board. That for instance, the board of directors in a meeting held on 30th April 2020 approved the proposal to approve the consolidated audited financial statements of M-kopa Holdings Limited.

62. The Respondent further stated that it reviewed the credit facility agreement from CDC Group PLC (CDC); the Norwegian Investment Fund for Developing Countries (Norfund) and Nederlandse Financierings- Maatschappij Voor Ontwikkelingslanden N. V (FMO) where it defined the senior manager to include the CEO, CFO, CCO as permanent employees in leading positions, setting strategic goals and making decisions on M-Kopa operations. That majority of the senior managers of the Appellant were residents in Kenya for the period under review.

63. The Respondent took the view that the Appellant’s board of directors ratified decisions approved by management in the committees held in various locations including Kenya; hence, the decisions were in substance made in Kenya despite the Appellant being incorporated in the United Kingdom.

64. It contended that having established that the Appellant is a tax resident in Kenya, it followed that the appointment of Jesse Moore as a tax representative was proper and in line with the provisions of Section 15 (1) of the Tax Procedures Act.a.On WHT on deemed interest on redeemable preference shares

65. The Respondent averred that since the ownership structure of the Appellant was fully maintained during the transition from M-Kopa LLC to its current status, it opted to treat the Appellant’s redeemable preference shares as a liability in the books of M-Kopa LLC.

66. The Respondent contended that the IAS 32 (18) (a) provides that a preference share that provides for mandatory redemption by the issue for a fixed or determinable amount at a fixed or determinable future date or gives the holder the right to require the issuer to redeem the instrument at or after a particular date for a fixed or determinable amount, is a financial liability.

67. The Respondent posited that the redeemable preference shares were repayable upon the occurrence of events stated in the operating agreement and thereby qualified as debt/liability subject to Withholding tax as per the provisions of Sections 10(c) and 35 of the Income Tax Act and as such the assessment was justified.

b)On WHT on Interest on Shareholder and Investor Loans 68. The Respondent averred the Appellant was a tax resident during the period under review and thus withholding tax was payable on interest received from the loans provided by non-resident third-party investors as per the provisions of Sections 10 and 35 of the Income Tax Act.

c)Paye 69. The Respondent stated that it reviewed the Appellant’s consolidated financial statements and it showed that its employees including senior executives received remuneration in the form of share-based payments without paying anything for the shares. That it thus taxed this benefit at the market price per share at the time the option was granted.

70. That the Appellant remunerated its employees in the form of stock options and hence the PAYE assessments were correct as per the provisions of Section 5 of the Income Tax Act.

Respondent’s Prayer 71. The Respondent prayed for the Tribunal: -a.To uphold its decision as proper and in conformity with the provisions of the law.b.To dismiss the Appeal with costs.

Issues for Determination 72. The Tribunal has considered the parties pleadings, submission and evidence from where it has concluded that the following are the issues that have commended themselves for determination in this dispute:a.Whether the Appellant was a tax resident in Kenya.b.Whether the appointment of Jesse as the tax representative of the Appellant was justified.c.Whether the Respondent’s tax assessment was justified.

Analysis and Findings 73. The Tribunal having identified the issues falling for its determination proceeds to analyse the same separately as hereunder.

a. Whether the Appellant was a tax resident in Kenya. 74. The point of divergence between the parties on this issue is whether the Appellant had its Place of Effective (PEM) in Kenya and was thus a tax resident in Kenya.

75. The Appellant argued that it did not have a PEM in Kenya because it is a private company limited by shares and was incorporated on 31st July 2017 under the United Kingdom Companies Act, 2006. That it also had its registered office in England and Wales as indicated in its certificate of incorporation and that only 5 out of 14 of its directors were Kenyan residents.

76. The Respondent on the other hand holds the view that the Appellant had its PEM in Kenya because:-a.Its management and control were exercised in Kenya because the directors and shareholders resided in Kenya, held their meetings in Kenya and also made key decisions in Kenya.b.Its senior managers like the CEO, CFO and CCO resided in Kenya.c.The company’s shape and structure were not changed by the re-organisation.d.The board merely ratified decisions of the committees which were held in Kenya.e.Its directors namely, Ms Moore and Hughes operated from Kenya as members of management and sub-committees of the board.

77. A resident is defined under Section 1 of the ITA as follows:“(b)to a body of persons, means -(i)that the body is a company incorporated under a law of Kenya; or(ii)that the management and control of the affairs of the body was exercised in Kenya in a particular year of income under consideration; …”

78. From this definition, it is clear that a resident when applied to a body corporate under the definition of residency in Section 1(b)(ii) of the ITA means the place where the management and control of the affairs of the body were exercised in that particular year under consideration.

79. The formula, method or model to be used in determining the place where management and control of affairs of the company was exercised has not been defined. The Tribunal is then left to rely on case laws and international legal instruments to guide it in identifying the Appellant’s place of effective management (PEM). This position was affirmed by Visram (J) (as he then was) in Unilever Kenya Limited vs The Commissioner of Income Tax (Income Tax Appeal No. 753 of 2003) [2005] eKLR when he said that: -“I have no doubt in my mind that the OECD principles on income and on capital and the relevant guidelines such as “Transfer Pricing” principles, the CUP method adopted for calculations of what ought to be the income, the Cost Plus Return method as well as Resale Minus Method adopted for looking into compliance with arm’s length principles are not just there for relaxed reading. These have evolved in other jurisdictions after considerable debates and taking into account appropriate factors to arrive at results that are equitable to all parties. The ways of doing modern business have changed very substantially in the last 20 years or so and it would be fool-hardy for any court to disregard internationally accepted principles of business as long as these do not conflict with our own laws. To do otherwise would be highly short-sighted.”

80. Whereas the OECD Guidelines can be used to help the Tribunal determine the residency of the Appellant in this Appeal, the Tribunal has cautioned itself that the Guidelines are applicable only in cases where there is a lacuna in our tax statutes.

81. Article 4, Paragraph 3 of the Articles of the Model Convention concerning taxes on Income and On Capital [as they read on 21st November 2017] states as follows concerning the definition of a resident:“Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, the competent authorities of the Contracting States shall endeavour to determine by mutual agreement the Contracting State of which such person shall be deemed to be a resident for the Convention, having regard to its place of effective management, the place where it is incorporated or otherwise constituted and any other relevant factors.

82. From this description, it is clear that the place of effective management is the pivot that determines the residency of a corporate entity like the Appellant.

83. The OECD Commentaries on the Articles of The Model Tax Convention have guided the interpretation of the term PEM. Commentary on the Article states as follows in Paragraph 21 concerning the definition of a resident.“It would not be an adequate solution to attach importance to a purely formal criterion like registration. Therefore paragraph 3 attaches importance to the place where the company, etc. is actually managed.”

84. Paragraph 24 thereof has defined PEM as follows;“The place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the entity’s business as a whole are in substance made. All relevant facts and circumstances must be examined to determine the place of effective management. An entity may have more than one place of management, but it can have only one place of effective management at any one time.”

85. Given the above provisions of the law, the Tribunal has recently explained the meaning of the term PEM in Judgment – Tat No. 65 Of 2023 M-Kopa Llc (C/O M-Kopa Kenya Limited) Vs. Commissioner Of Domestic Taxes when it stated as thus:-“The POEM is thus where the company is actually managed. Put another way, it is where the key management and commercial decisions that are necessary for the conduct of the entity‘s business are in substance made. This definition is aligned and consistent with the ITA which has defined a resident in regard to corporate persons to mean the place where management and control of the affairs of the corporate body was exercised.”

86. PEM is thus where the key management and commercial decisions necessary for the conduct of the entity’s business are in substance made as was also affirmed in the UK case of Trevor Smallwood Trust v Revenue and Customs, [2008] UKSPC SPC00669 where it was held that:“The POEM was where the key management and commercial decisions that were necessary for the conduct of the entity's business were in substance made, which would normally be where the most senior persons, such as the board of directors, made their decisions. The directors could not be regarded as a rubber-stamp or puppet if they applied their minds to the decision-making process.”

87. Having determined what constitutes a PEM the Tribunal shall now proceed to determine whether the Appellant had its PEM in Kenya.

88. A company may have more than one place of management but can only have a single PEM at any given time. In cases where a company's key management and commercial decisions are made in multiple locations, its PEM will be where those decisions are predominantly or primarily made.

89. There are normally multiple facts that need to be taken into account, often involving multiple locations, and from those facts and locations, it is therefore necessary to determine a single dominant place where effective management is located. Definitive rules cannot be laid down in determining the place of effective management and all relevant facts and circumstances must be examined on a case-by-case basis. The place of effective management test is one of substance over form. It therefore requires a determination of those persons in a company who actually “call the shots” and exercise “realistic positive management” as was stated the in the South African case of Wensleydale’s Settlement Trustees v Inland Revenue Commissioners, [1996] STC (SCD) 241 at 252. where the Court stated thus on the ordinary meaning of place of effective management:“I emphasise the adjective ‘effective’. In my opinion, it is not sufficient that some sort of management was carried on in the Republic of Ireland such as operating a bank account in the name of the trustees. ‘Effective’ implies realistic, positive management. The place of effective management is where the shots are called, to adopt a vivid transatlantic colloquialism.”

90. It needs to be emphasized that the assumption that a company’s place of effective management must be where its board meets is erroneous and has been overtaken by events in today's digital world. The PEM would thus be the location where key management and commercial decisions for the company are made by the directors or the senior managers.

91. The current global definition of what constitutes a PEM frowns on the traditional position of holding the location where the board meets as the ultimate and singular location of the PEM. More so in cases where the board meets and makes decisions in locations that bear no relationship to the company’s activities or the primary location from where the senior managers perform their core duties which keeps the company in operation.

92. Accordingly, it is the role played by senior managers or directors of the company in key management and commercial decisions that is determinative, in determining the PEM, and not the director’s title. This view was affirmed in the United Kingdom’s case of Laerstate v The Commissioner for Her Majesty’s Revenue & Customs [Corporation Tax][2009] UKFTT 209 (TC).

93. The Appellant argued that it is the board of directors that made key decisions and that many of its meetings were held outside Kenya and hence its PEM could not be in Kenya. Ironically, it also argued that the meeting held by the directors in Kenya did not make key decisions. This poses the question of whether the board was making selective locations from where it could make key decisions or whether it was making any key decisions.

94. The Appellant did not also table evidence of the key decisions that were made by the board in the meetings that were held outside Kenya. The determination of PEM is based on facts and circumstances.

95. Accordingly, The Appellant’s failure to provide evidence to support its argument that the board had actually made core decisions affecting the operation of the company in the meetings held outside Kenya meant that it had failed to discharge the burden of proving that it was not a resident in Kenya as enunciated in Section 30 of the TAT Act which states as thus;“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; orb.in any other case, that the tax decision should not have been made or should have been made differently”

96. Moreover, the evidence submitted by the Respondent that:a.The Appelant’s senior managers like the CEO, CFO and CCO who called the shots were residents in Kenya.b.Directors Moore and Hughes had participated in management deliberations.c.Most resolutions of the board Committees that were adopted by the board were deliberated and held in Kenya.Was not disputed and displaced by the Appellant. It thus stood undisputed and proved.

97. The implication of this is that the total of the activities carried out in Kenya ranging from the location of the senior managers, the locus of most committees of the board and the undisputed fact that the Board of Directors held a meeting on 30th April 2020 and approved the consolidation of audited financial statements of M-Kopa Holdings Limited which is a significant instrument in the operations of the Appellant has led the Tribunal to the conclusion that the key decisions regarding the Appellant were made in Kenya.

98. Nothing tangible was tabled before the Tribunal by the Appellant to show that the real conduct of the Appellant’s business was carried out in the UK as was held in De Beers Consolidated Mines Ltd v Howe [1906] AC, 455 where the court stated thus regarding residency”“The head and brains of the company are, as it appears to me, to be found in London, and the real conduct of the adventure takes place there. It does not matter in my opinion whence the subject matter with which the business deals is drawn; the inference which I draw from the facts is that the real business of the company is carried on in London.” (Emphasis added).

99. The Appellant had the statutory burden of responding to and addressing all these issues that were raised by the Respondent. It is only after he has addressed those issues would the burden of proof shift to the Respondent. The Appelant’s failure to discharge its burden of proof that it was managed and controlled from the UK meant that the Respondent’s assertion that the Appellant was managed and controlled from Kenya is presumed to be correct and affirmed as was stated in Kenya Revenue Authority v Maluki Kitili Mwendwa [2021] eKLR where Justice Mativo, as he then was, stated as follows:“Regarding the second justification, a presumption of correctness arises from the Commissioner’s determination/assessment. The presumption remains until the taxpayer produces competent and relevant evidence to support his/her position. When the taxpayer comes forward with such evidence, the presumption vanishes and the case must be decided upon the evidence presented.”

100. Accordingly, and based on the above analysis, the Tribunal upholds the Respondent’s decision that the Appellant’s PEM was in Kenya.

b. Whether the Respondent erred in the appointment of a tax representative 101. The Appellant argued that it was not a tax resident in Kenya during the audit period and as such the appointment of Jesse Moore as its tax representative in Kenya during the audit period was not justified under Section 15(1)(i) of the TPA which allows for the appointment of a tax representative of a non-resident person only if that person is controlling the non-resident’s person’s affairs in Kenya. That the management and control of affairs of the Appellant was vested on the entire Board and not an individual and therefore the Respondent erred in appointing Jesse Moore as its tax representative in Kenya.

102. The Respondent argued that it had complied with the law in appointing Jesse Moore as a tax representative of the Appellant.

103. Section 15(1) of the TPA provides as follows regarding persons who could be appointed tax representatives:“A person is the tax representative of another person for this Act or tax law, in the case of—a.…b.a company within paragraph (a) of the definition in section 3, if that person is the chief executive officer, managing director, company secretary, treasurer, trustee or a resident director or similar officer of the company acting or purporting to act in such a position.c.…(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.”

104. A plain reading of Section 15(1)(j) of the TPA implies that the Respondent can appoint a person acting on behalf of a company or any person who is a tax agent or representative of the taxpayer under tax law or as specified by the Commissioner in writing to be a tax representative of a taxpayer.

105. The law thus imputes that the Commissioner has the discretion and power to appoint any officer of a company to be its tax representative for tax purposes.

106. The Appellant has not denied and or traversed the Respondent’s allegations which inferred that the Appellant’s minutes of the meeting had described Mr. Moore as a member of the management. This in itself affirmed that the said Mr Moore was indeed an officer or a representative of the Appellant as envisaged under Section 15(1) (b) and (j) of the ITA.

107. Based on the above analysis, the Tribunal has concluded that the Respondent did not fall into error when it appointed Jesse Moore as a tax representative of the Appellant.

c. Whether the Respondent’s tax assessment was justified. 108. Having held that the Appellant had a PEM in Kenya, what now remains for the determination of the Tribunal is whether the Respondent’s assessment against the Appellant under the heads of WHT and PAYE were justified.

i. Withholding Tax a. Withholding Tax on Deemed Interest on Redeemable Preferred Shares 109. On WHT on redeemable preference shares, the Appellant submitted that the assessment was not grounded on the law because the Finance Act 2016, which was effective on 9th June 2016 had repealed Section 35 (6) of the Income Tax Act.

110. That the implication of the deletion of Section 35(6) of the ITA is that the withholding tax obligations on a person making a payment were repealed and therefore Respondent was not justified to levy WHT on the Appellant.

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

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

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

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

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

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

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

118. The Tribunal also notes that the assessment under Appeal extended to the year 2020 when the collection of WHT was re-introduced vide Finance Act of 2019 effective from 7th November 2019.

119. The issue that thus remains is whether the WHT assessments for the period commencing 7th November 2019 were justified. The issue for determination therein is whether the Respondent acted lawfully when it held that the the redeemable preference shares for the period under consideration qualified as debt subject to withholding tax as per the provisions of Section 10(c)and 35 of the ITA.

120. Section 10(1)(c ) provides as follows regarding the taxation of interests and deemed interests:“10. (1)For the purposes of this Act, where a resident person or a person having a permanent establishment in Kenya makes a payment to any other person in respect of -(a)…(b)…(c)interest and deemed interest;”

121. Deemed interest is defined as follows in Section 1 of the ITA:“deemed interest” means an amount of interest equal to the average ninety-one-day Treasury Bill rate, deemed to be payable by a resident person in respect of any outstanding loan provided or secured by the non-resident, where such loan is provided free of interest;”

122. The Oxford Reference Dictionary defines a loan as:“Money lent on condition that it is repaid, either in instalments or all at once, on agreed dates and usually that the borrower pays the lender an agreed rate of interest”

123. This means that a loan exists where money is lent and the the lent money is to be repaid at an agreed rate of interest.

124. Nothing was presented before the Tribunal to show that the Appellant received a loan disbursement from any entity. The argument that the rights of preference shares were a debt owed to the holders of preferred shares was moot and far-fetched. For the reason that liability arising from preference shares doesn’t require payment of a fixed charge or an interest. Nothing was also placed before the Tribunal to show how much interest is usually paid on preference shares and how that interest rate was discounted in this case.

125. The issue of deemed interest would only have applied if there was evidence that shareholders had provided loans to the Appellant at nil or an interest rate that was lower than the market rates. The Tribunal has not glanced anything in the parties pleadings to confirm that this was the case.

126. In a sum, the Tribunal is unable to find evidence of the amount owed, the fixed charge that was due from the amount owed, interest payable thereof or the discounted premium or interest that was received by the Appellant in the case of the outstanding preference shares.

127. Accordingly, the funding received by the Appellant in the form of preferred shares does not fall within the meaning of the term loan. Consequently, deemed interest cannot be applied to it.

b. WHT on interest 128. The Appellant submitted that it was not a tax resident in Kenya in the 2018, 2019 and 2020 years of income and as such the Respondent did not have a mandate within the confines of the ITA to demand WHT on interest paid by the Appellant on non-resident third party investor loans.

129. Section 38(1) of the TPA provides as follows regarding late payment interest:“Subject to subsection (2), a person who fails to pay a tax on or before the due date for the payment of the tax shall be liable for late payment interest at a rate equal to one per cent per month or part of a month on the amount unpaid for the period commencing on the date the tax was due and ending on the date the tax is paid.”

130. A plain reading of this provision means that a taxpayer who fails to pay tax on the due date is liable to payment of interest. The Appellant was thus liable to pay penalty and interest on any tax that may have been due and payable for the period commencing from 7th November 2019.

ii. Paye 131. On PAYE, the Appellant averred that it was not tax resident in Kenya in 2018, 2019 and 2020 years of income and as such the Respondent did not have any mandate to tax the remuneration of its employees and senior executives for what they received in the form of stock options.

132. That even if the PAYE was payable, provisions of the Income Tax Act (repealed) which provide for the taxation of remuneration of employees paid through stock options would add up to a tax liability of zero.

133. Section 5(1)(a) of the ITA provides as follows regarding the taxation of income from employment.“(1)For the purposes of section 3(2)(a)(ii), an amount paid to –(a)a person who is, or was at the time of the employment or when the services were rendered, a resident person in respect of any employment or services rendered by him in Kenya or outside Kenya;(b)……….shall be deemed to have accrued in or to have been derived from Kenya.”

134. The facts of this Appeal as discerned by the Tribunal is that the employees of the Appellant who were resident in Kenya received benefits in the form of stock options for the services rendered in Kenya.

135. A Plain reading of Section 5(1)(a) of the ITA cited above is explicit that a resident taxpayer is required to pay tax regarding any employment or services rendered to an employer who is resident in Kenya.

136. For that reason, the payments/benefits made to the employees as compensation for their services fell within Section 5(1)(a) of the ITA and were thus subject to ITA. This position was affirmed in the Judgment of the Tribunal in TAT 076 OF 2023 Japan Port Consultants Limited Vs. The Commissioner of Domestic Taxes, where the Tribunal stated as thus:-“For that reason, the payments made to the employees and consultants of JPC regarding services which were rendered to a Kenyan employer fell within Section 5(1)(b) of the ITA and were thus subject to ITA.”

137. Accordingly, the Respondent did not err in charging PAYE against the Appellant for the benefits paid to its employees.

Final Decision 138. Flowing from the above analysis, the Tribunal finds that the Appeal is partially merited and accordingly makes the following Orders: -a.The Appeal is partially allowed.b.The Respondent’s assessment regarding WHT on interest for the period commencing 7th November 2019 onwards be and is hereby upheld.c.The Respondent’s PAYE assessments be and is hereby upheld.d.The Respondent’s assessment regarding WHT on interest for the period from 6th November 2019 backwards be and is hereby set aside.e.The Respondent’s assessment on withholding tax on deemed interest on redeemable preferred shares be and is hereby set aside.f.Each Party is to bear its own costs.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF AUGUST, 2024ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH - MEMBERDR. TIMOTHY B. VIKIRU - MEMBERABRAHAM K. KIPROTICH - MEMBER