[2023] KETAT 495 (KLR)

Pevans East Africa Limited v Commissioner of Domestic Taxes (Tax Appeal 249 of 2022) [2023] KETAT 495 (KLR) (18 August 2023) (Judgment)

Neutral citation: [2023] KETAT 495 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 249 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, Jephthah Njagi & AK Kiprotich, Members

August 18, 2023

Between

Pevans East Africa Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a company duly incorporated in the Republic of Kenya. Its principal activity for the assessed period was carrying out sports betting business and provided the services through the website, mobile application, Unstructured Supplementary Service Data (USSD) code and short message service (SMS).

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, the Authority is charged with the responsibility of among others, assessment, collection, accounting, and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Appellant was served with a notice of intention to audit on 27th August 2020 and the exercise commenced on 8th October 2020.

4. The Appellant consequently sent records vide its letter dated 21st September 2020 and the preliminary findings were presented to the Appellant on 30th December 2020 and whose tax implication was Kshs. 95,056,820,089. 00.

5. The Appellant responded to the letter of findings on 6th January 2021 seeking for an extension of time to retrieve records. The extension of time was granted via a letter dated 12th January 2021.

6. The Appellant subsequently responded via the letter dated 15th February2021 and provided the supporting documents.

7. The Respondent on 3rd May 2021 wrote to the Appellant requesting for ledgers and the same was provided on 8th June 2021.

8. That after reviewing the Appellant’s response on the preliminary findings a notice of assessment was made to the Appellant on 29th July 2021 for corporation tax, PAYE, Withholding income tax, withholding tax on winnings, reverse VAT and Betting tax all adding up to Kshs. 88,671,470,995. 00, inclusive of penalties and interest.

9. The Appellant objected to the assessment on 27th August 2021 and at the same time conceded to Kshs. 30,012,348. 00 on reverse VAT for November and December 2019.

10. That upon review of the Appellant’s objection, the tax liability was partially allowed, and an objection decision issued on 27th January 2022 confirming tax of Kshs. 17,541,723,797. 00.

11. Being aggrieved by the objection decision, the Appellant filed a Notice of Appeal on 25th February 2022.

The Appeal 12. The Appeal is set on the Memorandum of Appeal dated 9th March 2022 and filed on 10th March 2022 on the following grounds:-a.That the Respondent erred in law and in fact by assessing Corporate Income Tax and Withholding Income Tax (WHT) of Kshs. 181,315,610. 00 on the Appellant for the year 2015 against the provisions of Section 31 of the TPA. Consequently, the Respondent’s Corporate Income Tax and WHT assessments are time-barred.b.That the Respondent erred in law and fact by failing to consider the explanations and documents provided by the Appellant and assessing Corporate Income Tax of Kshs. 5,919,564,618. 00 (inclusive or penalties & interest) after disallowing genuine business expenses which were wholly and exclusively incurred in the furtherance of business.c.That the Respondent erred in law and fact in failing to accept without any cogent reason the documents which clearly showed that direct costs amounting to Kshs. 220,100,000. 00 for the years 2018 and 2019 paid to Tech Pitch Limited (Tech Pitch) were not part of the scope of services offered under the revenue share contract between the Appellant and Tech Pitch dated 1st April 2018. d.That the Respondent erred in law and fact by disallowing WHT on winnings amounting to Kshs. 314,639,919. 00 on the erroneous assertion that the deduction constitutes a tax that is of an income tax nature.e.The Respondent erred in law and fact in introducing a new assessment on purported overclaimed customer payouts amounting to Kshs. 72,499,804. 00 contrary to Section 51 (8) of TPA.f.The Respondent erred in fact in making an assumption that the payouts amounting to Kshs. 72,499,804. 00 were overclaimed yet these were demonstrated to constitute amounts paid out to customers in the course of business.g.That the Respondent erred in law and fact in disallowing marketing expenses totaling to Kshs. 1,149,185,432. 00 comprising of marketing other, TV/Radio advertising, business trips, licenses, sponsorship/partnerships, transport and clearing charges and partnerships/activation costs which were wholly and exclusively incurred in the furtherance of the Appellant’s business.h.That the Respondent erred in law and fact in disallowing marketing and partnerships expenses incurred by the Appellant for brand awareness amounting to Kshs. 1,505,754,957. 00. i.That the Respondent erred in law and fact in failing to review the documents, reconciliations and explanations provided in support of professional and consultancy fees paid to service providers engaged by the Appellant totaling to Kshs. 1,040,464,359. 00 and especially noting that the Appellant appropriately deducted and remitted WHT on these fees to the Respondent.j.That the Respondent erred in law and fact in concluding that legal fees amounting to Kshs. 565, 716,864. 00 incurred by the Appellant on various suits were not incurred wholly and exclusively for business yet the Appellant provided the Respondent with all supporting documents which included invoices, copies of contracts and proof of payment of the legal fee payments.k.That the Respondent erred in law and fact by failing to consider the Appellant’s Transfer Pricing Policy and disallowing shared service expenses amounting to Kshs. 9,069,861,438. 00 incurred by the Appellant as a direct charge for utilizing intra-group shared services central to the Appellant’s business.l.The Respondent erred in fact and law in failing to consider and be guided by the decision on TAT Appeal No. 304 of 2019 and assessing WHT on winnings of Kshs. 5,981,470,509. 00 (inclusive of penalties & interest) on the basis that the Appellant failed to deduct and remit WHT on winnings for the 2019 year of income.m.The Respondent erred in fact and law in failing to consider the reconciliations and supporting documents provided by the Appellant and assessing WHT on local and foreign services of Kshs. 451,255,944. 00 and Kshs. 2,904,356,752. 00 (inclusive of penalties & interest) respectively on the incorrect assertion that the Appellant failed to avail conclusive reconciliations.n.That the Respondent erred in fact and law by assessing reverse VAT of Kshs. 10,895,610. 00 (inclusive of penalties & interest) despite the Appellant’s demonstration that reverse vat assessment relates to supplier invoices issued before the introduction of VAT on imported services (Reverse Charge VAT) for non-VAT registered persons in 2019. o.That the Respondent erred in computing interest of Kshs. 6,350,448. 00 on the purported unpaid reverse VAT of Kshs. 2,873,992. 00 against the express provisions of Section 38 (8) of the TPA which provides that accrued late payment interest shall not, in aggregate, exceed the principal tax liability.p.The Respondent erred in fact and in law by demanding Pay as You Earn (PAYE) of Kshs. 5,729,384. 00 (inclusive of penalties & interest) and further failing to consider the information shared by the Appellant which clearly demonstrates that employment income was appropriately taxed.q.The Respondent erred in assessing betting tax of Kshs. 2,268,450,980. 00 (inclusive of penalties & interest) despite unequivocally agreeing in its Objection decision dated 27th January 2022, with the Appellant’s contention that betting tax is an allowable expense. Further, as the original assessment dated 29th July 2021 did not assess this specific betting tax of Kshs. 2,268,450,980. 00 (inclusive of penalties & interest) the Respondent curtailed and defeated the Appellant’s right to rebut, challenge and mount a defense to the assessment.r.The Respondent erred in law and fact in assessing betting tax of Kshs. 2,268,450,980. 00 (inclusive of penalties & interest) despite the Appellant settling this tax in advance.s.The Respondent erred in law in assessing betting tax of Kshs. 2,268,450,980. 00 (inclusive of penalties & interest) on a matter that is sub judice as the matter is pending for disposition before the High Court of Kenya (Tax Appeal No. E48 of 2021 (as consolidated with Tax Appeal No. E079 of 2021).t.The Appellant requests the TAT to intervene on this matter and consider the substance of the documentary support provided. Further, due to the bulky nature of the documents in support of the appeal, the Appellant will adduce additional documents upon request.u.The Appellant is entitled to administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair as per Article 47 of the Constitution of Kenya. The practice by the Respondent to subject the Appellant to such rigorous exercise of providing proof of every single payment and every single invoice as a prerequisite for allowing the objection is not supported by any tax law and does not meet the threshold of Article 47 of the Constitution of Kenya.

The Appellant’s Case 13. The Appellant’s case is set on the documents herein below given:a.The Appellant’s Statement of Facts filed on 10th May 2022. b.The Appellant’s written submissions dated 9th February 2023 and filed on 14th February 2023. c.The Appellant’s witness statement of Mwirigi Imungi dated and filed on 16th December 2022 and which was admitted in evidence during the hearing on 26th January 2023.

14. The Appellant averred that the Respondent was time barred in demanding income tax and withholding tax amounting to Kshs. 181,315,610. 00. 00 for the 2015 year of income which is beyond the stipulated five (5) years period for issuance of an assessment.

15. The Appellant further averred that it submitted year 2015 self-assessment returns on 20th June 2016. That the Respondent’s issuance of an assessment on 29th July 2021 is outside the five (5) year period from the date of submission of the self-assessment return and the assessment is therefore null and void ab initio.

16. The Appellant submitted that the Respondent assessed Corporate income tax on cost of sales adjustments. The costs in issue included expenses relating to services provided by Tech Pitch, overclaimed costs of sales, overclaimed pay outs expenses, shared service expenses, legal fees expenses, expenses related to professional fees and consultancy fees expenses. That all these costs were necessary in maintaining and running the Appellant’s business and the law provides for the deduction of the same before ascertaining the taxable income.

17. The Appellant averred that the Respondent assessed WHT tax on winnings paid to punters for the 2019 year of income in complete disregard to the TAT decision in Appeal case No. 304 of 2019 and to the High Court injunction issued on 22nd May 2014,

18. That the High Court of Kenya injunction issued on 22nd May 2014 stopping the Respondent from demanding and collecting WHT on winnings pending the hearing and determination of a suit filed at the High Court. That the injunction was in effect till 29th March 2019.

19. The Appellant averred that the Respondent had no basis in assessing WHT on winnings for the period between 22nd May 2014 and 29th March 2019. That the Respondent's assessment of WHT tax on winnings for the period between 1st January 2019 and 29th March 2019 is unlawful and violates the orders of a competent court.

20. That on 6th November 2019, a separate judgment was delivered on Tax Appeal No. 304 of 2019 in relation to the taxation of winnings in the betting industry. That TAT's determination was that winnings in accordance with the provisions of the ITA excludes stake of punters and therefore the Respondent had no basis in demanding WHT on punter’s stake.

21. The Appellant averred that with effect from 30th March 2019 after the High Court injunction was lifted on 29th March 2019, it deducted WHT on winnings (amounts excluding punters stake) and proceeded to remit WHT on the same to the Respondent in accordance with the provisions of the ITA.

22. That the TAT judgement as delivered on 6th November 2019 affirmed that the Appellant's understanding of the definition of winnings was correct hence the Appellant's computation of WHT on winnings between 30th March 2019 and June 2019 was accurate. That this understanding is the issue in dispute as the Respondent erroneously re- computed WHT on payouts, without taking into account the stakes placed by the punters. The re-computation of WHT on winnings resulted into a flawed and excessive assessment.

23. That the Respondent’s decision is on the premise that the Judgement in TAT 304 of 2019 is immaterial as the same has been appealed against in the High Court.

24. The Appellant added that it is obligated to conduct business in conformity with the TAT’s Judgement and that the Respondent’s approach to set aside the Judgement on the claim that there is an active Appeal on the matter is unprecedented in jurisprudence and is effectively an usurpation of judicial authority.

25. On the WHT in respect of local services and foreign services the Appellant submitted that the Respondent confirmed the initial assessments of Kshs. 451,255,944. 00 and Kshs. 2,904,356. 75, respectively, but alleged that the Appellant failed to provide a conclusive reconciliation of the amounts withheld and the payments made.

26. The Appellant averred that for the period under review it provided conclusive reconciliations showing the service paid, dates paid and the WHT deducted and paid to the Respondent.

27. That the Respondent assessed reverse VAT amounting to Kshs. 10,895,610. 00 on the basis that the Appellant procured imported services in the year 2019 and did not account for reverse VAT.

28. The Appellant also contended that it was engaged in the provision of online sports betting services until its operating license was suspended in June 2019. That prior to this suspension, the Appellant's services were exempt from VAT in accordance with Part B of the First Schedule to the VAT Act, 2013 hence the Appellant was not registered for VAT.

29. The Appellant averred that the Respondent charged PAYE amounting to Kshs. 1,999,473. 00 on the basis that there was a variance between salaries and wages declared in the audited accounts and the Appellant’s payroll. That the Appellant had also failed to supply the documents to support the variance.

30. The Appellant on the PAYE issue submitted that it supplied the Respondent with all the necessary documents and the Respondent disregarded the same.

31. That the Respondent originally disallowed for income tax purposes an amount of Kshs. 1,683,418,900. 00 being betting tax expense on the premise that betting tax is not an allowable expense for income tax purpose.

32. That at the Objection review stage, the Respondent in its letter dated 27th January 2022 unequivocally allowed the total betting tax expense of Kshs. 1,683,418,900. 00 (including the Kshs. 1,272,469,133. 00 self-declared by the Appellant as underpaid betting tax) as an allowable deduction, effectively ruling in favor of the Appellant's objection on this specific item.

33. That the Respondent at the objection stage vide its letter dated 27th January 2022 purported to raise a new assessment on betting tax amounting to Kshs. 1,694,269,557. 00. That this is contrary to Section 51 (8) of TPA.

34. The Appellant also averred that it paid an amount of Kshs. 1,900,000,000. 00 to the Respondent on account and in good faith for its betting license to be re-instated pending judgment on the issue of withholding tax on winnings at the Tax Appeals Tribunal. That after the ruling, the Appellant applied to the Respondent requesting for an offset of the self-assessed tax of Kshs. 1,272,469,133. 00 against the amount paid on account of Kshs. 1,900,000,000. 00.

35. The Appellant further averred that on 21st August 2020, the Respondent informed the Appellant that it would not offset the betting tax with the tax paid on account. That the Respondent's refusal to refund and or set off the tax paid on account against the impugned betting tax amounts to deprivation of the Appellant's property and offends the Appellant's Constitutionally guaranteed protections.

36. The Appellant stated that aggrieved by the Respondent's decision, it appealed to the TAT on 4th September 2020 and the same was ruled upon on 16th April 2021.

37. That both parties appealed to the High Court on the TAT decision and the two appeals are pending before the High Court. That as the matter is the subject of Court proceedings, the Respondent's action is sub judice.

Appellant’s Prayers 38. The Appellant prayed for Orders, that:a.The review decision of the Respondent contained in the letter dated 27th January 2022 demanding payment of Kshs. 17,541,723,797. 00 be set aside in its entirety.b.The Respondent was time barred in demanding taxes for the 2015 year of income which is beyond the stipulated five-year period for issuance of an assessment.c.The Appellant sufficiently supported, evidenced and demonstrated full tax compliance in its operations.d.The Appeal be allowed

The Respondent’s Case 39. The Respondent’s case is premised on the hereinbelow indicated documents.a.The Statement of Facts dated and filed on 8th April 2022. b.The written submissions dated 10th February 2023 and filed on 15th February 2023.

40. The Respondent outlined the following issues for consideration in the matter by the Tribunal, summarized into two as hereinunder:i.Whether the Appellant has a valid Appeal before the Tribunal;ii.Whether the Respondent was justified in raising the assessments for the taxes specified in the objection decision

Whether the Appellant has a valid Appeal before the Tribunal 41. The Respondent puts to question the validity of the Appeal before the Tribunal in consideration of Section 52 of the Tax Procedures Act which provides as follows:A notice of appeal to the Tribunal relating to an assessment shall be valid if the taxpayer has paid the tax not in dispute or entered into an arrangement with the Commissioner to pay the tax not in dispute under the assessment at the time of lodging the notice‖.

42. The Respondent submitted through a self-disclosure letter, that the Appellant had accepted liability for betting tax due and amounting to Kshs. 1,272,469,133. 00. That the tax was not paid before the filing of the Appeal and it remains due at this juncture of the Appeal.

43. That the Appellant averred that the amount had been paid via an earlier amount of Kshs. 1,900,000,000. 00 paid to the Respondent and held on account pending the judgement on the issue of Withholding tax on winnings and that the Appellant therefore wished to offset the self-declared betting tax vide this amount held by the Respondent. That the Respondent's position on the same is that this is not possible and that this was communicated to the Appellant.

44. The Respondent further submitted that as there is an appeal before a higher Court on the issue of withholding tax on winnings, the monies held in account on behalf of the Appellant cannot be dispensed with in order to settle other taxes.

45. The Respondent in the circumstances submitted that the Appellant has not settled the taxes due and cannot therefore claim to have a valid appeal before the Tribunal.

Whether the Respondent was justified in raising the assessments for the taxes specified in the objection decision. 46. The Respondent submitted firstly on the issue of the income tax and the necessary expenses to be considered in determining the taxable income. It stated that it considered all the expenses claimed by the Appellant and allowed and or disallowed the same depending on different factors related to the same.

47. The Respondent added that it took into consideration the evidence in support of the expense(s), whether the expense is legally tenable, whether the same was wholly and exclusively expended in support of the Appellant’s business operations. That on the basis of the aforesaid factors it made a legally sound conclusion on the application of the expenses thus allowing or disallowing the same.

48. The Respondent submitted that the assessed Withholding tax on winnings was Kshs. 5,981,470,509. 00 for the period 2019.

49. That WHT on winnings was introduced by the Finance Act 2013, which came into effect from January 2014 at the rate of 20%. That the Finance Act 2015 amended the rate from 20% to 7. 5%. That the Finance Act 2016 repealed the Section of the law on taxation of winnings but the same was re-introduced by the Finance Act 2018 at the tax rate of 20% effective from 1st October 2018.

50. That in the TAT judgment for Appeal No. 304 of 2019, the Tribunal found that,Prior to 2018, winnings had the following definition in the ITA; Winnings has the meaning assigned to it in the betting, lotteries and gaming Act.

51. The Respondent added further that on 25th June 2018, Parliament enacted the Tax Law Amendment Act 2018, which came into effect on 1st July 2018. That the scope of winnings was limited to payments made less stakes by punters by substituting the existing definition with the following;Winnings means the positive difference between payments made and stakes placed in a given month, for each player, payable to punters by bookmakers licensed under the BLGA.‖

52. The Respondent stated that the Finance Act 2018 assented to on 21st September 2018 at Paragraph 2 thereof amended Section 2 of the ITA by inserting the following new definition in proper alphabetical sequence—b.by deleting the definition of the word ―winnings‖ and substituting therefore the following definition—―Winnings‖ includes winnings of any kind and a reference to the amount or the payment of winnings shall be construed accordingly; Part 1 of the Finance Act 2018 provides that, ―This Act may be cited as the Finance Act, 2018, and shall come into operation, or be deemed to have come into operation, as follows—Sections 48, 49, 50, 54, 56, 58, 60, 61, 62, 63, 64, 65, 66, 67, 68, and 78, on the 1st October, 2018;

Sections 4, 6, 7, 11(a), and 11(c) on the 1st January, 2019;

all other sections on the 1st July, 2018. ‖

53. The Respondent further stated that in the High Court of Kenya Constitutional Petition, no 9 of 2018, The Honourable Judge H P G Waweru, ruled as follows;―Definition of ―Winnings‖ under Section 2 of the Income Tax ActThe Petitioners have challenged the definition of ―winnings‖ in section2 of the Income Tax Act as amended by the Finance Act, 2018. The intention of the legislature in enacting the new definition was to widen the tax base. It is not for this court to determine if ―winnings‖ from betting, etc. should be taxed, or how such tax should be collected or administered. That is the province of the National Assembly.I do not find any ambiguity or un-constitutionalism in the new definition of winnings at all. Any practical difficulty in collection of the withholding tax that may come to light will not amount to un- constitutionalism; it will be a matter be taken up with Kenya Revenue Authority for better management of the tax.‖

54. The Respondent also submitted that the Finance Act 2018 was to be effected retrospectively. That as a general principle, enacted laws should not have retrospective effect. That there may be exceptions to this principle. That it is up to the person urging any retrospective effect to demonstrate acceptable (that is, Constitutional and legal) exception to this well know principle and that none had been demonstrated by the Respondent.

55. That to the extent therefore that any effective date for the taxation on ―winnings‖ as expanded by the new definition would fall outside the coming into effect of the Finance Act, 2018, that would be illegal and unconstitutional.

56. That the Appellant had contended that the basis of computation of withholding tax on winnings had been heard at the TAT and a ruling made whereby the Tribunal indicated that winnings as stipulated in the Income Tax Act refers to pay-outs by the licensee but does not include the amount staked by the bettor i.e. the difference between gross pay-outs and the stakes placed by the punter.

57. The Respondent submitted that in analyzing the response, the reconciliation provided for the variances in the year 2018 by the Appellant had no supporting data. That in addition, the Respondent requested for a system report giving a breakdown of winnings and stakes related to winnings which was not provided. That further there is a pending appeal at the High Court on the TAT ruling.

58. The Respondent also submitted that in the computation of the outstanding taxes it had taken into consideration prior assessments and withholding tax on winnings already paid as per the table below:Description 2019 KShsPay-outs as per FS 80,020,511,503WHT Computed – 20% 16,004,102,301WHT Already assessed (Various Assessments) (9,850,830,019)Variance (New Assessment) 6,153,272,282WHT Paid (1,818,873,362)WHT Outstanding 4,334,398,920Penalty 20% 866,879,784Interest 1% 780,191,806Tax Due ,981,470,509

59. The Respondent on WHT on winnings, submitted that it confirmed the assessment, having reviewed the Appellant’s grounds of objection on this issue and noting that there is an active Appeal by the Respondent on the decision of the Tax Appeals Tribunal.

60. The Respondent on WHT on income tax submitted that the Appellant failed to provide a conclusive reconciliation of the amounts withheld and the payments made in respect of the local services, foreign services and other categories like royalties and dividends. That the Commissioner therefore rejected the grounds of objection and the initial assessment was confirmed.

61. The Respondent on the issue of reverse VAT noted that the Appellant conceded and paid tax not in dispute amounting to Kshs. 30,012,348. 00. That taking into consideration that the Appellant did not provide evidence to show that the invoices used by the assessing team had been duplicated as contended by the Appellant, the Respondent confirmed the assessment on the balance of Kshs. 3,411,061. 00.

62. On the PAYE claim, the Respondent averred that it analyzed the salaries and wages expense using the Appellant’s PAYE returns and the salaries expense in the financial statements and this resulted in variances.

63. That the Appellant provided a reconciliation stating that the variance for years 2016 and 2017 related to payments to interns and pension for executive staff. That the primary supporting documents were not provided and the Respondent confirmed the assessment.

64. The Respondent also averred that from the withholding tax schedules provided and withholding tax payments from the iTax system it noted payments made to individuals who also appeared in the PAYE data.

65. That the Appellant contended that the individuals paid were consultants, event hosts, influencers, athletes, presenters e.t.c, and that there are decided cases on whether an individual is an employee or a consultant. That in addition, the contracts clearly stated that they were independent contractors.

66. The Respondent submitted that it requested for the specific service contracts for the affected individuals and that a review of the contracts indicated that three (3) individuals were employees of the Appellant. That the Respondent therefore confirmed the assessment for the three (3) noting that they were not independent contractors.

67. The Respondent also noted that there were other benefits enjoyed by the staff under the following expense lines; staff welfare, rent and rates, subscriptions and staff medical insurance that were not charged to tax.

68. That the Appellant contested on the taxation of the benefits and that the Respondent reviewed the evidence in support of the same and consequently allowed some not to fall under taxation and disallowed and confirmed the rest as taxable.

69. The Respondent contended that the Appellant had underdeclared on the betting tax. That the Respondent reviewed this issue in line with the grossed- up revenues under the Corporation tax assessment and reworked the betting tax based on the declared revenue as per the financial statements and the declared pay outs.

70. The Respondent averred that further this was compared with the betting tax expense claimed and a variance of Kshs. 1,694,269,557. 00 was established. That in addition, an over claimed pay-outs in the year 2018 of Kshs. 72,499,804. 00 was noted and this formed part of the confirmed tax under Corporation tax as part of direct costs review.

Respondent’s Prayers 71. The Respondent prayed for:a.The Appellant’s Appeal to be dismissed for lack of merit.b.The Respondent’s decision and resultant tax demand be upheld.c.The Respondent be awarded the costs of the Appeal

Issue For Determination 72. The Tribunal upon considering all that has been presented by the parties was of the view that there is only one issue falling for its determination namely:Whether the Respondent was justified in raising the assessment on Withholding tax on ―Winnings‖

Analysis And Findings 73. The parties herein filed a partial Consent dated the 19th June 2023 and filed with the Tribunal on 26th June 2023, the consent indicated that the only tax liability to be determined by the Tribunal was on Withholding tax on winnings. The Consent was adopted as a partial Judgement in the matter by the Tribunal on 1st August 2023.

74. Having identified the only issue outstanding for determination in the matter, the Tribunal proceeded to analyze the same as hereunder.

75. The Respondent issued the Appellant with the objection decision dated 27th January 2022 and it contained several tax heads including Corporation tax, Withholding tax on winnings, Withholding tax on local services, Withholding tax on foreign services, reverse VAT, PAYE and the Betting tax.

76. The Respondent upon filing its submissions had raised the issue of the Appeal being invalid alleging that at the time the same was filed the Appellant was owing the Respondent Kshs. 1,272,469,133. 00 as admitted betting tax and which amount the Appellant had not paid. However, the issue on the betting tax was settled as part of the Consent aforementioned in clauses 5 and 8. The clauses determined the betting tax due and owing and the mode of settling the same. The submission on the validity of the Appeal was thus spent.

77. The Respondent had assessed the Appellant on Withholding tax on winnings for the period of the year 2019 and the Appellant’s response to the assessment was that it had paid all that it owed for the review period.

78. The Appellant argued that for the period between January and March 2019 it had no obligation for WHT as there was a Court order barring the Respondent from demanding and collecting WHT on winnings.

79. The Tribunal noted that the orders were issued pending the hearing and determination of the Court case Milimani Commercial Courts CMCC No. 1662 of 2014. The restraining orders covered the period 22nd May 2014 to 29th March 2019. They were lifted by the consequential Court orders of 29th March 2019. The two orders are annexed to the Appellant’s documents and they are not disputed by the Respondent. During their existence the Appellant was not bound to pay the taxes demanded by the Respondent.

80. The Appellant also argued that as regards the period between April and June 2019 it paid the tax due and the same was calculated by deducting WHT on winnings (amounts won and excluding the punter’s stakes) and remitted the same to the Respondent. The Appellant added that for the rest of the year it was not operating as its license had not been renewed and its operations had stalled.

81. The Appellant further argued that in computing its tax dues for 2019 it took into consideration the Judgement of TAT in its case No. 304 of 2019 which had determined that winnings in accordance with the provisions of the ITA excludes stakes of punters and the Respondent had no basis therefore of demanding WHT on the punters stakes.

82. The Respondent on its part argued that the law provided for the payment of WHT on winnings by the Appellant as per the provisions of the Finance Act 2018 and that though there was the TAT decision (TAT 304 of 2019) on the computation of WHT on winnings, there was also in existence an active Appeal by the Respondent on the same.

83. The parties’ main gist of contention is on the computation of WHT on winnings. The Appellant argued that winnings in accordance with the provisions of the ITA excludes the stakes of punters and the Respondent therefore had no basis of demanding WHT on the punter’s stake. The Respondent on the other hand computed WHT on payouts without taking into account the stakes placed by the punters, that is, it included the punter’s stakes in the computation.

84. The applicable law on WHT on winnings is laid down in the ITA together with the subsequent amendments and the same can be summarized as hereunder:a.Prior to 2018, winnings had the definition in the ITA as:―Winnings‖ has the meaning assigned to it in the Betting, Lotteries and Gaming Act;b.The Tax Law (Amendment Act), 2018 which came into effect on 1st July 2018 defined winnings as:―Winnings‖ means the positive difference between payments made and stakes placed in a given month, for each player, payable to punters by bookmakers licensed under the Betting, Lotteries and Gaming Act‖c.The Finance Act 2018 which came into effect on 1st July 2018 amended Section 2 of the ITA as follows:(b)by deleting the definition of the word ―winnings‖ and substituting therefore the following definition-―Winnings‖ includes winnings of any kind and a reference to the amount of the payment of winnings shall be construed accordingly‖.

85. The meaning of the term ―winnings‖ was one of the issues to be determined in the TAT case No.304 of 2019. The Appellant in the present matter was also a party to the same together with some other interested parties in the same industry. The Tribunal determined that;―Winnings as stipulated in the ITA refers to pay-outs by the licensee but does not include amounts staked by the bettor‖.

86. The Appellant argued that it had used the TAT case’s definition of the term ―winning‖ in calculating the taxes due and the Respondent had argued that it was not bound by the same as it had an Appeal on the issue pending.

87. The Tribunal noted that it had already determined the meaning of winnings in that matter and the decision still is subsisting and applicable until the higher court makes a contrary decision. The calculation of the Appellant therefore was the right one in the circumstances.

88. The Tribunal also took into consideration the holding in the Cape Brandy Case on the interpretation of the tax statute where it was held that:In a taxing Act clear words are necessary in order to tax the subject……..one has to look merely on what is clearly said. There is no reason for any intendment …………..Nothing should be read in, nothing should be implied. One can only look at the language used…‖

89. Similarly, in Scott vs. Rusell [1948] 2 ALL ER it was stated as follows:-there is a maxim in Income tax law which, though it may sometimes be over stressed, yet ought not to be forgotten, It is that the subject ought not to be taxed unless the words of a taxing statute unambiguously imposes the tax on him‖.

90. The Respondent had also argued that the Appellant had failed to supply it with the evidence to show specifically what constituted the ―punters stakes‖ and the ―winnings‖. The Tribunal perused the documents filed by the Appellant on the issue. It noted that the Respondent requested for the data on 13th October 2021 and on 22nd November 2021.

91. The Tribunal also noted that the requested evidence was supplied by the Appellant as per its email dated 9th December 2021 and which email indicated that the Appellant had attached the data on the winning stakes of 2019. Some of the evidence thus supplied, as per the correspondence of the parties, included the raw data of the Appellant’s clientele.

92. The Tribunal has also noted that the parties discussed the details of the data in question with the Appellant raising the issues initially of the confidential nature of the same and the risk of the third parties whose data was being exposed staking legal claims on the same against the Appellant. The parties finally agreed and all the data that the Respondent required was supplied. The Respondent therefore cannot claim that the Appellant failed to conform to its request.

93. The Tribunal has also taken into consideration the provisions of the Finance Act 2016 which amended Section 35 of the ITA by deleting Paragraph 35 (6). The import of this amendment was that where a person failed to withhold tax as prescribed, the Commissioner cannot demand tax not withheld from that person who should have withheld. Consequently, the Respondent cannot demand WHT from the Appellant as if it was tax due from it. It is to be appreciated that when Parliament intended WHT to be recovered from the withholding agent as if it was tax due from it, the legislation clearly stated so.This was not a tax due from the Appellant.

94. The Tribunal taking into consideration the facts of the matter and the applicable law makes a decision that the Appeal is meritorious and makes the orders as herein below spelt out.

Final Orders 95. The upshot of the foregoing analysis is that the Appeal is partially merited and the Tribunal accordingly proceeds to make the following Orders: -a.The Appeal be and is hereby partially allowed in the following terms.i.The partial judgement is hereby confirmed in terms of the Consent dated on 19th June 2023 that was filed on the 26th June 2023 and adopted on the 1st August 2023 as a part Judgment of the Tribunal.ii.The Respondent’s objection decision dated 27th January 2022 be and is hereby set aside relating to the withholding tax on winnings.b.Each party to bear its own costs

96. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 18TH DAY OF AUGUST, 2023. ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERGRACE MUKUHA - MEMBERJEPHTHAH NJAGI - MEMBERABRAHAM K. KIPROTICH - MEMBER