[2024] KETAT 113 (KLR)

Preferred Personnel Limited v Commissioner of Domestic Taxes (Tax Appeal 1149 of 2022) [2024] KETAT 113 (KLR) (Civ) (2 February 2024) (Judgment)

Neutral citation: [2024] KETAT 113 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tax Appeal 1149 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, E Ng'ang'a, AK Kiprotich & B Gitari, Members

February 2, 2024

Between

Preferred Personnel Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a network of professionals providing Human Resource (HR) solutions to better growth of its clients.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and KRA 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 Respondent issued an assessment in a letter dated 28th June, 2022 in which it demanded an additional tax amounting to Kshs. 157,824,499. 00 which comprised of Kshs. 111,931,320. 00 in principal tax and a total penalty and interest of Kshs. 45,893,179. 00. The taxes assessed comprised Corporation tax, Withholding tax (WHT) and Value-Added Tax ("VAT").

4. The Appellant partly objected to Kshs 111,931,320. 00 (in principal tax) of the additional assessment and conceded to Kshs 2,809,052. 00 (in principal tax) as per Section 51(3) of the Tax Procedures Act, 2015. The Appellant's notice of objection dated 22nd July, 2022 was received by the Respondent on 25th July, 2022.

5. The Respondent issued and delivered its objection decision dated 12th September, 2022. In the aforesaid objection decision, the Respondent amended the additional assessment to Kshs. 153,803,747. 00 which comprised of Kshs. 109,115,724. 00 in principal tax and a total penalty and interest of Kshs. 44,688,023. 00.

6. The Appellant being dissatisfied with the Respondent’s decision filed a Notice of Appeal dated and filed on 26th September, 2022.

The Appeal 7. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal dated and filed on 7th October, 2022:a.That the Respondent failed to take into account all information and explanations (including documents) provided by the Appellant before arriving at the objection decision.b.That the Respondent wrongfully charged Value Added Tax (VAT) on reimbursed salary and staff costs despite correctly describing the Appellant's business as human resource outsourcing and support services.c.That the Respondent wrongfully assessed VAT after dismissing the existence of an agency relationship between the Appellant and its clients despite describing the services offered as recruitment and outsourcing services.d.That the Respondent wrongfully assessed VAT on reimbursed staff costs after comparing the human resource outsourcing service offered by the Appellant with labour outsourcing services offered in the market.e.That the Respondent unfairly assessed income tax on allowed tax credits after disregarding the shortcomings in its system for offsetting of income tax credits against future liabilities.f.That the Respondent's demand of Kshs 153,803,747. 00 is excessive, punitive and beyond the ability of the Appellant to pay contrary to generally accepted cannons of taxation.

Appellant’s Case 8. The Appellant’s case is premised on the following documents:a.The Appellant’s Statement of Facts dated and filed on 7th October, 2022 together with the documents attached thereto.b.The Appellant’s witness statement of Aggrey Ratemo dated 26th April, 2023 and filed on 8th May, 2023; admitted as evidence under oath on 17th October, 2023.

9. That the VAT assessment raised by the Respondent was derived from the variance between total sales declared in the filed VAT returns and annual income tax returns. The Appellant explained this variance not subjected to VAT in its filed self-assessment returns as incidental reimbursements that do not qualify as 'taxable value' under the VAT Act.

10. That these reimbursements are disqualified as both 'taxable supplies' and 'taxable value' under the VAT Act because of the following reasons:a.The reimbursements represent employment income that is not a 'taxable supply' under the VAT Act; andb.The reimbursements in question are 'incidental costs' that do not qualify as 'taxable value'.

11. That under the HR support outsourcing service, the Appellant focuses on offering various support services to clients such as payroll administration, HR administration, legal compliance and benefit administration. That the role of payroll administration involves dispatching the salaries and related statutory deductions.

12. That Section 2 of the VAT Act defines taxable supply as follows:“taxable supply” means a supply, other than an exempt supply, made in Kenya by a person in the course or furtherance of a business carried on by the person, including a supply made in connection with the commencement or termination of a business;”

13. That Section 2 of the VAT Act defines business as follows:“business” means –a.trade, commerce or manufacture, profession, vocation or occupation;b.any other activity in the nature of trade, commerce or manufacture, profession, vocation or occupation;c.any activity carried on by a person continuously or regularly, whether or not for gain or profit and which involves, in part or in whole, the supply of goods or services for consideration; ord.a supply of property by way of lease, licence, or similar arrangement, but does not include-(i)employment…”

14. That salaries and statutory deductions that the clients of the Appellant are reimbursed represent consideration for personnel employed by and working for those clients. That one of the conditions of a taxable supply is that the supply must be in the course or furtherance of a business. That a business is expressly defined to exclude 'employment' activities. That it is for this reason that the Appellant disagrees with the VAT assessment on the employment income reimbursed by the Appellant's clients.

15. That the Respondent has argued in its objection decision that the human resource outsourcing service offered by the Appellant is a professional service offered in the course or furtherance of its business. That the Appellant agrees to this and emphasizes that the consideration for this professional service is the mark-up it receives. That the recharged salary and staff costs are actual direct costs that do not form the Appellant's consideration.

16. That the outsourcing of HR support services by the Appellant's clients does not in any way amount to transfer of the human resources to the Appellant. That on the contrary, the service of HR support only hands over the administrative duties of payroll administration, benefit administration, legal compliance and HR administration to the Appellant. That it is these services that the Appellant is contracted and remunerated for, and creates an agency relationship under the substance-over-form principle.

17. That the Respondent has actually erred in referring to the service as 'HR/ labour outsourcing' instead of 'HR support outsourcing' service. That support implies that the Appellant's client and employee (human resource) are substantially the main parties, while the Appellant is merely an agent of its client hired to offer the administrative services, payroll administration, benefit administration, legal compliance and HR administration.

18. That the labour support outsourcing service and business model adopted by the Appellant is fundamentally different from other service providers like security companies/ agencies, cleaning companies, construction companies, etc. That there are two major differences:a.Unique and specially skilled personnel – That the Appellant's clients operate in a variety of industries requiring specific skills to be competitively sourced and screened by both the Appellant and its clients. That this is unlike other service providers such as security firms that recycle their personnel because of standard employee skills that meet requirements of multiple clients. In addition the Appellant is further expected to offer HR support services to maintain and retain the employee(s), and has no authority to reassign the resource to multiple clients.b.Process of separation – That unlike security firms, the Appellant;i.Does not retain any employee(s) whose 'employer' has terminated its contract with the Appellant.ii.Upon instruction from the client, the Appellant’s employees can be 'absorbed' by the client firm and continue to provide their skills to the 'employer', as there is no interference with the services offered by the Appellant.iii.Does not retain any employee(s) when the Appellant terminates its contract with the 'employer'

19. That in summary the personnel hired by the Appellant can only be terminated by the acts of the client they are serving. That these terms have been specified in the sample agreements provided that outline the nature of the relationship between the three parties.

20. That the mere fact that the Appellant's clients transfer salaries for payment by the Appellant should not be viewed legally as taking of the 'employer' role; but rather a task that is 'incidental' to the payroll administration function of the HR support service offered by the Appellant. That Section 13(5) of the VAT Act provides as follows:“any incidental costs incurred by the supplier of the services in the course of making the supply to the client: party as an agent of his client, then such disbursement shall be excluded from the taxable value.”

21. That the strict application of the statutes presented above has been recommended by this Tribunal in the judgment of Appeal No. 638 of 2021 between Southern Cross Safaris (MSA) Ltd v Commissioner of Investigations & Enforcement as follows:“In often cited double edged case that establishes the principle in tax law that tax statutes must be interpreted strictly, Partington v AG [1869] LR 4 HL, Lord Cairns stated thus:“If a person sought to be taxed comes within the letter of the law, he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be. In other words, if there be admissible in any statute what is called an equitable construction, certainly such a construction is not admissible in a taxing statute, where you simply adhere to the words of the statute.”

22. That the interpretation of the cited VAT Act provisions by the Appellant was approved in the case of Reed Employment Ltd v Revenue & Customs [2011]UKFTT 200 (TC) where it was determined as follows:“86. In these circumstances, having regard to the contracts between Reed and the client and the temp worker, and the facts as a whole, viewed objectively, we find that the economic reality is that the supplies by Reed to its clients in respect of the temp workers are supplies of introductory services and other ancillary services, including evaluation of the temp worker's capabilities, the taking of references and a payments service with respect to the payments of the pay rates to the temp worker.88. In our view, in ascertaining the nature of a supply it is relevant to have regard to what it is that the supplier is capable, as a matter of contract, of providing, and on that basis to consider what in economic reality has been supplied. In the case of Reed, at no time did Reed exercise control over its temp workers, such that control could be ceded by Reed to its clients. The obligations owed by a temp worker to Reed did not amount to an ability of Reed to exercise control over the temp worker, and in any event those obligations commenced only after the temp worker had accepted the assignment, and accordingly had come under the control of the client. The making of a supply of staff must in our view, at the least, connote a passing of control of staff from the supplier to the person receiving the supply. There is no such passing of control in this case. Absent that factor, Reed was capable only of making a more limited supply, which can, in our view, be characterized only as a supply of introductory services, along with the ancillary services to which we have referred.”

23. That in regard to the Corporation tax assessment, that this assessment comprises of expenses that the Respondent has disallowed from the Appellant's filed income tax returns. That the reasons for disallowing the expenses have been outlined in the objection decision and range from failure to justify allowability of the expenses or present information/ documents supporting the nature of the expenses.

24. The Appellant contended that the Respondent may have willfully and capriciously ignored most of the information and documents presented as evidence in explaining the issues that gave rise to the assessed Corporate tax. That this is despite the fact that the Appellant asserted bearing the burden of proof in full as set out by this Tribunal in the case of Appeal no. 133 of 2020 Samich Construction Ltd v Commissioner Domestic Taxes as follows:“74. The Tribunal made reference to case TAT No. 115 of 2017; Digital Box Ltd v Commissioner of Domestic Taxes, where the Tribunal held that the taxpayer bears the burden of proof and which burden is discharged by adducing evidence. The Tribunal relied on the decision in Alfred Kioko Muteti v Timothy Miheso & Another [2015] eKLR where the Court held that:“....a party can only discharge its burden upon adducing evidence. Merely making pleadings is not enough. In reaching its findings, the Court stated that: "Thus, the burden of proof lies on the party who would fail if no evidence at all were given by either party....”75. It is the Tribunal's view that the Appellant failed to prove that the tax liability was wrongly assessed considering that the tax was reduced to Kshs. 191,707,829. 15 from Kshs. 257,383,775,bearing in mind that the Appellant originally failed to submit the required documents in time.”

25. That in regard to unreconciled staff cost variance, the Appellant already provided additional information reconciling this variance in its notice of objection. That in summary all the seemingly 'overstated' staff costs have been reconciled to negative amounts.

26. That the Respondent denied in its objection decision receiving any additional information and explanations addressing concerns raised in a meeting with the Appellant's tax agent dated 8th September, 2022. That on the contrary, the information was sent to the Respondent in an email dated 9th September, 2022 as agreed.

27. That in regard to disallowed professional fees and overclaimed expenses in the year 2018, the Appellant observed in its notice of objection that the Respondent's numbers neither correspond to the figures in the filed income tax returns, audited accounts or trial balance (ledger accounts) for the year 2018. That as for professional fees, the Respondent demanded for additional supporting documents. That unfortunately the Respondent again denied in its objection decision receiving the additional information requested in the Meeting of 8th September, 2022 as already demonstrated above, despite the same being shared in emails dated 8th and 9th of September 2022.

28. That in regard to amendment of year 2017 filed income tax return, according to the Respondent's objection decision, the Appellant failed to provide additional information supporting the grounds presented in its notice of objection. That the Appellant attached a copy of the email dated 8th September 2022 sent by the Appellant's tax agent with the information requested during a Meeting with the Respondent on the same date.

29. That in regard to effect of tax credits, the Appellant objected to the disallowing of this adjustment on the basis that the iTax system did not permit the application of refund of the overpaid taxes. That furthermore Finance Act 2022 provided a 'legal remedy' to the system's inefficiency by permitting the transfer of any instalment taxes in a year with a tax credit without requiring a refund application. That Section 47 of the Tax Procedures Act (TPA) now provides as follows:“(9)Notwithstanding any other provision of this section, where a person overpays an instalment tax due under section 12 of the Income Tax Act, the Commissioner shall apply the overpaid tax to offset the taxpayer's future instalment tax liability.”

30. That the Appellant undertook to lodge online applications for transfer of tax payments after amendment of the additional assessments in iTax in line with Section 47 of the TPA.

31. That the actions of the Respondent on this matter also amount to unfairness and violation of the Appellant's right to fair administrative action under Article 47 of the Constitution of Kenya. That the Respondent has not denied in its objection decision the fact pointed out in the Appellant's notice of objection that the iTax online system does not sufficiently facilitate the application for refund of the overpaid taxes. That therefore the upholding of the Corporate tax assessment on this matter will infringe on the Appellant's Constitutional right to fair administrative action under Article 47 and Section 7 of the Fair Administrative Actions Act.

32. That the Appellant should not be allowed to suffer because of administrative failures on the Respondent's end and systems.

33. That in regard to withholding tax, the Respondent has amended its assessment in its objection decision to recognize the taxes conceded by the Appellant in its notice of objection. That however the Respondent still blames absence of supporting documents for the remaining confirmed assessment.

34. That the Appellant has already demonstrated above all the information shared by its tax agent that the Respondent ignored when preparing its objection decision. That the Appellant prays that the Respondent reviews all information and explanations shared beforehand that have not been considered.

Appellant’s Prayers 35. The Appellant prayed that this Tribunal considers and allows the Appeal and:a.Upholds the objection filed by the Appellant;b.Sets aside and annuls the objection decision by the Respondent; andc.Makes such other orders that it may deem appropriate.

Respondent’s Case 36. The Respondent’s case is premised on the hereunder filed documents:-i.The Respondent’s Statement of Facts dated 4th November, 2022 and filed on the 7th November, 2022 together with the documents attached thereto.ii.The Respondent’s witness statement of Eric Mwangi dated 11th October, 2023 and filed on 13th October, 2023, admitted as evidence under oath on 17th October, 2023.

37. That the Respondent's review of the documents provided and information available established the following;a.The range of services provided by the Appellant were subject to VAT at the standard rate.b.The staff provided under the labor outsourcing contracts were the Appellant's employees and were only seconded to their clients in line with the contract signed between the parties for the provision of services.c.That the above statement was evidenced by the fact that the Appellant was responsible for hiring, remuneration, firing, disciplining, and all other activities that may relate to the staff.d.That the Appellant was only charging VAT on the margins earned from the services provided thereby leaving out the labor cost element of the invoices they were issuing to the clients.e.That the cost of labor with respect to the employees in question is a direct cost to the Appellant in respect of the services being offered to its clients. That this can be confirmed by the treatment of the same in the audited financial statements.

38. The Respondent reiterated its position as stated in the objection decision communicated to the Appellant and refuted each and every allegation by the Appellant's Memorandum of Appeal and Statement of Facts.

39. The Respondent further averred that it considered all the available material facts and documents provided and its findings were in accordance to the information availed by the Appellant.

40. The Respondent further contended that the objection decision was based on all available information and was to the best judgement of the Respondent. That all details of the adjustments that were made were well explained in the audit findings, assessment and the objection decision.

41. The Respondent averred that its findings were that the engagement between the Appellant and its clients are similar to labour outsourcing contracts thus the consideration of the service provided includes both the cost of labour as well as the mark-up on the cost.

42. The Respondent additionally stated that the Appellant did not tax the reimbursements by their clients for staff costs on their behalf which is inappropriate and that all services provided by the Appellant are taxable supplies subject to VAT at the standard rate.

43. The Respondent stated that it is incorrect to exclude the cost of labour from consideration and only charge VAT on the mark-up since it contradicts the Appellant's Income tax declaration whose total consideration is recognized as income thus, the VAT was rightfully charged upon the Appellant.

44. The Respondent noted that there is no agency relationship between the Appellant and its clients for reasons that they contracted to provide a taxable service in form of skilled labor.

45. That additionally, the staff in question were employees of the Appellant and as such the implication that the staff are third parties is incorrect. That consequently, the Respondent averred that payments received from the Appellant’s clients cannot be classified as disbursements made to a third party.

46. The Respondent averred that the Appellant employed staff who carried out activities for consideration and it is therefore in order to say that the services offered by this business is a definition of taxable supply. That Section 2 of the VAT Act 2013 defines business as a profession. i.e.“Profession involves activity carried on by a person continuously which involves in part or in whole, the supply of goods or services for consideration”

47. The Respondent noted that the engagement between the Appellant and its clients is similar to other labor outsourcing contracts. That the consideration of the service provided includes both the cost of labor as well as their mark-up on the cost.

48. On tax credits, the Respondent contended that it was improper for the Appellant to claim an overpayment of tax as an allowable deduction. That the Appellant ought to have applied for a refund in the same year the overpayment was made as prescribed under the replaced Section 47 of the Tax Procedure Act 2015.

49. That the Appellant is obligated by law to pay taxes. The Respondent noted that the Court in Republic v Kenya Revenue Authority Ex-parte Bata Shoe Company (Kenya) Limited [2014] eKLR, stated as follows;“This brings me to the role and interpretation of tax laws. Payment of tax is an obligation imposed by the law; it is not a voluntary activity. That being the case, a taxpayer is not obliged to pay a single coin more than issue to the taxman. The taxman on the other hand is entitled to collect up to the last coin that is due from a taxpayer.”

50. That Section 56(1) of the Tax Procedures Act provides that the burden shall be on the Appellant to prove that a tax decision is incorrect thus, the Appellant herein is obligated to prove that the Respondent's objection decision is wrong.

Respondent’s Prayers 51. The Respondent prayed that the Tribunal finds as follows:a.The Respondent's objection decision is proper and in conformity with the provisions of the law.b.That this Appeal be dismissed with costs.c.The Appellant to pay the assessed total tax liability amounting to Kshs. 153,803,747. 00 inclusive of applicable penalties and interest.d.The Respondent be awarded the costs of the Appeal.

Issues for Determination 52. The Tribunal has carefully reviewed the pleadings and documentation filed by both parties and is of the conidered view that the issues for its determination are as follows:-a.Whether the Respondent’s assessment for Corporation tax was justifiedb.Whether the Respondent’s assessment for Withholding tax was justifiedc.Whether the Respondent’s assessment for Value Added Tax was justified

Analysis and Findings 53. The Tribunal having established the issues falling for its determination, proceeded to analyse them as hereunder.

a. Whether the Respondent’s assessment for Corporation tax was justified 54. The Appellant averred that, in relation to tax credits, the iTax system did not permit application for a refund and that the Finance Act 2022 provided a legal remedy permitting transfer of instalment taxes in a year with a tax credit. On its part, the Respondent averred that the Appellant should have applied for a refund.

55. On unreconciled staff costs, the Appellant provided a reconciliation that resulted in negative variances while the Respondent averred that it did not receive documentation that supported this position.

56. On disallowed professional fees and overclaimed expenses, the Appellant claimed that the Respondent’s figures did not correspond to the Appellant’s financial statements while the Respondent argued that it did not receive information that it requested in support of the Appellant’s averment.

57. In regard to amendment of its 2017 filed income tax return, the Appellant averred that it provided supporting documentation which the Respondent denied receiving.

58. In regard to tax credits, the Tribunal noted that Section 47 of the TPA requires a taxpayer to make an application for refund of any overpayments in the “approved form”. That the application is subjected to an audit process and the Respondent is expected to communicate its decision on the application within ninety (90) days of receipt thereof.

59. The Tribunal cites the Finance Act 2022 which amended Section 47 of the TPA by repealing the previous Section and replacing it as follows:“47. (1)Where a taxpayer has overpaid a tax under any tax law, the taxpayer may apply to the Commissioner, in the prescribed form —

(a)to offset the overpaid tax against the taxpayer's future tax liabilities;or(b)for a refund of the overpaid tax within five years, or six months in the case of value added tax , after the date on which the tax was overpaid.(2)The Commissioner shall ascertain and determine an application under subsection 1) within ninety days and where the Commissioner ascertains that there was an overpayment of tax —(a)in the case of an application under subsection (l)(a), apply the overpaid tax to such future tax liability; and(b)in the case of an application under subsection (l)(b), refund the overpaid tax within a period of two years from the date of the application….”

60. The Tribunal further cites Section 47(9) of the TPA that states as follows:“(9)Notwithstanding any other provision of this section, where a person overpays an instalment tax due under section 12 of the Income Tax Act, the Commissioner shall apply the overpaid tax to offset the taxpayer’s future instalment tax liability.”

61. The Tribunal finds that Section 47 provides for the offset of overpaid taxes by the Commissioner against a taxpayer’s future tax instalments. Additionally, the Section provides for a procedure by which offset of taxes should be undertaken.

62. The Appellant in the instant case claimed that it was unable to apply for a refund because the iTax system did not permit application for a refund. Having gleaned through the Appellant’s pleadings, the Tribunal established that this averment was not supported by any documentation that would confirm that indeed the Appellant had credits that it was unable to make an application for. Further, there was no documentation or any correspondence to prove that the taxpayer had attempted to file for a refund and was unable to.

63. In this regard, the Tribunal concludes that the Appellant did not follow the provisions of Section 47 of the TPA and the Respondent was justified in disallowing the tax credits claimed as a deductible expense.

64. Regarding the claims by the Respondent that it did not receive supporting documentation for the other elements of the Corporation tax assessment, the Tribunal confirmed that the Appellant submitted detailed emails on 8th and 9th September 2022 with details relating, inter alia, to the following:a.Unreconciled staff variances.b.Overclaimed direct costs.c.Overstated professional fees.

65. The Tribunal posits that from the objection decision issued on 12th September, 2022, the Respondent considered the same and still claimed that the Appellant needed to provide further documents to fully support its averments.

66. The Tribunal posits that the burden of proof on tax cases is on the Appellant. In this regard, Section 56 of the TPA provides as follows regarding the burden of proof.“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

67. The Tribunal additionally notes that Section 30 of the TAT Act provides as follows regarding 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 made differently.”

68. To the extent that the Appellant did not provide the further information requested by the Respondent, the Tribunal finds that it did not exhaust its burden of proof in demonstrating that the residual Corporation tax assessment was not justified.

69. The Tribunal therefore concludes that, based on the fact that the Appellant did not provide specific information requested to support its averments on Corporation tax, the Respondent was justified in raising the Corporation tax assessments in relation to unreconciled staff variances, overclaimed direct costs and overstated professional fees.

b. Whether the Respondent’s assessment on Withholding tax was justified 70. The Respondent claimed that the Appellant did not provide documentation while the Appellant averred that the Respondent relied on documentation it provided to accept its concession to part of the Withholding tax assessment. In this regard, the Appellant stated that the Respondent ignored the information it supplied to it.

71. The Tribunal confirmed that the Appellant provided supporting documents as follows:a.Withholding tax certificatesb.A schedule of withholding taxes remitted to the Respondent for the year 2022 and part of 2021. c.The contract for the consultant seconded to its client.

72. The Tribunal notes that from objection decision issued on 12th September, 2022, the Respondent considered the same and still claimed that the Appellant needed to provide invoices in support of its averments.

73. To the extent that the Appellant did not provide the invoices requested by the Respondent to conclusively support its averment, the Tribunal finds that it did not exhaust its burden of proof in demonstrating that the residual Withholding tax assessment was not justified.

74. The Tribunal relied on the case of Alfred Kioko Muteti v Timothy Miheso & Another [2015] eKLR where the court held that:-“a party can only discharge its burden upon adducing evidence. Merely making pleadings is not enough”. In reaching its findings, the Court stated that: “Thus, the burden of proof lies on the party who would fail if no evidence at all were given by either party…. Pleadings are not evidence....”

75. In view of the foregoing, the Tribunal therefore finds that the Respondent was justified in assessing the additional withholding tax.

c. Whether the Respondent’s assessment on Value Added Tax was justified 76. The Appellant argued that it provides HR solutions to its clients and it gets reimbursements of employment costs and earns a margin for the service.

77. On its part, the Respondent argued that all payments made by the Appellant’s clients should be subjected to VAT.

78. The Tribunal reviewed two contracts between the Appellant and its clients. The Tribunal noted that the first contract stipulates under the clause relating to fees, rates and billing, the client would pay:a.12% of the gross salary for the first year of employment or Kshs. 150,000 (whichever is higher) for the recruitment of Graduate Trainees and Clerical Staff e.g. Data Entry Clerks.b.15% of the total Gross Salary for the first year of employment for the recruitment of Administrative Staff e.g. Personal Assistants recruitment of graduates and postgraduates with up to 5 years post academic work experience and Middle Level Managers e.g. Project Managers.c.18% of the total Gross Salary for the first year of employment for the recruitment of Senior Managers with more than 10 years post academic work experience e.g. Head of Departments and Project Leads.d.20% of the total Gross Salary for the first year of employment for Executive Recruitment e.g. Suite Level.e.For PPA Hires for 12 months or longer who then become Client Hires, no PPA Recruitment Fee is payable.f.For PPA Hires for less than 12 months who then immediately become Client Hires, the fee is the lower of USD 2000 and an amount equal to one month's gross salary of the relevant PPA Personnel member.

79. The contract also stipulates that the Appellant (PPA) unconditionally guarantees that Client Hire employees will remain available to the Client as an employee for a minimum period of 90 days from the starting date of employment. That pursuant to this guarantee, if for any reason the individual leaves his/her employment with the client, or if the employment relationship with such individual is terminated by the client during such period, then PPA will, within forty-five days of the individual leaving employment status, conduct a new PPA recruitment at no expense to the Client.

80. The contract additionally provides that in respect of PPA Hire, the Client shall pay PPA as its sole remuneration:a.A one-time payroll setup fee of 2500 USD (“PPA Payroll Setup Fee") in respect of all services associated with PPA Hire;b.In respect of each member of PPA Personnel for the duration of their assignment to the Client: a rate to be agreed between the Client and PPA before the PPA Personnel member is employed, which rate shall be all-inclusive of all costs of employment costs and taxes; and a fee in the amount of 20% of candidate's monthly Gross Salary.

81. The second contract provides, under a remuneration clause, that monthly charges would be as follows:a.Salaries (fixed and overtime) as per member of seconded staff.b.Management fee will be 18% of the total salary bill for the month.

82. Section 35(3) of the Income Tax Act ("ITA") provides as follows in regard to deduction of withholding tax in respect of management or professional services fees:-“(3)Subject to subsection (3A), a person shall, upon payment of an amount to a person resident or having a permanent establishment in Kenya in respect of:-(f)management or professional fee or training fees the aggregate value of which is twenty-four thousand shillings or more in a month.…which is chargeable to tax, deduct therefrom tax at the appropriate resident withholding tax.”

83. Section 2 of the ITA defines management or professional fees to mean:“payment made to a person, other than a payment made to an employee by his employer, as consideration for managerial, technical, contractual, professional or consulting services however calculated;”

84. From a review of the contracts provided by the Appellant, it is apparent to the Tribunal that indeed the Appellant undertakes Human Resource services for its clients including and not limited to assisting with hiring and secondment of personnel who then work with its clients under the specified terms highlighted by the Tribunal in the earlier paragraphs as per the contracts reviewed.

85. Further, the contracts clearly set out the terms of payment which separate the employee emoluments (and related taxes) from the fee earned by the Appellant for the various categories of services it provides.

86. The Tribunal found that the payments by the Appellant’s clients comprise the service fee/compensation for the Appellant’s HR services and an element that is paid to compensate the Appellant for the employees’ emoluments as well as tax on the same.

87. Section 13(5)of the VAT Act provides as follows regarding reimbursements:“In calculating the value of any services for the purposes of subsection (1), there shall be included any incidental costs incurred by the supplier of the services in the course of making the supply to the client:Provided that, if the Commissioner is satisfied that the supplier has merely made a disbursement to a third party as an agent of his client, then such disbursement shall be excluded from the taxable value.

88. Further, from the Appellant’s attached documents, it is clear that that the Appellant withheld and remitted withholding taxes on the service element and remitted the same to the Respondent.

89. As a result of the foregoing, the Tribunal finds that the payments made to the Appellant for reimbursement of employee-related costs are not vatable as they constitute reimbursements of employee salaries and emoluments and therefore not chargeable to VAT.

90. Consequently, the Tribunal finds that the Respondent was not justified in raising the VAT assessment on the total pay received by the Appellant from its clients as only VAT on the service element was taxable and this was accounted for by the Appellant.

Final Decision 91. The upshot of the foregoing is that the Appeal is partially merited and consequently, the Tribunal makes the following Orders: -a.The Appeal be and is hereby partially allowed.b.The Respondent’s objection decision dated 28th June, 2022 be and is hereby varied in the following terms:i.The Corporation tax assessment be and is hereby upheld.ii.The Withholding tax assessment be and is hereby upheld.iii.The VAT assessment be and is hereby set aside.c.Each party to bear its own costs.

92. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 2ND DAY OF FEBRUARY,2024ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH - MEMBEREUNICE NG’ANG’A - MEMBERABRAHAM K. KIPROTICH - MEMBERBERNADETTE GITARI - MEMBER