[2024] KETAT 1592 (KLR)

Shinryo Corporation Kenya Branch v Commissioner of Domestic Taxes (Appeal E041 of 2024) [2024] KETAT 1592 (KLR) (22 November 2024) (Judgment)

Neutral citation: [2024] KETAT 1592 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal E041 of 2024

E.N Wafula, Chair, G Ogaga, RO Oluoch & AK Kiprotich, Members

November 22, 2024

Between

Shinryo Corporation Kenya Branch

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a branch of Shinryo Corporation, a company resident in Japan. The branch was registered on 31st July 2018 and issued a Certificate of Compliance under Section 366 of the Companies Act Cap 486 of the Laws of Kenya. It is a permanent establishment within the meaning in Section 2 of the Income Tax Act Cap 470.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 Laws of Kenya (KRA Act). Under Section 5 (1) of the Act, KRA is an agency of the Government for the collection and receipt of all revenue. For the performance of its function under Subsection (1), the Authority is mandated under Section 5(2) of the Act to administer and enforce all provisions of the written laws as set out in Parts I and II of the First Schedule to the KRA Act to assess, collect, and account for all revenues under those laws.

3. The Respondent conducted an audit on the Appellant’s transactions for the years 2018 to 2023 and raised additional Corporation tax amounting to Kshs. 143,496,565. 00 and Pay As You Earn (PAYE) amounting to Kshs. 47,568,237. 00 inclusive of penalties and interest in a notice of audit findings issued on 12th September 2023.

4. The Appellant objected to the entire assessment, and the Respondent issued its Objection decision on 4th December 2023, rejecting the Appellant’s Objection in its entirety and confirming the additional assessments.

5. The Appellant, being dissatisfied with the Respondent’s Objection decision, filed its Notice of Appeal on 2nd January 2024.

The Appeal 6. The Appeal is premised on the Memorandum of Appeal dated and filed on 16th January 2024 which raised the following grounds: -a.That the Respondent erred in law by imposing Income tax on an approach that contravenes the applicable sections of the Income Tax Act and Kenyan jurisprudence.b.That the Respondent erred in law by imposing Pay As You Earn on an approach that contravenes the applicable sections of the Income Tax Act and Kenyan Jurisprudence.

Appellant’s Case 7. The Appellant’s case is premised on the following documents:a.The Appellant’s Statement of Facts dated and filed on 16th January 2024, and the documents attached to it; andb.The Appellant’s written submissions dated 20th August 2024 and filed on 22nd August 2024.

8. The Appellant stated that it undertakes the local works component in Kenya on behalf of its Head Office in Japan. That the Head Office was subcontracted by Toyo Construction Company (herein Toyo) (Contract No. Toyo-Shinryo 2019-007) for the execution and installation of utility works for civil engineering, air conditioning, plumbing, firefighting, and electrical services under Mombasa Port Development Project (MPDP). That Toyo, a Japanese company, won the contract to construct MPDP-2.

9. The Appellant further stated that on 20th November 2007, the Government of Kenya and the Government of Japan agreed to develop infrastructure installations at the Port of Mombasa.

10. That Phase 2, called MPDP-2, cost Japanese Yen 32. 1 billion which amounts to Kshs. 25. 0 billion (per the Central Bank of Kenya exchange rate on 16th January 2015). That MPDP-2 entails: -a.The construction of a second container terminal at the Port, known as the Mombasa Container Terminal 2 (MCT 2), is expected to add a capacity of 450,000 twenty-foot equivalent units (TEUs) annually.b.Modern facilities include 6 berths, 18 quay cranes, and 54 rubber-tired gantry cranes.c.Development of a new oil terminal and the expansion of the existing LPG terminal.d.Construction of a new access road and railway line to improve the Port's connectivity to the hinterland.

11. It was the Appellant’s averment that the Government of Kenya needed financial and technical assistance with this project, resulting in a charitable interest rate of 0. 1% per annum and a repayment period of thirty (30) years. That the Japan International Corporation Agency (JICA) disbursed the Loan.

12. That it was also negotiated that the Japanese companies, employees, and consultants engaged in the project would be exempted from taxes as captured in clause 8 of the Exchange Notes signed on 16th January 2015 by the Cabinet Secretary to the National Treasury (CS).

13. The Appellant submitted that Exchange Notes, being a binding multilateral agreement, created a legal right to the tax exemptions mentioned therein under Section 6A of the Tax Procedures Act as cited below: -“Any multilateral agreements and treaties that have been entered into by or on behalf of the Government of Kenya relating to international tax, compliance, and prevention of evasion of tax or exchange of information on tax matters shall have effect in the manner stipulated in such agreements or treaties.”

14. The Appellant stated that the CS National Treasury proceeded to gazette the contents of that exemption under Legal Notice No. 15 of 2021 reproduced below: -“In Exercise of the powers conferred by section 13 (2) of the Income Tax Act, the Cabinet Secretary for National Treasury and Planning directs that the income which accrued in or was derived from Kenya by Japanese companies, Japanese consultants, and Japanese employees involved in the projects under the Financing Agreements specified in the second column of the Schedule that was signed on the corresponding dates specified in the second column of the Schedule shall be exempt from income tax to the extent set in the Financing Agreements....11. Mombasa Port Development Project (Phase 1) -20th November 200712. Mombasa Port Development Project (Phase 2)- 9th March 2015”

15. The Appellant reiterated that it was subcontracted by Toyo Construction Company (Contract No. Toyo-Shinryo 2019-007) for the execution and installation of utility works for buildings and associated works, including mechanical, electrical, plumbing and fire protection under MPDP-2. The Appellant averred that the contract is attached in the Appendix 7 to 10.

16. The Appellant asserted that it recognises as exempt income in Kenya, the portion related to activities undertaken in Kenya. That the Head Office recognizes as income in Japan the portion pertaining to works conducted in Japan, which according to the Appellant, is not subject to Kenyan taxation.

17. The Appellant affirmed that after the Head Office set up the branch in Kenya, it still played a key technical role in the work undertaken by staff situated in Japan.

18. That the employees on the Appellant’s payroll are those who work in Kenya. The Appellant further affirmed that the Japanese employees are treated as tax-exempt. That non-Japanese staff are subject to Pay As You Earn (PAYE) on their emoluments, and this was deducted and remitted by the Appellant as per the law.

19. The Appellant stated that the Respondent undertook an audit for 2018 to 2023 and raised additional Corporation tax amounting to Kshs. 143,496,565. 00 and Pay As You Earn (PAYE) amounting to Kshs. 47,568,237. 00 inclusive of penalties and interest in a notice of audit findings issued on 12th September 2023.

20. That dissatisfied with the Respondent’s decision, the Appellant objected on 9th October 2023.

21. The Appellant stated that the Objection review process began and at its culmination, the Respondent issued its Objection decision on 4th December 2023, confirming additional assessment that amounted to Kshs. 191,064,801. 00 inclusive of penalties and interest.

22. That dissatisfied with the Respondent’s decision, the Appellant filed a Notice of Appeal on 2nd January 2024.

23. The Appellant stated that the Respondent contended that principal tax is due and payable on omitted income as per Section 3 of the Income Tax Act and Section 31 of the Tax Procedures Act.

24. That the Respondent has stipulated that self-assessment returns for remuneration paid to foreign expatriates were not accounted for as required in Sections 5 and 37 of the Income Tax Act.

25. The Appellant summarised the issues that the Tribunal should consider determining as follows:a.Whether the treaty between the Government of Kenya and the State of Japan is binding regarding taxation.b.Whether the exemptions issued by the Cabinet Secretary for the National Treasury (CS) under Section 13(2) of the Income Tax Act apply as per the stipulations of the CS or only from the date of the gazettement.c.Whether income earned by a non-resident company out of consulting activities carried out outside Kenya is subject to Kenyan taxation.d.Whether nonresident employees absent from Kenya are subject to Pay As You Earn (PAYE) in Kenya.Whether the treaty signed between the Government of the Republic of Kenya and the Republic of Japan is binding regarding taxation.

Primacy of Treaty 26. The Appellant averred that the Exchange Notes attached to the Appeal outline the agreement between the Government of Kenya and the State of Japan. That this agreement is an international treaty under the law.

27. The Appellant asserted that the Constitution of Kenya, 2010 admits, as part of the laws of Kenya, all the treaties that are ratified and promulgated by the Country as provided under Article 2(6) captured below: -“Any treaty or convention ratified by Kenya shall form part of the law of Kenya under this Constitution.”

28. That in unison with the Constitution, Section 6A of the Tax Procedures Act, cited above, provides that such a treaty creates a legal right to exemption.

29. The Appellant submitted that the manner of exemption is per the extent stipulated in the agreement. That the “extent” of the agreement includes the effective date of 16th January 2015.

30. The Appellant stated that Clause 8 of the Agreement outlines that the Government of Kenya shall exempt the Japanese contractors, companies, suppliers, consultants, and employees from all fiscal levies, taxes, and duties payable on income derived within Kenya during the implementation of the MPDP-1 and MPDP-2.

31. The Appellant reiterated that it was awarded a contract to provide building services. That income earned from the services was approved for tax exemptions granted by the National Treasury and Planning, and that MPDP-1 and MPDP-2 are indicated in the notice.

32. The Appellant relied on the case of Beta Healthcare International Ltd vs The Commissioner of Customs Services (Miscellaneous Civil Application 4 of 2009) where the High Court upheld that the rulings of the World Customs Organisation was binding because they were made in line with the Convention on the Harmonised Commodity Description and Coding System to which Kenya is a signatory. That this case reinforces the principle that international agreements ratified by Kenya are legally binding and must be upheld by the courts.

Respect for International Law: Vienna Convention 33. The Appellant submitted that Kenya is a signatory of the United Nations Vienna Convention on the Law of Treaties (1969), which is an international agreement regulating treaties between states. That it establishes comprehensive rules, procedures, and guidelines for how treaties are defined, drafted, amended, interpreted, and generally operated.

34. The Appellant averred that imposing a tax on the Appellant renders the treaty between the Government of Kenya and the State of Japan insignificant, contravening Articles 7, 18, and 26 of the United Nations Vienna Convention on the Law of Treaties (1969).

35. The Appellant proceeded to cite Article 26 of the Vienna Convention as follows while submitting that imposing such a tax reflects a failure to honor this commitment, which risks tarnishing Kenya’s reputation as a reliable and trustworthy member of the international community: -“Every treaty in force is binding upon the parties to it and must be performed by them in good faith.”

36. It was the Appellant’s further argument that this egregious duplicity risks painting our nation as a dishonest rebel in the international community. That the Respondent should not be allowed to drag the name of our good Country to that shameful status.

37. The Appellant argued that the principle of pacta sunt servanda—that agreements must be kept—is fundamental to maintaining international trust and stability. That by disregarding this principle and failing to uphold treaty obligations, Kenya’s actions could be perceived as a breach of good faith, potentially branding the nation as a non-compliant entity on the global stage.

38. The Appellant prayed that in light of these considerations, it is crucial that the Respondent’s actions be reassessed to ensure compliance with the established principles of international law and to preserve Kenya’s reputation as a responsible member of the global community.Treaty Protection, Legitimate Expectation, and Diplomatic Considerations

39. The Appellant argued that the CS is an authorized signatory whose actions bind Kenya. That the Appellant is protected under the treaty, and the legitimate expectation owed to the Appellant is that the exemption is honoured.

40. The Appellant submitted that Article 18 of the Vienna Convention obligates a State not to defeat the objectives and purpose of international treaties: -“Article 18: Obligation not to defeat the object and purpose of a treaty before it entered into forceA State is obliged to refrain from acts that would defeat the object and purpose of a treaty when: -a.it has signed the treaty or has exchanged instruments constituting the treaty subject to ratification, acceptance, or approval until it shall have made its intention clear not to become a party to the treaty; orb.it has expressed its consent to be bound by the treaty, pending the treaty's entry into force and provided that such entry into force is not unduly delayed.”

41. That Article 26 of the Vienna Convention stipulates the terms and conditions of an international treaty in effect, which are obligatory upon the parties and must be performed honestly.

42. The Appellant averred that the agreement’s provisions with Japan apply because Kenya has validly entered the treaty. That based on this alone, the query on taxes imposed on the Appellant should be set aside.

43. In support of this argument, the Appellant referred to the case of Kenya Airways Ltd v. Commissioner of Domestic Taxes [2019] eKLR and averred that the High Court upheld the application of a bilateral air services agreement (a treaty) between Kenya and the United Kingdom, affirming that the terms of the treaty were binding and had to be honored by both parties. That this case reinforces the principle that international treaties, once entered into, carry binding obligations that must be respected by the state.

44. That based on these considerations, it was the Appellant’s prayer that the tax imposed on the Appellant should be set aside, as it contravenes the binding treaty obligations under the Vienna Convention and the agreement with Japan.Whether the exemptions issued by the CS under Section 13(2) of the Income Tax Act vide Legal Notice No 15 of 2021 apply only from the date of gazettement or as clearly as specified by the CS in the gazette notice.

45. The Appellant submitted that Legal Notice No. 15 of 2021 affirms the exemption in the Exchange Notes. That Section 13 of the Income Tax Act states: -1. Notwithstanding anything in Part II, the income specified in Part I of the First Schedule which accrued in or was derived from Kenya shall be exempt from tax to the specified extent.2. The Minister may, by notice in the Gazette, provide—a.that any income or class of income which accrued in or was derived from Kenya shall be exempt from tax to the extent specified in such notice;b.that any exemption under subsection (1) of this Section shall cease to have the effect either generally or to the extent specified in the notice.”

46. That Section 13 of the Income Tax Act gives the CS wide-ranging powers to exempt specific incomes “to the extent specified in such a notice. That there is no statement that the exemption so lawfully will be effective only from the date of the Gazette.

47. That the Legal Notice provides that its application is “to the extent specified in the Financing Agreements” between the Government of Kenya and Japan.

48. That, therefore, the criteria to be applied should be “the extent specified in the Financing Agreements”, including the effective dates.

Treaty, Exchange Notes 49. The Appellant stated that the extent specified in the Financing Agreements is found in clause 8 as follows: -1. The Government of the Republic of Kenya shall exempt;a.JICA from all fiscal levies and taxes imposed in the Republic of Kenya on or in connection with the Loan, as well as interest accruing on the Loan;b.Japanese companies operating as suppliers, contractors, and or consultants from all fiscal levies and taxes imposed in the Republic of Kenya concerning the income accruing from the supply of products and/or services to be provided under the Loan;c.Japanese companies operating as suppliers, contractors, and/or consultants from all duties and related fiscal charges imposed in the Republic of Kenya concerning the import and re-import of their materials and equipment needed for the implementation of the Project; andd.Japanese employees engaged in implementing the Project from all fiscal levies and taxes imposed in the Republic of Kenya or their income derived from Japanese companies operating as suppliers, contractors, and/or consultants for implementing the Project.2. The Government of the Republic of Kenya shall assume all value-added taxes imposed in the Republic of Kenya concerning the products and/or services necessary for the implementation of the project.”

50. The Appellant also cited Section 77 of the Public Finance Management Act submitting empowers the CS to undertake the action which he took in the interest of the people of Kenya. That the provision states as follows: -“77. The Cabinet Secretary may waive a national tax, a fee, or a charge imposed by the National Government and its entities by criteria prescribed in regulations provided that—a.the National Treasury shall maintain a public record of each waiver together with the reason for the waiver and report on each waiver per Section 82 of this Act;b.an Act of Parliament has authorized such a waiver or variation; andc.a State Officer may not be excluded from the payment of a tax, fee, or charge because of the office of the State Officer or the nature of work of the State Officer.”

Correct and Strict Interpretation 51. The Appellant submitted that both Section 13 of the Income Tax Act and Section 77 of the Public Finance Management Act are in unison with Section 6A of the Tax Procedures Act, which requires that multilateral arrangements be honoured.

52. That it is now a well-settled principle of law that in a taxing Act, one must look merely at what is clearly stated. That there is no room for any intendment. That there is no presumption as to tax, and nothing is to be read in; nothing is to be implied. That one can only look somewhat at the language used. That this principle, enunciated in the case of Cape Brandy Syndicate v Inland Revenue Commissioner (1921), has been extensively adopted by courts in Kenya.

53. The Appellant referred to the case of T.M. Bell v Commissioner of Income Tax [1960] EALR 224, where Justice Roland stated as follows: -“…in a taxing Act, one has to look at what is clearly said. There is no room for an amendment to a tax. Nothing is to be read; nothing is to be implied. One can only look fairly at the language used… If a person seeking 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.”

54. That, further, Justice Nyamu in the High Court case of Stanbic Bank Kenya Limited v Kenya Revenue Authority adopted the holding in Russell v Scott [1948] 2 ALL ER 5 which stated that Lord Simonds held that: -“There is a maxim of income tax law which, though it may sometimes be overstressed, ought not to be forgotten. The subject is not to be taxed unless the words of the taxing statute unambiguously impose the tax upon him.”

55. That this rule on taxation only based on “clear stipulation of the law” was also upheld in another landmark case, Keroche Industries Ltd vs. the Kenya Revenue Authority and Five Others where Justice Nyamu instructed in his analysis as follows: -“I accept the Applicant’s counsel’s powerful argument that taxation can only be done on clear words and that taxation cannot be on intendment. ...Where the inclination of the legislature is not clear or where there are two or more possible meanings, the inclination (or the Court) should be against a construction or interpretation which imposes a burden, tax or duty on the subject (taxpayer).”

KRA’s Error and Absurdity of Outcome 56. The Appellant stated that the Respondent’s view is that the date of the notice is the time when the exemption applies. That, however, the CS clearly states that the exemption is per the Financing Agreement. The Appellant asserted that the Respondent is putting words into the mouth of the CS and that the Respondent’s additional requirement also encroaches into the jurisdiction of Parliament. That the Respondent is adding words to the law which do not exist in the black-and-white letter of the law.

57. The Appellant maintained that the statement by the Respondent is a laboured interpretation. That the principle of going by the written word should not be tampered with because it offers much-needed certainty regarding taxation obligations. That certainty is a principal tenet of a sound tax system. That when an exemption is agreed upon, it should be followed through.

58. The Appellant prayed that the Respondent be guided to restrict itself to its obligation outlined in Section 5(2) of the Kenya Revenue Authority Act, which is to implement tax legislation (as they are). That making or amending the gazette notice under Section 13 of the Income Tax Act is the work of the CS. That if the CS says the exemption is as per the Financing Agreement, it is as per the Financing Agreement, and the Tax Procedures Act allowed this under Section 6A.

59. The Appellant asserted that a rock-solid principle of interpretation of tax law is the rule against absurdity. That interpretation should not be made to the effect of an absurdity as clear as the sun in the midday sky.

60. The Appellant decried that it would be the height of dishonour and absurdity for the Government of Kenya to undertake the following: -a.Request financial and technical assistance for the expansion of the Port of Mombasa, which is critical to our economy as the gateway to and central economic hub in the Eastern African region from Japan;b.Enter into a Treaty with Japan for such assistance after such a Treaty (Exchange Notes) is approved by the Attorney General, the Ministry of Foreign Affairs, and the Cabinet;c.Only be charged a peppercorn interest rate of 0. 1% per annum and a generous 30-year repayment period;d.Formally agree to and express agreement to the Japanese state and companies and employees;e.Publicly promulgate such an agreement via a gazette notice issued by the CS;f.Begin implementing part of the agreement;g.Receive support with the project, which is then launched by the President and whose capacity improvement benefit is celebrated globally; andh.Then, it turns its back on the Japanese state, companies, and employees and demands taxes through the backdoor, especially from those who have been good to us.

61. That on this basis, the Appellant prayed that the assessment be set aside, and the Respondent be asked to apologise to the Appellant and the good people of Japan for its extreme action.

Suspension of the Legal Notice No. 15 of 2021 62. The Appellant stated that the Respondent contended that, under the Judgment in Petition E280 of 2021, the Appellant’s earnings from 2018 to 2023 should be subject to taxation under the stipulations outlined in Section 3(2)(a)(i) of the Income Tax Act.

63. The Appellant referred to Section 6A of the Tax Procedures Act and Article 2(6) of the Constitution of Kenya submitting that the provisions create a legal right for treaties, including the Exchange Notes with Japan, to be practical and applicable in tax law.

64. Further that in English Common Law, the equitable principle of Estoppel would not allow the retraction of rights already granted in law and enjoyed as follows: -“The doctrine of estoppel operates as a principle of law which precludes a person from asserting something contrary to what is implied by a previous action or statement of that person.”

65. The Appellant submitted that the principle of equitable or promissory Estoppel does not, generally, find a cause of action. That this limitation goes back to the founding (or rediscovery) of the doctrine in the contract jurisprudence by Lord Denning. That for example, in Combe v. Combe [1951] 2 K.B. 215, 219, Lord Denning remarked that equitable Estoppel does not create new causes of action where none existed before. That it only prevents a party from insisting on his strict legal rights when allowing him to enforce them would be unjust.

66. The Appellant further emphasised that the doctrine of equitable Estoppel prevents a party from acting inconsistently with a promise the party has made if that promise or representation induced another party to rely on it to that other party’s detriment reasonably.

67. That the High Court’s decision in Petition No. E280 of 2021 must be established and stopped operating as a representation which is acted upon by the opposite side to its detriment. That, moreover, Estoppel can never give rise to a cause of action; it may only be used as a defense.

68. The Appellant stated that the Respondent’s action of backdating the taxes based on the Court’s directive will be against the principle of equitable etoppel.

69. The Appellant apprised the Tribunal that the Ruling in Civil Appeal E176 of 2023 has provisionally halted the enforcement of the declarations outlined in the Judgment of Petition No. E280 of 2021 regarding Legal Notice No. 15 of 2021 and Section 13 of the Income Tax Act. That this suspension of the specified declarations will be in effect for six (6) months from the current date, pending the hearing and resolution of the applicants’ appeal.

70. That based on these grounds and the preceding points, the Appellant requested that the assessment be nullified.Whether income earned by a non-resident company out of consulting activities carried out outside Kenya is subject to Kenyan taxation.

Assessment Invalid Irrespective of the Treaty Exemption 71. The Appellant stated that without prejudice to the above points, which are the Appellant’s primary grounds, the Corporation tax assessment, amounting to Kshs. 111,747,914. 00, by the Respondent would still be invalid even if there was no exemption under Section 13(2) of the Income Tax Act.

72. The Appellant averred that the Respondent brought the income earned by the Shinryo Corporation Head Office, which is purely in Japan, into charge. The Appellant stated that part of the work was undertaken in Japan. That the income for that and the cost thereof is due to the Head Office. That under the contract, the Head Office staff fully undertook its activities in Japan. That the staff and other operating expenses in Japan were only claimed in Japan.

73. The Appellant affirmed that the only portion of a non-resident person’s income that may be taxed in Kenya is the part attributed to its permanent establishment (Branch). That such a branch is, first, treated as a distinct and separate entity from its Head Office as if it were an independent sub-contractor and then compensated for its services on an arm’s length basis.

74. The Appellant further stated that the income earned from locally undertaken activities is due to the Branch, in this case, the Appellant. The Appellant asserted that it correctly submitted the income tax for the earnings associated with the Kenyan Branch, and referred the Tribunal to its income tax returns for 2018, 2019, 2020, 2021 and 2022 and financial statements that it stated are appended to the Appeal.

75. That given the arguments above, the Corporation tax assessments are requested to be nullified as they are inconsistent with the relevant laws.

Exclusion of Business Incomes of Non-resident Persons 76. The Appellant stated that the income of the Shinryo Corporation – the Head Office is classifiable as business income. That Section 4(a) of the Income Tax Act, which deals with business incomes, states as follows: -“For the purposes of section 3(2)(a)(i)a.where a business is carried on or exercised partly within and partly outside Kenya by a resident person, the whole of the gains or profits from that business shall be deemed to have accrued in or to have been derived from Kenya.”

77. The Appellant averred that Kenya operates a territorial tax system primarily concerned with incomes derived from or accrued in Kenya. That the only circumstances when the business income of a non-resident person may be regarded as derived from or accrued in Kenya are as Section 4(a) of the Income Tax Act which provides as follows:

Income of Aircraft and Ship Charterers 78. That Section 9(1) of the Income Tax Act deems as derived from or accrued in Kenya any income of a non-resident ship, aircraft owner, or charterer earned from the carriage of passengers who embark or cargo or mail that is embarked in Kenya, except if the embarkment is for transshipment.

Income from Telecommunication Business 79. That Section 9(2) of the Income Tax Act deems as derived from Kenya any gross amounts received from the transmission of messages which are transmitted by the apparatus established in or outside Kenya, whether or not those messages originate from Kenya where such amounts are received by a carrying on the business of transmitting messages by cable, radio, optical fibre, television broadcasting, Very Small Aperture Terminal (VSAT), internet, satellite or by any other similar method of communication.

Income from manufacturing, growing, mining, producing, and harvesting 80. That Section 18(1) of the Income Tax Act deems as derived from Kenya any business income earned by a non-resident person who carries on a business in Kenya which consists of manufacturing, growing, mining, producing, or harvesting and sells outside, or for delivery outside Kenya, that product or products, or utilizes that product or produce in a business carried on by him outside Kenya.

Income of a non-resident bank 81. That Section 18(2) of the Income Tax Act deems a bank’s income, which is a permanent establishment of a non-resident person, any gains or profits earned from deposits, assets, or property acquired from its operations in Kenya.

82. The Appellant finally submitted that income from engineering businesses is not indicated in those particular categories. That it, therefore, falls under the general provision for determining the income of permanent establishments/branches.Provisions applicable to Shinryo Corporation Kenya Branch, Section 18(3) and Transfer Pricing Rules

83. The Appellant asserted that Section 18 of the Income Tax Act is the operating Section on cross-border related party transactions. That in particular, Section 18(3) outlines the legal approach to be adopted in the event of a transaction between the Head Office and its Branch (permanent establishment). That the provision states as follows: -“Where a non-resident person carries on business with a related resident person or through its permanent establishment and the course of that business is such that it produces to the resident person or through its permanent establishment either no profits or less than the ordinary profits which might be expected to accrue from that business if there had been no such relationship, then the gains or profits of that resident person or through its permanent establishment or from that business shall be deemed to be the amount that might have been expected to accrue if the course of that business had been conducted by independent persons dealing at arm's length.”

84. That this means that the income of the permanent establishment is to be determined based on the arm’s length principle as if the activities of the Branch were undertaken by an independent entity doing business at arm’s length with its Head Office.

85. The Appellant submitted that the Transfer Pricing Rules outline the transactions subject to transfer pricing principles on determining taxable income. That Rules 3, 4 and 5 are as follows: -3. The purposes of these Rules are-a.to provide guidelines to be applied by related enterprises in determining the arm's length prices of goods and services in transactions involving them andb.to provide administrative regulations, including the types of records and documentation to be submitted to the Commissioner by a person involved in transfer pricing arrangements.4. The taxpayer may choose a method to determine the arm's length price from the methods set out in Rule 7. 5.The guidelines referred to in Rule 3 shall apply toa.transactions between related enterprises within a multinational company, where one enterprise is located and is subject to tax in Kenya, and the other is located outside Kenya;b.transactions between a permanent establishment and its head office or other related branches, in which case the permanent establishment shall be treated as a distinct and separate enterprise from its head office and associated branches.”

86. The Appellant submitted that Section 18(3) and Rule 5 capture the transactions with the Head Office.

Distinct and separate principle 87. The Appellant submitted that Transfer Pricing Rule 5 has indicated that determining a permanent establishment’s arm’s length profit shall be treated as a distinct and separate entity from the head office.

88. That this is determined by undertaking a functional and factual analysis of the functions performed, assets employed, risks assumed, and capital employed. That on that basis, the Branch is characterized appropriately, for example, as an engineering project manager. That after that, the arm’s length profit that the branch would have earned is established with transfer pricing methods.

89. The Appellant further submitted that the Rules then guide taxpayers in determining the arm’s length price of various transactions, including the applicable methods. That they are modelled around the OECD Transfer Pricing Guidelines (OECD TPG), and, in practice, it is the OECD document that guides the detailed determination of the arm’s length price.

90. The Appellant averred that the Act has not exhaustively elaborated on the distinct and separate principle or the attribution of profits to a permanent establishment/branch. That whenever such hardship is experienced, courts in Kenya, the Tax Appeals Tribunal, the Respondent, and taxpayers rely on international instructions (generally accepted best practice). That the OECD Model has been invariably cited as the international instructions on taxation in two leading cases, Unilever vs. Kenya Revenue Authority and Civicon vs. Kenya Revenue Authority, where the Courts ruled to that effect.

91. The Appellant submitted that Article 5 of the OECD Model Tax Convention (OECD MC) on PEs, Article 7 on business profits, the OECD Report on the Attribution of Profits to a Permanent Establishment 2010 (OECD Report) and the OECD Transfer Pricing Guidelines are the critical materials to determine the profits attributable to the Appellant. That the relevant court rulings and Practice Notes may also be relied upon to give finer meaning.

92. The Appellant prayed that this Tribunal finds as follows:a.That all the income of a non-resident person is not deemed to be derived from or accrued in Kenya, except where expressly stated under the Income Tax Act.b.That Section 18(3) and Transfer Pricing Rules are the applicable substantive sections for determining the taxable income of a branch of a non-resident person in Kenya.c.That in determining the income of a branch, the Branch is treated as distinct and separate from its head office in line with Rule 5(b) of the Transfer Pricing Rules.d.That when treated as distinct and separate, the functions, assets, risks, and capital of the Branch are considered in line with the OECD Authorized Approach. That the OECD Report on the Attribution of Profits to Permanent Establishments may be applied as best practice and international instructions. That the OECD Guidelines are admitted into Kenyan tax law, where our guidelines are not adequate, through case law as per the Unilever and Civicon cases.e.That Transfer Pricing methods are used to determine the arm’s length price of a branch based on its activities in Kenya. That OECD TPG is applicable in augmenting the Transfer Pricing Rules in the determination of the arm’s length profit of a branch.f.That lacking a legal basis, even without considering the exemption, the corporation tax assessment is set aside.Whether PAYE was due and payable from payments made to the Shinryo Corporation Kenya Branch Employees.

93. The Appellant opined, without prejudice to its primary point of exemption of Japanese employees from PAYE, that even without considering the exemption, payments made in Japan to employees working in Japan are not subject to tax in Kenya.

94. It was the Appellant’s assertion that PAYE only applies to employment services discharged in Kenya or by individuals who exercise their employment activities for an aggregate duration longer than six months in Kenya. The Appellant averred that this is consistent with Section 5 of the Income Tax Act, which explicitly states that employment income is taxable in Kenya if the employment is exercised within the country.

95. The Appellant further submitted that the OECD Model Tax Convention on Income and on Capital further supports this position under Article 15 (Income from Employment) which stipulates that employment income is typically taxable in the country where the employment activities are physically performed unless the employee is present for fewer than 183 days within a tax year and their remuneration is paid by an employer not resident in that state.

96. The Appellant averred that in the year of income 2020, the Japanese staff were repatriated to Japan due to the COVID-19 pandemic which limited their presence and work activities within Kenya. The Appellant argued that the employment income of the Japanese staff that was earned and paid while they were physically present in Japan falls outside the ambit of Kenyan taxation. That the assessment for that year should be excluded from the assessment as it is inconsistent with both Kenyan tax law and international tax principles.

97. That the law states as follows under Section 5 of the Income Tax Act: -1. For the purposes of section 3(2)(a)(ii) of this Act, 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;orb.a non-resident person in respect of any employment with or services rendered to an employer who is resident in Kenya or the permanent establishment in Kenya of an employer who is not so resident, shall be deemed to have accrued in or derived from Kenya.”

98. It was the Appellant’s submission that Sections 3(2)(a)(ii) and Section 5 of the Income Tax Act cannot be extended to include another country. That it is not the intention of Kenyan law to obtrude itself in another jurisdiction in which it is not applicable.

99. The Appellant further submitted that the principles regarding the taxation of employment income have been upheld in Kenyan case law, including Kimani v. Commissioner of Domestic Taxes [2017] eKLR, where the High Court reaffirmed that employment income is taxable in Kenya only if the employment activities are carried out within the country. That this reinforces the argument that income earned by Japanese employees working in Japan during the 2020 tax year should not be subject to Kenyan PAYE.

100. The Appellant submitted that in light of the preceding, income from employment is not taxable and prayed that the assessment is set aside on this basis.

Appellant’s prayers 101. The Appellant prayed that the Tribunal:a.Upholds the Appeal.b.Sets aside the additional assessment raised by the Respondent amounting to Kshs. 191,064,801. 00.

Respondent’s Case 102. The Respondent’s case is premised on the following documents:a.The Respondent’s Statement of Facts dated and filed on 13th February 2024, and the documents attached thereto; andb.The Respondent’s written submissions dated 29th July 2024 and filed on even date.

103. The Respondent stated that the Appellant was awarded by Kenya Ports Authority (KPA) a sub-contract (contract no. Toyo-Shinryo-2019007) by Toyo Construction Company Limited (TCCL) on 5th March 2019 relating to the execution and installation of utility works for buildings and associated works including mechanical, electrical, plumbing and fire protection under the Mombasa Port Development Project (MPDP) Phase 2 amounting to Kshs. 333,200,000 and USD 7,797,000.

104. The Respondent further stated that the Agreement was later amended through Amendment Subcontract Agreement No. Toyo-Shinryo-201 -00 on 30th June 2022 to Kshs. 427,271,623-32 and USD 12,642,249.

105. The Respondent affirmed that it conducted an audit for tax purposes which resulted to raising tax assessments for the period 2018 to 2023 on 24th July 2023.

106. The Respondent averred that the Appellant requested the Respondent to defer the assessments on the basis of the talks between the Kenya and Japan Governments.

107. The Respondent stated that on 12th September 2023, it issued a formal assessment notice confirming taxes amounting to Kshs. 191,064,801 for the period 2018 to 2023. That on 9th October 2023, the Appellant filed a notice of objection to the assessments.

108. The Respondent further stated that it received and acknowledged the late objection on 11th October 2023. That the Respondent requested for supporting documentation to validate the objection.

109. The Respondent averred that after considering the documents provided by the Appellant, it issued its Objection decision on 4th December 2023 confirming the entire assessment objected to by the Appellant.

110. The Respondent stated that it noted that in the Appellant’s Objection application of 9th October 2023, the Appellant indicated that it was engaged solely for the implementation of an official aid funded project and that the incomes earned were tax-exempt since:a.The Exchange Notes (ENs) forming part of the Financing Agreements dated 20th November 2007 and 9th March 2015 specified that the Japanese companies (thus TCCL & Shinryo Corporation-Kenya Branch Comprised), consultants and Japanese employees were to be exempted from income tax on incomes earned from the implementation of MPDP Phase 2. b.Kenya Gazette Notice, Legal Notice Number No. 15 dated 26th February 2021 issued by the Cabinet Secretary (CS) for the National Treasury and Planning exempted the company from income tax to the extent specified in the Financing Agreement.

111. The Respondent averred that in response, it refuted the Appellant’s grounds stating that in the assessing the letter of 12th September 2023, the Respondent indicated that a letter dated 10th August 2018 from the Principal Secretary (PS) - National Treasury and Planning to the Commissioner of Domestic Taxes, which was also copied to TCCL, specified that income tax was chargeable on income earned on MPDP Phase 2.

112. In addition, that the Respondent noted that through the Judgment in the Appeal No. 105 of 2021- Kenya Ports Authority - Vs. Commissioner of Domestic Taxes Department, the Tax Appeal Tribunal noted that the CS National Treasury and Planning issued the requisite Legal Notice for MPDP on 25th February 2021 and no evidence was provided to prove the backdating of the effective date of the exemption.

113. The Respondent further argued that in the Judgment in Petition No. E280 of 2021, Eliud Karanja Matindi – Vs - Cabinet Secretary- National Treasury, Commissioner General - Kenya Revenue Authority, Attorney General, National Assembly and Speaker of National Assembly, the High Court Judge held that the Legal Notice Number 15 dated 26th February 2021 was unconstitutional and did not undergo public participation as envisaged.

114. The Respondent stated that it, therefore, reached a conclusion that the income earned by the Appellant on MPDP for the years of income 2018 to 2023 was chargeable to tax as per Section 3(2)(a)(i) of the Income Tax Act which provides that: -“3(2) Subject to this Act, income upon which tax is chargeable under this Act is income in respect of- gains or profits from- a business, for whatever period of time earned”

115. The Respondent asserted that the assessments were correctly issued and conform to the law. That the Appellant did not provide any evidence that would have altered the tax assessment.

116. The Respondent submitted that Section 56(1) of the Tax Procedures Act places the onus of proof in tax objections on the taxpayer who in this case failed to avail evidence that would support a contrary assessment or that would have guided the Respondent at arriving to a different Objection decision.

Respondent’s prayers 117. The Respondent prayed that the Tribunal finds:a.That the Respondent’s decision dated 4th December 2023 be upheld.b.That the confirmed assessments amounting to Kshs, 191,064,801. 00 were proper in law.c.That the Appeal herein be dismissed with costs to the Respondent.

Issues For Determination 118. The Tribunal has considered the facts of the matter and the submissions made by the parties, and considers the issues for determination as follows:a.Whether the income of the Appellant and its Japanese expatriate employees is exempted from income tax.b.Whether the Respondent was justified in issuing the corporation tax and PAYE assessments on the Appellant’s income and the employment income of the Appellant’s expatriate employees.

Analysis And Findings 119. The Tribunal analysed the issues that call for its determination as hereunder, having reviewed all the pleadings, information and documents adduced by the Appellant and the Respondent concerning the impugned objection decision.

120. The Respondent conducted an audit on the Appellant’s transactions for the years 2018 to 2023 and raised additional Corporation tax amounting to Kshs. 143,496,565 and Pay As You Earn (PAYE) amounting to Kshs. 47,568,237 inclusive of penalties and interest in a notice of audit findings issued on 12th September 2023.

121. The Appellant objected to the entire assessment, and the Respondent issued its Objection decision on 4th December 2023, rejecting the Appellant’s Objection in its entirety and confirming additional assessments.

122. The Appellant, being dissatisfied with the Respondent’s Objection decision, filed its Notice of Appeal on 2nd January 2024. a.Whether the income of the Appellant and its Japanese expatriate employees is exempted from income tax.

123. The Respondent assessed Corporation tax on the Appellant’s profits for the years 2019, 2020, 2021 and 2022. The Respondent also assessed PAYE on what the Respondent classified as untaxed emoluments of expatriates employed by the Appellant.

124. The Respondent stated that the income is chargeable to tax following the Judgment in Petition No. E280 of 2021 Eliud Karanja Matindi – Vs - Cabinet Secretary- National Treasury, Commissioner General - Kenya Revenue Authority, Attorney General, National Assembly and Speaker of National Assembly, where the High Court Judge held that the Legal Notice No. 15 dated 26th February 2021 was unconstitutional and did not undergo public participation as envisaged.

125. The Appellant disputed the Respondent’s Corporation tax and PAYE assessments arguing that the its incomes and that if its Japanese expatriate employees are exempted from income tax for the following reasons:a.That the Exchange Notes attached to the Appeal outline the agreement between the Government of Kenya and the State of Japan, and the agreement is an international treaty under the law. That Article 2(6) of the Constitution of Kenya, 2010 admits, as part of the laws of Kenya, all the treaties that are ratified and promulgated by the country.b.That Kenya is a signatory of the United Nations Vienna Convention on the Law of Treaties (1969) and because Kenya has validly entered the treaty, the agreement’s provisions with Japan. That the Appellant is protected under the treaty, and the legitimate expectation owed to the Appellant is that the exemption is honoured.c.That the Exchange Notes, being a binding multilateral agreement, created a legal right to the tax exemptions mentioned therein under Section 6A of the Tax Procedures Act.d.That Legal Notice No. 15 of 2021 given under Section 13 of the Income Tax Act affirms the exemption in the Exchange Notes to the extent specified in the Financing Agreements between the Government of Kenya and the Government of Japan.e.That Section 77 of the Public Finance Management Act empowers the CS to undertake the action which he took in the interest of the people of Kenya.f.That the Ruling in Civil Appeal No. E176 of 2023 has provisionally halted the enforcement of the declarations outlined in the Judgment of Petition No. E280 of 2021 regarding Legal Notice No. 15 of 2021 and Section 13 of the Income Tax Act in effect for six (6) months from the current date, pending the hearing and resolution of the applicants’ appeal.

126. The Tribunal referred to the case of Matindi v CS, National Treasury & Planning & 4 others (Constitutional Petition E280 of 2021) [2023] KEHC 1144 (KLR) (Constitutional and Human Rights) (17 February 2023) (Judgment) and notes that the Court held as follows:a.It is hereby declared that the first respondent violated the Constitution by exempting Japanese companies, Japanese consultants and Japanese employees as set out in Legal Notice No 15 of 2021 dated 15/2/2021 published on 26/2/2021 as issue No 17. b.It is hereby declared that Legal Notice No 15 of 2021 dated 15/2/2021 published on 26/2/2021 as issue No 17 is unconstitutional by itself and in its effect as it is contrary to articles 27 and 210 of the Constitution and had not been subjected to public participation. The said notice is hereby quashed.c.It is hereby declared that section 13(2) of the Income Tax Act is unconstitutional to the extent that it authorizes Income Tax waivers through a notice in the Gazette and for specified persons without regard to the dictates of article 210 of the Constitution. To the extent of the inconsistency, in particular the use of the Kenya Gazette, instead of legislation, to effect tax waiver, is struck down.d.It is hereby declared that Exemption or waiver of tax income can only be granted the National Assembly through National legislation after the same passes as a money bill as provided under article 114(3) of the Constitution; after public participation and in strict compliance with article 210 of the Constitution, which legislation will require that there be: -a.A public record of each waiver and the reasons for the waiver.b.Each waiver, and the reason for it shall be reported to the Auditor General.c.And, as per the dictate of article 27 of the Constitution, there can be no waiver based on national origin, race, colour, marital status, health status, Ethic society, religion, conscience, belief, culture, dress, language or birth.e.It is hereby declared that legislation on tax waiver involving country by country agreements must comply with the Constitution and must be on the basis of reciprocity, nondiscrimination, equality and tax neutrality.f.It is hereby declared that the National Assembly has no power to authorize waiver of tax other than through legislation contemplated and in strict compliance with article 210 of the Constitution.g.The National Assembly breached the Constitution by waiving public participation.h.The prayers related to legal Notices No 27/2021 are not Justiciable and as such are dismissed in limine.i.…j.…k.…l.Income Tax covered under legal notice dated 15/2/2021 published on 26 /2/2021 as issue No 17 is collectable with effect from the date of quashing of the impugned unconstitutional Legal Notice No 15 of 2021. ”

127. The Tribunal also refers to the stay orders issued by the Court of Appeal through the ruling in Civil Appeal (Application) No. E176 of 2023 National Assembly, Republic of Kenya & another v Matindi & 3 others (Civil Appeal (Application) E176 of 2023) [2023] KECA 1566 (KLR) (19 December 2023) (Ruling) as follows at paragraph 38: -“We believe that the circumstances of this case warrant the grant of an order, which we hereby grant, temporarily suspending the coming into effect of the declarations made by the trial court with respect to Legal Notice No. 15 of 2021 and section 13 of the Income Tax Act. The suspension of the said declarations shall remain in force for a period of six (6) months from the date hereof, pending hearing and determination of the applicants’ appeal, which counsel for the applicants and the 2nd and 3rd respondents informed the Court had already been filed.”

128. The Tribunal analysed the Appellant’s arguments and makes the following findings:a.Section 6A of the Tax Procedures Act was introduced by Section 35 of Finance Act, 2021, and the effective date of the provision was 1st July 2021. Further, that the multilateral agreements and treaties referred to in Section 6A of the Tax Procedures Act are those relating to international tax compliance and prevention of evasion of tax or exchange of information on tax matters. The Tribunal’s review of the Financing Agreement that is the subject of this Appeal finds that the agreement is not of the nature cited in Section 6A of the Tax Procedures Act, therefore Section 6A of the Tax Procedures Act does not apply to the Appellant’s case.b.The High Court in Matindi v CS, National Treasury & Planning & 4 others (Constitutional Petition E280 of 2021) [2023] KEHC 1144 (KLR) (Constitutional and Human Rights) (17 February 2023) (Judgment) addressed the Appellant’s arguments and the holding by the Court renders that the income of the Appellant and its Japanese expatriate employees are not exempted from Income tax.c.The Ruling in National Assembly, Republic of Kenya & another v Matindi & 3 others (Civil Appeal (Application) E176 of 2023) [2023] KECA 1566 (KLR) (19 December 2023) (Ruling) which suspended the enforcement of the declarations outlined in the Judgment of Petition No. E280 of 2021 regarding Legal Notice No. 15 of 2021 and Section 13 of the Income Tax Act remained in force for a period of six (6) months from the date of that Ruling pending hearing and determination of the applicants’ appeal. The date of delivery the Tribunal’s Judgment of this Appeal is long after the six (6) months from the date of the above-cited Ruling which was 19th January 2023. Based on this finding, the Tribunal finds that the stay orders given in the Ruling are no longer in force.

129. Consequently, the Tribunal finds, in the absence of a superior court overruling the High Court decision in Matindi v CS, National Treasury & Planning & 4 others (Constitutional Petition E280 of 2021) [2023] KEHC 1144 (KLR) (Constitutional and Human Rights) (17 February 2023) (Judgment), that it is bound by the law of precedent that the income of the Appellant and its Japanese expatriate employees is not exempted from income tax during the period of assessment.b.Whether the Respondent was justified in issuing the Corporation tax and PAYE assessments on the Appellant’s income and the employment income of the Appellant’s Japanese expatriate employees.

130. Having established that the income of the Appellant and its Japanese expatriate employees is not exempted from income tax, the Tribunal proceeds to determine whether the Respondent was justified in issuing the Corporation tax and PAYE assessments on the Appellant’s income and the employment income of the Appellant’s Japanese expatriate employees.

131. Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal (TAT) Act place the burden of disproving the Commissioner’s decisions upon the taxpayer. To satisfy this burden, a taxpayer ought to submit all the relevant evidentiary material in its possession.

132. Section 54A(1) of the Income Tax Act envisions that a person carrying on a business must keep certain records and documents which in the opinion of the Commissioner are adequate for computing tax. The legislation provides as follows: -“A person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds, contracts and vouchers which in the opinion of the Commissioner, are adequate for the purpose of computing tax.”

133. A person is also obligated to maintain and retain any document required under a tax law for a period of five years from the end of the reporting period to which it relates, as per Section 23(1) of the Tax Procedures Act so as to enable the person’s tax liability to be readily ascertained.

134. The Tribunal refers to the case of Commissioner of Domestic Taxes v Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR) where the Court held at paragraph 26 that: -“From the above, it is clear that the evidential burden of proof rests with the taxpayer to disprove the Commissioner and that once competent and relevant evidence is produced, then this burden now shifts to the Commissioner. I have emphasized and underlined ‘competence’ and ‘relevance’ because it is only evidence that meets these two tests that demolishes presumption of correctness and swings the burden to the Commissioner. This means that even if one avails evidence but then it is found that the same is incompetent or irrelevant, then the burden continues to remain with the tax payer.”3. Every person required under subsection (1) to keep records shall, at all reasonable times, avail the records to an authorised officer for inspection and shall give the officer every facility necessary to inspect the records.”

135. In the absence of relevant documentation to facilitate the assessment of a tax liability, the Respondent is empowered under Section 31(1) of the Tax Procedures Act to use its best judgement in making its tax assessment.

Corporation Tax 136. The Respondent assessed Corporation tax on the income that the Appellant declared as exempt in its self-assessment returns for the years 2019, 2020, 2021 and 2022. The Respondent averred that the Appellant did not provide any documentation in its dispute against the assessments and has still not provided any documentation with its Appeal.

137. In its without prejudice argument against the Corporation tax assessment, the Appellant alleged that the Respondent brought the income earned by the Shinryo Corporation Head Office, which is purely in Japan, into charge. That under the contract, part of the work was undertaken in Japan. That the Head Office staff fully undertook its activities in Japan, and that the staff and other operating expenses in Japan were only claimed in Japan. The Appellant affirmed that the income for that and the cost thereof is due to the Head Office.

138. The Appellant further stated that the income earned from locally undertaken activities is due to the Branch, in this case, the Appellant. The Appellant asserted that it correctly submitted the Income tax for the earnings associated with the Kenyan Branch, and referred the Tribunal to its income tax returns for 2018, 2019, 2020, 2021, and 2022 and financial statements that it stated are appended to the appeal.

139. The Appellant then cited provisions of the Income Tax Act, subsidiary legislation and OECD Guidelines regarding the taxation of the income from the project during the period assessed, and concluded that given its, the Corporation tax assessments are inconsistent with the relevant laws.

140. The Tribunal analysed the Respondent’s additional assessment of Corporation tax for the years 2019, 2020, 2021 and 2022 to establish if the Appellant had demonstrated that the assessments were incorrect or excessive.

141. The Appellant adduced as evidence its signed audited accounts for the years 2019 to 2022 and its Corporation tax returns for the years 2020 to 2022.

142. The Tribunal observes that the amounts on which the Respondent assessed Corporation tax for the years 2019, 2020, 2021 and 2022 were the profits before tax in the respective years which the Appellant declared in its signed audited accounts for the years 2019 to 2022 and its Corporation tax returns for the years 2020 to 2022.

143. Inspite of the Appellant’s argument that the Respondent assessed Corporation tax on what the Appellant described as income of its Head Office in Japan, that is, income of a non-resident that is not income taxable in Kenya, the Appellant’s audited accounts presented before the Tribunal contained the Appellant’s Report of the Directors on Page Three for the years 2019, 2020, 2021 and 2022 which stated as hereunder:“Limitation Of Scope Of The Financial StatementsThese financial statements reflect only transactions in respect of the company’s operations in Kenya, including those transactions conducted overseas in respect of the Kenyan operations.”

144. The Tribunal further notes that the Appellant in its pleadings stated that the income earned from locally undertaken activities is due to the Branch, in this case, the Appellant. The Tribunal further notes the Appellant’s assertion that it correctly submitted the income tax for the earnings associated with the Kenyan Branch, and referred the Tribunal to its income tax returns and financial statements which were are appended to the Appeal.

145. The Tribunal observes that the Appellant’s pleadings are consistent with the directors’ report cited above, which indicates that the income declared in its accounts and tax returns was solely branch income.

146. The Tribunal further finds that the Appellant failed to furnish the Tribunal with any document or records to illustrate which proportion of the Appellant’s self-declared income and profits pertained to income and profits of its Head Office. In this regard, the Tribunal notes that the Appellant merely made assertions in its argument against the Respondent’s Corporation tax assessments without producing evidence in support of its arguments.

147. Contrary to the Appellant’s requirement under Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act to prove that the Commissioner’s Corporation tax assessments are incorrect or excessive as argued, the Appellant neglected to present to the Tribunal any relevant source documents for the purpose of ascertaining its tax liability, as required by Section 54A(1) of the Income Tax Act and Section 23(1) of the Tax Procedures Act.

148. Consequently, the Tribunal finds that the Appellant failed to substantiate its argument that the Corporation tax assessment was invalid.

Pay As You Earn (PAYE) 149. The Respondent assessed PAYE on what it classified as untaxed emoluments of Japanese expatriate employees employed by the Appellant, based on comparable income earned by individuals having the same skill set as the expatriate employees for the period September 2018 to August 2023. The Respondent referred to Section 3(2)(a)(ii) of the Income Tax Act and Section 5(1)(b) of the Income Tax Act in issuing the assessment.

150. The Respondent averred that the Appellant did not provide any documentation in its dispute against the assessments and has still not provided any documentation with its Appeal.

151. The Appellant’s argument, which it stated was without prejudice to its primary point of exemption of Japanese employees from PAYE, was that even without considering the exemption, payments made in Japan to employees working in Japan are not subject to tax in Kenya.

152. The Appellant averred that in the year of income 2020, the Japanese staff were repatriated to Japan due to the Covid-19 pandemic which limited their presence and work activities within Kenya. The Appellant argued that the employment income of the Japanese staff that was earned and paid while they were physically present in Japan falls outside the ambit of Kenya taxation.

153. In support of its argument, the Appellant referred to Sections 3(2) and 5 of the Income Tax Act and Article 15 of the OECD Model Tax Convention on Income and on Capital.

154. It is not disputed by the Parties that the Japanese expatriate employees were in employment with or rendered services to the Appellant in the period of assessment, and that the Appellant was the employer to these employees according to the meaning provided in Section 2(1) of the Income Tax Act cited below: -“"employer" includes any resident person responsible for the payment of, or on account of, emoluments to an employee, and an agent, manager or other representative so responsible in Kenya on behalf of a non-resident employer”

155. It is further not in dispute that the Appellant is a permanent establishment in Kenya of a non-resident person, having been registered as a branch in Kenya and issued a certificate of compliance under the Companies Act.

156. The dispute that the Tribunal is left to determine is whether Income tax is chargeable on the employment income of the Japanese expatriate employees based on comparable income earned by individuals having the same skill set as the expatriate employees for the period September 2018 to August 2023.

157. Section 3(1) of the Income Tax Act stipulates the basis of charge of Income tax in Kenya: -“(1) Subject to, and in accordance with, this Act, a tax to be known as income tax shall be charged for each year of income upon all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya.”

158. Section 3(2)(a)(ii) of the Income Tax Act clearly states that gains or profits from employment or services rendered comprise income upon which tax is chargeable under the Act, subject to the Act.

159. Section 5(1) of the Income Tax Act details the gains or profits from employment or services rendered by residents and non-residents that is mandatorily deemed to have accrued in or to have been derived from Kenya as follows: -“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;orb.a non-resident person in respect of any employment with or services rendered to an employer who is resident in Kenya or the permanent establishment in Kenya of an employer who is not so resident, shall be deemed to have accrued in or to have been derived from Kenya.” (Emphasis added)

160. Section 37(1) of the Income Tax Act, the basis for the deduction of and accounting for PAYE, provides as follows: -“An employer paying emoluments to an employee shall deduct therefrom, and account for tax thereon, to such extent and in such manner as may be prescribed.”

161. The issue in dispute calls for the interpretation of the provisions of the Income Tax Act. As cited by Majanja J. in Tax Appeal No. E003 of 2020 China Road and Bridge Corporation v Commissioner of Domestic Taxes it was held that: -“15. Any tax imposed on a subject is dictated by the terms of legislation and taxing authority must satisfy itself that the transaction fits within the definition of the statute. In Adamson v Attorney General (1933) AC 257 at p 275 it was held that, “The section is one that imposes a tax upon the subject, and it is well settled that in such cases it is incumbent on the Crown to establish that its claim comes within the very words used, and if there is any doubt or ambiguity this defect-if it be in view of the Crown a defect-can only be remedied by legislation.”

162. It follows from the strict interpretation of the clear language of the statute cited above, being Section 3(1) of the Income Tax Act, Section 3(2)(a)(ii) of the Income Tax and Section 5(1) of the Income Tax Act that any employment income that falls under Section 5(1) of the Income Tax Act is income chargeable to tax in Kenya and that Section 37(1) of the Income Tax Act should apply with regard to the deduction of and accounting for PAYE on that employment income in accordance with the Income Tax (P.A.Y.E.) Rules, 1973.

163. Contrary to the Appellant’s assertion, the Tribunal finds that it would be improper to imply or read into the provisions of Sections 3(1), 3(2)(a)(ii) and Section 5(1)(b) of the Income Tax Act that employment rendered by the Japanese expatriate employees from any employment with or services rendered to the Appellant is not chargeable to tax in Kenya. It also violates the principles of interpretation of tax statutes.

164. The Tribunal is guided by the holding in Equity Group Holdings Limited v Commissioner of Domestic Taxes (Civil Appeal E069 & E025 of 2020) [2021] KEHC 25 (KLR) (Commercial and Tax) (23 August 2021) (Judgment) regarding interpretation of tax laws where Mativo J. held in paragraph 11 that: -“11. In construing fiscal statutes and in determining the liability of a subject to tax one had to have regard to the strict letter of the law. If the revenue satisfied the court that the case fell strictly within the provisions of the law, the subject could be taxed. If, on the other hand, the case was not covered within the four corners of the provisions of the taxing statute, no tax could be imposed by inference or by analogy or by trying to probe into the intentions of the legislature and by considering what was the substance of the matter.”

165. The Tribunal, cognizant of its mandate, is cautious not to expand the scope of statutory provisions beyond the words of the statute. Parliament, in its wisdom, allocated Kenya the taxing rights over the employment income of a non-resident person for an amount paid to the non-resident person in respect of any employment with or services rendered to the permanent establishment in Kenya of an employer who is not so resident as the income is deemed to have accrued in or to have been derived from Kenya.

166. The Tribunal further notes that the Respondent stated that it based the PAYE assessment on the employment income of Japanese expatriate employees on comparable income earned by individuals having the same skill set as the expatriate employees for the period September 2018 to August 2023. The Tribunal observes that the Appellant did not make any pleadings against this basis of assessment.

167. Based on the foregoing, the Tribunal is not persuaded that the Respondent erred in assessing PAYE on the employment income of the Japanese expatriate employees for the periods of September 2018 to August 2023.

Final Decision 168. The upshot of the foregoing analysis is that the Tribunal finds that the Appeal lacks merit and accordingly proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 4th December 2023 be and is hereby upheld.c.Each party to bear its own costs.

169. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 22ND DAY OF NOVEMBER, 2024. ERIC NYONGESA WAFULACHAIRMANGLORIA A. OGAGA DR. RODNEY O. OLUOCH MEMBER MEMBERABRAHAM K. KIPROTICHMEMBER