[2023] KETAT 166 (KLR)

Total E & P International K2 Ltd (Kenya Branch) v Commissioner of Domestic Taxes (Appeal 396 of 2021) [2023] KETAT 166 (KLR) (Commercial and Tax) (10 February 2023) (Judgment)

Neutral citation: [2023] KETAT 166 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Appeal 396 of 2021

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

February 10, 2023

Between

Total E & P International K2 Ltd (Kenya Branch)

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

1. The Appellant is a duly registered branch of Total E&P International K2 Limited, a private limited liability company duly incorporated in the United Kingdom. Its principal activity is the exploration and production of petroleum resources. The Branch is licensed to conduct oil and gas exploration and production activities in Kenya's South Lokichar basin, Turkana County and holds a Production Sharing Contract ("PSC') with the Government of Kenya.

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

3. The Respondent conducted an in-depth audit of the Appellant’s tax affairs with respect to the years of income 2016 - 2018 with a view to ascertain its compliance with applicable Kenyan tax legislation, which includes the provisions of the Income Tax Act.

4. Upon conclusion and noting alleged instances of non-compliance with the Withholding Income Tax provisions of the ITA, the Respondent issued a letter of preliminary findings dated 7th February 2020. Aggrieved by the Preliminary Findings, the Appellant responded to the same vide letter dated 6th March 2020 through which it sought to illustrate its interpretation of the applicable legislation and further, prove its compliance with the WHT provisions of the ITA.

5. The Respondent, in disagreement with the Appellant’s position as captured in the Response, proceeded to issue an additional assessment vide letter dated 7th July 2020 indicating WHT liabilities amounting to Kshs. 231,813,727. 95, inclusive of penalties and interest.

6. Further aggrieved by the assessment raised, the Appellant exercised its right to object against the same and urged the Respondent to vacate the WHT liabilities captured in the assessment based on the applicable domestic tax legislation, international principles of taxation and industry best practice.

7. The Respondent proceeded to issue an objection decision on 21st May 2021.

8. The Appellant being aggrieved lodged a Notice of Appeal dated and filed on 18th June 2021.

The Appeal 9. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal dated 2nd July 2021 and filed on 9th July 2021:-i.That the Respondent erred in law and fact by failing to appreciate that the head office recharges allocated to the Appellant constitute management or professional fees and that the same is exempt from WHT in Kenya pursuant to Proviso (ii) of Section 10 of the ITA which exempts management or professional fees paid by a branch to its head office from WHT in Kenya.ii.That while the Appellant agrees with the Respondent that transactions concluded between the Appellant and its United Kingdom (UK) resident Head office are governed by the Kenya-UK Double Taxation Agreement (DTA), the Respondent erred in law and in fact by misinterpreting Article 14 of the Kenya-UK DTA under which the tax treatment and the rate of tax applicable to management fees must be determined by reference to the local legislation.iii.That the Respondent erred in law and fact by concluding that payments between the Appellant and its head office for management or professional fees with respect to services performed outside Kenya are subject to WHT in Kenya at the rate of 12. 5% pursuant to article 14(1) of the Kenya-DTA without due consideration to the exclusions and exemptions contained under article 14(6) of the Kenya-UK DTA.iv.That the Respondent erred in law and fact by misinterpreting and applying article 14(6) of the Kenya-UK DTA which confirms that Kenya does not have taxing rights with respect to management or professional fees where services are performed outside Kenya.v.That notwithstanding the foregoing, the Respondent erred in law and fact by failing to appreciate that the head office recharges allocated to the Appellant by its head office constitutes service fees, a distinct class of income established under paragraph 15 of the 9th Schedule to the ITA.vi.That the Respondent erred in law and in fact in failing to appreciate that the Kenya-UK DTA does not expressly address service fees as an independent class of income created under paragraph 15 of the 9th Schedule to the ITA, and therefore Article 24 of the Kenya-UK DTA is applicable in determining the country that has taxing rights with respect to service fees allocated to the Appellant since these are not expressly addressed under the Kenya-UK DTA.vii.That the Respondent erred in law and in fact by misapplying the provisions of Article 24 of the Kenya-UK DTA which expressly grants the UK taxing rights with respect to items of income of a resident of the UK.viii.That the Respondent erred in law and in fact by failing to consider and appreciate that the Appellant had diligently complied with all its income tax obligations and cooperated with the Respondent as per the provisions of the ITA, CAP 470, Laws of Kenya and genuinely demonstrated good faith throughout in relation to its tax obligations.

The Appellant’s Case 10. The Appellant’s case is premised on the Statement of Facts dated 2nd July 2021 and filed on 9th July 2021; and the written submissions dated 7th February 2022 and filed on 8th February 2022.

11. The Appellant is of the view that there are four (4) key issues for determination in relation to the Respondent's objection decision as follows:-i.Whether Section 10 of ITA is applicable in determining the tax treatment accorded to the head office recharges allocated to theAppellant and characterized as management or professional fees by the Respondent are subject to WHT in Kenya pursuant to Section 10 of the ITA;ii.Whether the Respondent has imposed tax at the correct rate of tax applicable to management fees paid by a branch to its head office based on the appropriate interpretation of the Kenya-UK DTA;iii.Whether Article 14 of the Kenya-UK DTA allocates taxing rights to Kenya with respect to payments for services of a managerial or professional character, where the said services were performed outside Kenya; andiv.Whether head office recharges relating to technical, geological, engineering and limited centralized administrative support services, collectively deemed services of a managerial character by the Respondent, provided to the Appellant ought to be classified as service fees by virtue of Paragraph 15 of the Ninth Schedule to the ITA and therefore are subject to tax under Article 24 of the Kenya-UK DTA.

12. The Appellant addresses the various issues in contention as hereinafter.

i. Whether Section 10 of ITA is applicable in determining the tax treatment accorded to the head office recharges allocated to the Appellant and characterized as management or professional fees by the Respondent are subject to WHT in Kenya pursuant to Section 10 of the ITA; 13. The Appellant makes reference to Section 3(1) of the ITA, the charging section, which confirms that all items of income of a person, whether resident or non- resident, accrued in or derived from Kenya is subject to tax in Kenya.

14. Further reference is made to Section 10 of the ITA, which seeks to impose WHT on certain qualifying payments accrued in or derived from Kenya made by a resident person or a person with a permanent establishment in Kenya. Payments subject to WHT in Kenya include, inter alia management or professional or training fees.

15. However, that notwithstanding the above, provison (ii) to Section 10(1) of the ITA, as it was prior to amendment by the Finance Act 2019 and thereby applicable with respect to the assessment period, excludes payments made between a branch and its head office from the ambit of WHT in Kenya. Specifically, proviso (ii) to Section 10(1) of the ITA provides as follows:-“Provided that -This subsection shall not apply to any such payment made, or purported to be made, by the permanent establishment in Kenya of a non-resident person to that non-resident person."

16. The Appellant guided by the rules of statutory interpretation, asserts that based on a plain text reading of proviso (ii) to the ITA, cost allocations made by the head office to the Branch ought to be considered exempt from WHT in Kenya.

17. Specifically, the Appellant notes that during the assessment period, the branch was recharged various costs by the head office incurred in furtherance of the Appellant's oil and gas exploration operations in Kenya. These costs included service fees relating to technical, geological, engineering and centralized administrative support provided for the benefit of the branch operations, together with interest expenses allocated to the branch. It is further noted that these costs were allocated to the branch by the head office in accordance with the Total Group's internal policy which requires service entities to invoice operating entities directly, where services are provided to operating entities.

18. It is further confirmed that the cost recharges do not amount to actual cash payments, but merely the allocation of costs between the branch and its head office from an accounting perspective.

19. The Appellant submits that these costs allocations fall squarely within the purview of proviso (ii) to Section 10 (1) of the ITA and should therefore be considered outside the ambit of WHT in Kenya.

20. In addition to the above, and though not contested by the Respondent in its objection decision, the Appellant argues that even where cost allocations arising from the Head Office do not relate to services performed by the head office, the exclusion from WHT remains. This position is premised on the fact that proviso (ii) to Section 10 (1) of the ITA is not conditional upon performance of the services by the head office; the only condition imposed is that the payment made, or purported to be made, be between a branch and its head office.

21. That the Respondent's objection decision therefore fails in its entirety based on the application of proviso (ii) to Section 10 (1) of the ITA, to the extent that the same expressly exempts payments made, or purported to be made, between a branch and its head office.

22. That in the present instance, the applicable legislation expressly exempts these payments from the ambit of WHT. Any abrogation by the Respondent from this legal principal would be a departure from the express provisions of legislation and would be tantamount to a derogation from the rule of law intended at denying the Appellant its statutory and constitutional right.

23. That in any case the Appellant would like to emphasize as well that the Appellant's head office recharges relating to the year of income 2018 amounting to Kshs. 294,958,148 were added back and subjected to taxation at the rate of 37. 5%. Therefore, if a tax would have been withheld, the same amount would have been taxed twice in Kenya.

24. That in addition, by virtue of Section 18(5) of the ITA these cost allocations were treated as nonallowable in the branch's self-assessment return for the year of income 2018. Indeed, Section 18 (5) of the ITA provides:“When a non-resident person carries on a business in Kenya through a permanent establishment in Kenya, the gains or profits of the permanent establishment shall be ascertained without any deduction in respect of interest, royalties or management or professional fees paid or purported to be paid by the permanent establishment to the non-resident person and by disregarding any foreign exchange loss or gains with respect to net assets or liabilities purportedly established between the permanent establishment in Kenya and the non-resident person.”

25. On this basis, and without prejudice to the preceding arguments, the Appellant holds the view that WHT ought not to be demanded where the expenses in question are disallowed from a CIT perspective. The Appellant therefore maintains that principal WHT demanded amounting to Kshs. 36,869,769. 00 being the WHT arising from inter-company cost allocations amounting to Kshs. 294,958,148. 00 incurred in the year 2018, ought to be deducted from the principal tax demanded, together with attendant penalties and interest.

26. Therefore, in view of the above, the Appellant prays that this Honourable Tribunal declares the Respondent's objection decision null and void and vacates the same in its entirety.

ii.Whether the Respondent has imposed tax at the correct rate of tax applicable to management fees paid by a Branch to its head office based on the appropriate interpretation of the Kenya- UK-DTA. 27. The Appellant notes that the Respondent's case is primarily based on its interpretation of Article 14 of the Kenya-UK DTA. In view of this, the Respondent has concluded that head office recharges to the Branch are subject to WHT in Kenya at the rate of 12. 5% as management fees.

28. The Appellant notes that this conclusion by the Respondent is based on its failure to correctly interpret provisions of the DTA and determine how these interact with the applicable provisions contained in the local legislation.

29. That Article 14 (1) & (2) of the Kenya-UK DTAprovides as follows:“(1)Management fees arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.(2)Notwithstanding Article 8, management fees may also be taxed in the State in which they arise and according to the law of that State, but where such management fees are paid to a resident of the other Contracting State who is subject to tax there in respect thereof the tax so charged in the Contracting State in which the management fees arise shall not exceed 12 1/2 percent of the gross amount of the management fees arising there."

30. That in other words, management fees arising in Kenya and paid to a resident of the UK are only taxable in the UK. However, Kenya may impose tax on the same at a rate not exceeding 12. 5%. The language used in the DTA when setting the applicable rate is "…shall not exceed 12. 5%...". This means that the rate may be set in the local legislation at between 0% and 12. 5%, but it is not mandatory for the rate to be 12. 5% as implied by the Respondent.

31. That further, the objective of a DTA is the avoidance of double taxation; therefore, where a given source of income is exempt from tax in the DTA or by reference to the local legislation, the position should remain in order to honor the spirit of the DTA.

32. That whilst the Appellant agrees with the Respondent's position that transactions concluded between itself and its head office may fall within the purview of Article 14 of the Kenya-UK DTA, the Appellant notes that in order to determine the tax treatment and the rate of tax applicable in the present circumstances, reference must be made to the local legislation. The Respondent's attempt to impose tax at the rate of 12. 5% without reference to the local legislation amounts to a misinterpretation of the provisions of the DTA.

33. That since the payments may be taxable under Article 14 of the DTA, reference is made to local legislation for purposes of determining the applicable rate, subject to a maximum of 12. 5%. In this case, the local legislation expressly provides that payments made by a branch to its head offices are exempt from tax under Section 10 of the ITA. Based on this, the applicable rate in this case is 0% and the application of this rate fulfils the objective of the DTA to avoid double taxation.

iii.Whether Article 14 of the Kenya-UK DTA allocates taxing rights to Kenya with respect to payments for services of a managerial or professional character, where said services were performed outside Kenya. 34. That without prejudice to the foregoing, the Appellant agrees with the Respondent's position that transactions concluded between itself and head office fall within the purview of the Kenya-UK DTA, as empowered by Section 41 (1) of the ITA. Indeed, Section 41(1) of the ITA empowers the Cabinet Secretary, National Treasury to conclude Double Taxation Agreements (DTAs) between the Government of Kenya and any other country purposed at preventing double taxation, and where such agreements are concluded, the same override the provisions of domestic legislation.

35. That reference is therefore made to Article 1 of the Kenya-UK DTA which confirms the scope of the DTA. Specifically, Article 1 provides that the Kenya- UK DTA "shall apply to persons who are residents of one or both of the Contracting States."

36. That while the Appellant confirms that it is a resident of Kenya, and that the head office is a resident of the UK, thereby entitled to apply the provisions of the Kenya-UK DTA, it is noted that this is not in contention in the present instance.

37. That the Kenya - UK DTA pronounces itself on various items of income and provides the tax treatment that ought to be accorded with respect to transactions that fall within its purview.

38. That items of income provided for under the Kenya-UK DTA include, inter alia, management fees. Management fees are defined under Article 14 (3) of the Kenya-UK DTA to mean "payments of any kind to any person, other than to an employee of a person making the payments, in consideration for any services of a managerial, technical or consultancy nature".

39. In the present instance, the Appellant contends that head office recharges allocated to it by the head office fall within this definition to the extent that the same constitute payments in consideration for services of a managerial nature. This confirms the applicability of Article 14 of the Kenya-UK DTA to the present tax dispute.

40. Further, that it is not in issue that Article 14 (2) of the Kenya-UK DTA grants Kenya taxing rights with respect to management fees paid to a resident of the UK to a maximum of 12. 5%. Article 14 (2) provides:“Notwithstanding Article 8, management fees may also be taxed in the State in which they arise and according to the law of that State; but where such management fees are paid to a resident of the other Contracting State who is subject to tax there in respect thereof the tax so charged in the Contracting State in which the management fees arise shall not exceed 12 ½ percent of the gross amount of the management fees arising there."

41. That the above notwithstanding, the Appellant refers to Article 14(6) of the Kenya-UK DTA which provides an exception to Article 14 (2). Specifically, Article 14 (6) states:“Management fees shall be deemed to arise in a Contracting State when the payer is the government of that State or a political sub-division thereof, a local authority or a resident of that State, and to the extent that they are attributable to services rendered in that State. Where, however the person paying the management fees whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment in connexion with which the obligation to pay the management fees was incurred and the management fees are borne by that permanent establishment, then the management fees shall be deemed to arise in that Contracting State to the extent that they are attributable to services rendered in that State."

42. The Appellant contends that the above stated provision limits the application of WHT on management fees in Kenya to instances where the services that gave rise to the management fees arose/were performed in Kenya. In the present instance, the Appellant confirms that the head office recharges that the Respondent seeks to subject to WHT in Kenya as management fees arose as a result of services performed wholly offshore and are therefore not subject to WHT in Kenya.

43. Specifically, the Appellant reiterates that based on its interpretation of Article 14 (6), the head office recharges in dispute are only taxable in Kenya to the extent that the underlying services that gave rise to them were performed in Kenya. Where, however, the same are performed outside Kenya, as is the case in this dispute, taxing rights are accorded fully to the UK.

44. Based on above, the Appellant submits that this Honourable Tribunal ought to dismiss the Respondent's objection decision in its entirety.

iv. Whether head office recharges relating to technical, geological, engineering and limited centralized administrative support services, collectively deemed services of a managerial character by the Respondent, provided to the Appellant ought to be classified as service fees by virtue of Paragraph 15 of the Ninth Schedule to the ITA and therefore are subject to Article 24 of the Kenya - UK DTA. 45. The Appellant acknowledges that it receives various services from non-resident related parties to enable it to efficiently perform its obligations under the Production Sharing Contract (PSC) with the Government of Kenya in relation to its operational activities. As such the petroleum sub-contracting services so received primarily include geological, engineering support and limited administrative support.

46. The Appellant further states that these services are provided directly to the branch's head office from various Group entities including Total SA (France), Total E&P North Sea UK Limited (UK), Total E&P Norge (Norway) and Total E&P Denmark (Denmark) and thereafter the head office allocates and recharges these costs to the Appellant in line with the Group's internal Inter-company transactions policy which requires service entities within the group to invoice operating companies directly, where services are provided to operating entities.

47. The Appellant contends that, head office recharges; by the head office amount to service fees pursuant to Paragraph 15 of the Ninth Schedule to the ITA. Paragraph 15 of the 9th Schedule to the ITA provides:"Subject to subparagraph (3), a non-resident subcontractor who derives a fee for the provision of services (referred to in this paragraph as a "service fee") to a licensee or contractor in respect of mining or petroleum operations shall be liable to pay non-resident withholding tax at the rate specified in subparagraph (2) on the gross amount of the service fee."

48. That in the present instance, Paragraph 15 of the Ninth Schedule to the ITA imposes a burden on petroleum contractors/ licensees to withhold tax at the rate of 5. 625% with respect to service fees paid to non-resident subcontractors.

49. The Appellant submits that where, an effective DTA is in force, as is the case in the present tax dispute, guidance ought to be sought from the DTA in determining the tax treatment to be accorded to the category of income in issue. Reference is therefore made to the provisions of the Kenya-UK DTA for guidance on the taxation of service fees allocated to the Appellant by the head office.

50. The Appellant submits that it is not in dispute that where a valid and enforceable DTA exists the same should be applied with the aim of providing relief from double taxation as envisaged in Section 41 of the ITA. However, it is noted that the Kenya-UK DTA does not specifically provide for the taxation of service fees as a distinct category of income provided for under Paragraph 15 of the Ninth Schedule to the ITA.

51. Consequently, reference is made to Article 24 of the Kenya-UK DTA, which provides for the taxation of items of income not expressly dealt with under the DTA. Article 24 of the Kenya - UK DTA states as follows:“Items of income of a resident of a Contracting State being income of a class or from sources not expressly mentioned in the foregoing articles of this Agreement in respect of which he is subject to tax in that State shall be taxable only in that State. Provided that this article shall not be construed as affecting the taxation of income attributable to a permanent establishment which a resident of one Contracting State has in the other Contracting State."

52. The Appellant further contends that Article 24 of the Kenya-UK DTA is clear that where items of income of a resident of a Contracting State (i.e. the Head Office in the UK), are not expressly provided for in the DTA, the same are only taxable in that state (i.e. the UK). Therefore, service fees payable by the Appellant to its Head Office ought only to be taxable in the UK.

53. The above notwithstanding, the Appellant submits that though Paragraph 15 of the 9th Schedule to the ITA is clear that fees paid to a non-resident subcontractor for services provided to a licensee or contractor in respect of mining or petroleum operations amount to service fees, and is subject to WHT in Kenya at the rate of 5. 625%, Paragraph 16 of the 9th Schedule to the ITA creates an ambiguity to the extent that it seeks to levy WHT on management or professional fees paid by a licensee, which carry a similar character to service fees, at the rate of 12. 5%.

54. However, despite this ambiguity, the Appellant notes that it is trite law that where an ambiguity is created by tax legislation, the same ought to be interpreted in favour of the taxpayer.

55. Pursuant to the above, the Appellant submits that despite the ambiguity created by Paragraph 15 and 16 of the Ninth Schedule to the ITA, fees allocated to its Head Office in support of its petroleum operations ought to be considered to amount to service fees and thereafter subjected to tax in Kenya as such, with reference to the provisions of the Kenya-UK DTA.

56. The Appellant reiterates that unless the Kenya-UK DTA expressly provides for taxation of service fees, the same should be subjected to tax in Kenya in accordance with Article 24 of the Kenya-UK DTA. The drafters of the Kenya- UK DTA having envisaged issues such as the one in dispute took cognizance that it may not be able to comprehensively cover all incomes earned or generated by contracting states through express provisions as they are innumerable.

57. The Appellant strongly contends that taking cognizance of the transaction in dispute, domestic legislation and the Kenya-UK DTA, Kenya does not hold any taxing rights with respect to service fees allocated to the Appellant.

58. The Appellant maintains that since the income in form of services fees is payable by the Appellant to a resident of the contracting state (i.e. Head office, Total E&P International K2 Limited), it can only be taxed in that state (i.e. the UK) by virtue of Article 24, seeing that there is no other provision that cover service fees.

59. The Appellant states that this position is supported by the TAT's conclusions in the case of McKinsey and Company Inc Africa Proprietary Ltd v Commissioner of Legal Services and Board Coordination in Appeal No 199 of 2020 which related to the application of WHT on professional fees under the Kenya - South Africa DTA. The TAT concluded that where a DTA does not contain a separate management fees article, income by way of management fees would ordinarily be characterized as business profits and therefore not subject to WHT in Kenya.

60. That in a similar manner, given that the Kenya-UK DTA contains no specific provision on the taxation of service fees as a distinct category of income, and given no other Articles of the DTA deal with this category of income, the same is taxable under- the provisions of Article 24 of the DTA.

61. The Appellant maintains that since its inception it has dutifully carried on its business in line with the statutory requirements.

62. The Appellant is of the view that the Respondent has failed to substantiate its allegations and that it has discharged its burden of proof in relation to the formal assessment and objection decision in accordance with Section 56 of the Tax Procedures Act (TPA).

63. In support of its case, the Appellant relied on the following eight (8) cases:a.Keroche Industries Limited v Kenya Revenue Authority & 5 Others [2007] 2 KLR 240. b.Cape Brandy Syndicate v Inland Revenue Commissioners [1920] 1 KB 64. c.The decision of the Court in Okiya Omtatah Okoiti v Attorney General & 2 others; Francis K. Muthaura (Amb) & 5 others (Interested Parties) [2019] eKLR.d.Commissioner of Income Tax v Westmont Power (K) Limited [2006] eKLR.e.Motaku Shipping Agencies Limited v Commissioner of Income Tax [2014] eKLR.f.The South Africa’s Supreme Court of Appeal case in AM Moola Group Ltd v Commissioner for South Africa Revenue Services [2003] 65 SATC 414. g.The dicta of Lord Donovan in Mangin v Inland Revenue Commissioner [1971] AC 739. h.MJ v NK & another [2017] eKLR.

Appellant’s Prayers 64. The Appellant made the following prayers:i.That the Tribunal finds that the Respondent’s confirmed assessments per the objection decision have no basis in law or in fact and the Tribunal should set them aside.ii.That the costs of this Appeal be awarded to the Appellant.

Respondent’s Case 65. The Respondent’s case is grounded on its Statement of Facts dated 3rd August 2021 and filed on the same date and its written submissions dated 2nd March 2022 and filed on 3rd March 2022.

66. The Respondent states that Maersk Oil Exploration International Kenya Kl, K2, K3 Limited- Kenya Branches (MOEIKL- Kenya entities) are branches of Maersk Oil Exploration International Kenya K1, K2, K3 Limited UK, which are companies incorporated in the UK. The branches have 25% interest in three oil and gas exploration licenses in Kenya for blocks 10BA, 10BBB and 13T.

67. That the Respondent conducted a desk audit on the MOEIL Kenya entities and issued WHT assessments on 7th July 2020 which the taxpayer objected to on 5th August 2020.

68. That the audit established that Maersk Oil Exploration International Kenya Kl Limited - Kenya Branch (MOEIL-K1) was recharged by its head office, Maersk Oil Exploration International Kenya K2 Limited (UK) for services rendered by various Group companies.

69. That it was noted that prior to the acquisition of Maersk AP Moller by Total E&P in March 2018, the aforesaid services were provided and invoiced by MOGAS Denmark to Maersk Oil International Limited, UK. Maersk Oil International Limited UK would then re-invoice Maersk International Oil International K1 Limited UK, which allocated the cost to its Kenyan Branch. Post-acquisition, the services were provided by Maersk Oil North Sea UK Limited, Maersk Oil Norway AS, Total E&P Denmark A/S (CPH) and Total SA and invoiced to Total E&P International UK (Formerly Maersk Oil International UK) and further reallocated to the branch in Kenya.

70. That the services rendered by employees of Maersk/Total companies were in various categories as indicated in the table below: -

ice cription

Project associated services Technical support/project management- specialized work from geologists, geoscientists, engineers

Headquarter Services/ Global Services Centralized services including local support (e.g. Finance IT HR, HSE, general management etc.) and global services e.g. global finance, global IT, general management

Pass-through transactions Costs incurred by TEPDK or its related parties on behalf of each other 71. That the Respondent had conducted an in-depth audit of the Appellant's tax affairs with respect the years of income 2016-2018 (the assessment period) upon which the Respondent issued its preliminary findings vide a letter dated 7th February, 2020.

72. That the Appellant disagreed with the Respondent's position and responded to the same vide letter dated 6th March 2020.

73. That the Respondent reviewed the Appellant's response and disagreed with the Appellant's position. The Respondent then raised additional assessment amounting to Kshs. 231,813,727. 95 of principal tax vide a letter dated 7th July 2020.

74. That the Appellant objected to the assessment in its entirety and lodged a notice of objection dated 5th August 2020.

75. That the Respondent on 21st May 2021 made its objection decision confirming the assessments of Kshs. 231,813,727. 95 and demanded the settlement of the same within thirty days of the date of the objection decision.

76. The Respondent is of the view that this Appeal invokes the following three (3) issues for determination:a.Whether the Respondent erred in fact and in law in its classification of head office recharges.b.Whether the Respondent erred in fact and in law in its interpretation and application of Article 14 of the Kenya-UK Double Tax Agreement.cWhether the head offices recharges are subject to Withholding tax in Kenya pursuant to Section 10 of the Income tax Act.

77. That based on the Appellant's own documents, the Appellant is a branch licensed to conduct oil and gas exploration and production activities in Kenya's South Lokichar basin, Turkana County and holds a PSC with the Government of Kenya.

78. That the Appellant is therefore a contractor whose activities would be taxed under the 9th Schedule to the ITA.

79. That Section 15(7)(e) of the ITA provides for specified sources of income where subparagraph (iv) (b) provides for determination of income of a licensee from one license area or a contractor from one contract area as determined by the 9th Schedule.

80. That Section 15(7)(e) provides as follows:- “Notwithstanding anything contained in this Act-(e)the specified sources of income are- ·(ivB) income of a licensee from one licence area or a contractor from one contract area as determined in accordance with the Ninth Schedule”

81. That Section 15(7) of the Income Tax Act as a non obstante clause therefore means that the specified sources of income are to be determined as per the said subsection.

82. That Paragraph 16 of the 9th Schedule to the ITA provides for deduction of withholding tax by contractor. The paragraph stipulates that “the rate of withholding tax to be deducted by a contractor under section 35(1) is in the case of management, training or professional fees, twelve and a half per cent of the gross amount of the management or professional fees payable”.

83. That Section 2 of the ITA defines "management or professional fees" to mean any payment made to any person other than a payment made to an employee by his employer, as consideration for any managerial, technical, agency, contractual, professional or consultancy services".

84. That during audit, the Respondent noted that the services provided to the Appellant were technical in nature and specific to the Appellant's extractive activities.

85. That the Appellant's head office in UK allocated and recharged the costs for the services to the Appellant. The Appellant therefore paid the recharges costs to its head office in UK.

86. The Respondent avers that the nature of the services offered to the Appellant are management fees that are technical in nature which fall within the definition of management fees under both the ITA and the Kenya-UK DTA.

87. That these services could therefore only be taxed in accordance with the 9th Schedule.

88. That Section 41 of the ITA provides for special arrangements for relief from double taxation as follows:-"(1) The Minister may from time to time by notice declare that arrangements, specified in the notice and being arrangements that have been made with the Government of any country outside of the Republic of Kenya with a view to affording relief from double taxation in relation to income tax and any taxes of a similar character imposed by the laws of that country, shall, subject to subsection (5) but notwithstanding any other provision to the contrary in this Act or in any other written law, have effect in relation to income tax, and every such notice shall, subject to the provisions of this section, have effect according to its tenor."

89. That Section 41(1) of ITA is an obstante clause that gives recognition to any existing double tax agreements.

90. That the Kenya-UK DTA allocates taxing rights on management fees at Article 14. The Article provides as follows:-“(1)Management fees arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.(2)Notwithstanding Article 8, management fees may also be taxed in the State in which they arise and according to the law of that State: but where such management fees are paid to a resident of the otherContracting State who is subject to tax there in respect thereof the tax so charged in the Contracting State in which the management fees arise shall not exceed 12 1/2 percent of the gross amount of the management fees arising there"(6)Management fees shall be deemed to arise in a Contracting State when the payer is the government of that State or a political sub-division thereof, a local authority or a resident of that State, and to the extent that they are attributable to services rendered in that State. Mere, however, the person paying the management fees whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment in connexion with which the obligation to pay the management fees was incurred and the management fees are borne by that permanent establishment, then the management fees shall be deemed to arise in that Contracting State to the extent that they are attributable to services rendered in that State.”

91. That Article 14 of the Kenya-UK DTA allocates taxing rights on management fees to both states.

92. That pursuant to Article 14(2) of the DTA, management fees may be taxed in the state in which they arise, and according to the law of that state, and the tax so charged shall not exceed 12 ½ per cent of the gross amount of the management fees.

93. That the Respondent therefore subjected the recharges costs paid by the Appellant to its Head office in UK to WHT at a rate of 12. 5% pursuant to article 14(2) of the Kenya-UK DTA.

94. The Respondent avers that its assessment and objection decision were issued in accordance with the law and should be upheld. The Respondent replies to the Appellant's appeal and statement of facts as hereunder:-a)Whether head office recharges allocated to the Appellant constitute management or professional fees and that the same are exempt from in Kenya WHT pursuant to provision (ii) of section 10 of the Income Tax Act.

95. The Respondent avers that based on the Appellant's own documents, the recharge costs allocated to the Appellant were for services that primarily focused on the extractive industry and included geological, engineering support with limited management support: services in the nature of centralized administrative support.

96. The Respondent states that these services are technical in nature and their fees fall within the definition of management fees as defined both under the Income tax Act and under the Kenya-UK DTA.

97. The Respondent notes the contents of proviso (ii) of Section 10 of the ITA which provides as follows:-“(1)For the purposes of this Act, where a resident person or a person having a permanent establishment in Kenya makes a payment to any other person in respect of-(a)a management or professional fee or training fee;the amount thereof shall be deemed to be income which accrued in or was derived from Kenya: Provided that-(ii)this subsection shall not apply to any such payment made, or purported to be made, by the permanent establishment in Kenya of a non-resident person to that non-resident person:"

98. The Respondent states that the Appellant's office recharges constitute management fees which under Kenyan legislation are taxed in accordance with Section 15(7) (e)(iv B) and the 9th Schedule to the ITA.

99. That Section 15 (7) of the ITA commences with the words “Notwithstanding anything contained in this Act". This means that this section is a non-obstante clause which means that this provision is not subject to any other provision within the Act and also it cannot affect the other non-obstante clauses within the Act.

100. The Respondent states that Section 15(7)(e) (iv B) of the ITA specifies that income of a licensee from one license area or a contractor from one contract area (the extractive industry), is to be determined in accordance with the 9th Schedule to the ITA.

101. That this means that income determined under the 9th Schedule is not subject to any other section of the Act, including section 10(1) of the Act unless expressly stated. This means that taxation of management fees paid by the Appellant are determined in accordance with the 9th Schedule and not Section 10 of the ITA.

102. That the Proviso (ii) to Section 10(1) of the 9th Schedule to the ITA is therefore inapplicable to the recharge cost paid by the Appellant to its head office.

103. That further, in view of the presence of the Kenya-UK DTA, Section 41(1), another non obstante clause mandates the Respondent to consider the DTA, notwithstanding any other provision to the contrary in the Act.

104. That consequently, the applicable provision in taxing the recharge costs is Article 14(2) of the Kenya-UK DTA whose rate is the same as that of paragraph 16 of the 9th schedule to the ITA.

105. That it is therefore erroneous for the Appellant to aver that the recharge costs fall within the purview of proviso (ii) of Section 10(1) of the ITA.

i.Whether the Respondent has imposed tax at the correct rate of tax applicable to management fees paid by a branch to its head office based on the appropriate interpretation of the Kenya -UK DTA. 106. The Respondent avers that it has correctly interpreted the provision of Article 14(2) of the Kenya -UK DTA.

107. The Respondent states that Article 14 allocates taxing rights to management fees to both states. Article 14 (2) allocates taxing rights to the contracting state in which the management fees arise and stipulates that the tax so charged shall not exceed 12 ½ per cent of the gross amount of the management fees arising there.

108. The Respondent states that in determining the tax treatment and rate of tax applicable under the Kenya UK DTA, reference should be made to the local legislation which in this instance is paragraph 16 of the 9th schedule, and not Section 10(1) of the ITA as averred by the Appellant.

ii.Whether Article 14 of the Kenya-UK DTA allocates taxing rights to Kenya with respect to payments for services of a managerial or professional character, wheresaid services were performed outside Kenya. 109. The Respondent states that Article 14(2) of the Kenya-UK DTA clearly allocates taxing rights to Kenya to tax the management fee which arose in Kenya by virtue of the recharges that were paid by the Appellant to its head office.

110. Respondent further avers that the group recharges have been claimed by the Appellant as expenses for the Appellant in Kenya. The payments that were made were therefore for management services rendered for consumption by the Appellant in Kenya. The Respondent further notes that some of the services rendered were technical services that required to be physically performed in Kenya. It is therefore incorrect to say that the services were not rendered in Kenya.

111. The Respondent further notes that the Appellant in making this argument that the services were performed outside Kenya is in essence contradicting all its earlier arguments where it sought to rely on Article 14(2) of the Kenya UK DTA and Section 10 of the ITA to state that the said services are exempted under the local legislation.

112. The Respondent avers that the Appellant cannot advance such an argument in view of its earlier arguments where it sought to rely on the same DTA to state that the said charges are exempt from taxation.

i. Whether head office recharges relating to technical, geological, engineering and limited centralized administrative support services, collectively services of a managerial character by the Respondent provided to the Appellant ought to be classified as service fees by virtue of paragraph 15 of the 9th Schedule to the ITA and therefore subject to Article 24 of the Kenya UK DTA. 113. The Respondent states that the nature of the services offered are technical in nature offered under a PSC and the recharges costs for the said services would then fall squarely within the definition of management fees both under the DTA and the ITA. This is very distinct from the service fees under paragraph 15.

114. That paragraph 16 of the 9th Schedule to the ITA is clear in deduction of withholding tax by a contractor with respect to management or professional fees payable.

115. The Respondent avers that the Appellant's argument to categorize the aforesaid services as service fees is flawed in view of the description of the services that were offered to the Appellant, that are subject to the dispute at hand.

116. The Respondent further avers that the Appellant's argument to introduce Article 24 of the Kenya-UK DTA as the taxing article for the services subject to the recharge costs in dispute is flawed for the following reasons:-a.The Appellant has averred in its documents and Appeal that the recharge costs are management fees that ought to be determined pursuant to Article 14(2). The Appellant cannot therefore aver that the same costs amount to an income that should be taxed under Article 24. b.Article 24 of the Kenya-UK DTA caters for income that is not expressly mentioned, which is not the case herein.c.The Respondent avers that the nature of the group recharges as seen above are not service fees under the 9th Schedule to the ITA. Rather, the recharges are classified as management fee under the 9th Schedule to the ITA. As such, provisions of Article 24 of the Kenya UK-DTA are irrelevant.d.In addition, the nature and form of group recharge is clearly defined by Article 14 and therefore the recharges should be taxed based on the Article 14. Article 24 would not apply at all since Article 14 and the 9th Schedulede fine the group recharges as management fee.

117. The Respondent further states that the ruling in the case of Mckinsey and Company Inc. Africa Proprietary Ltd vs. Commissioner of Legal Services and Board Coordination, Appeal No. 199 of 2020 does not apply to this case.

118. The Respondent further avers that the Appellant has raised so many alternate grounds in its Appeal hence contradicting its position in relation to the dispute.

119. The Respondent thus maintains that the recharge costs made by the Appellant to its head office in the UK are subject to withholding tax at the rate of 12. 5% in accordance with Article 14 of the Kenya-UK DTA.

120. That the Respondent's assessments and subsequent objection decision resulting to the dispute herein are in accordance with the law and should be upheld.

121. The Respondent reiterates its position in its objection decision and submits that the obligation to withhold taxes is one imposed by law and clearly provided for under statute.

122. That the Constitution under Article 210 (1) states:“No tax or licensing fee may be imposed, waived or varied except as provided by legislation."

123. That the Constitution thus envisages a system of taxation that is imposed and controlled by law.

124. That at the same time, any action that is related to taxation can only be carried out in accordance with the law. Section 35 (1)(e) of the ITA provides for the withholding of taxes from payments made to non-residents for the categories detailed within the Section;"A person shall, upon payment of any amount to any non-resident person not having a permanent establishment in Kenya in respect of interest, including interest arising from a discount upon final redemption of a bond, loan, claim, obligation or other evidence of indebtedness measured as the original issue discount"

125. That the Act imposes the obligation on the person initiating the payment. It is upon such person making the payment to deduct the taxes owing and remit them to the Commissioner.

126. That in Kenya Revenue Authority v Republic (Exparte Fintel Ltd)[2019] eKLR the court in explaining what withholding tax is stated;“Needless to say, withholding tax is where the tax payer of certain incomes is responsible for deducting tax at source from payments made and remitting the deducted tax to the revenue body, in our case, the Appellant."

127. That in this Appeal however, the Kenya-UK DTA kicks in with regards to WHT on interest expenses. This more so by dint of Section 41 of the ITA that provides for special arrangements for relief from double taxation as follows:-"(1) The Minister may from time to time by notice declare that arrangements) specified in the notice and being arrangements that have been made with the Government of any country outside of the Republic of Kenya with a view to affording relief from double taxation in relation to income tax and any taxes of a similar character imposed by the laws of that country, shall, subject to subsection (5) but notwithstanding any other provision to the contrary in this Act or in any other written law, have effect in relation to income tax and every such notice shall, subject to the provisions of this section, have effect according to its tenor”.

128. In the Appellant's objection dated 5th August 2020, it stated that:“...Total E&P International K2 Ltd recharged the branch's portion of the interest expense. We confirm that the branch did not directly incur interest expenses in the UK and is therefore not required to account for WHT on interest”

129. That in the Appellant's very own documents, it has described in no uncertain terms that interest expense was indeed a head office recharge to the Kenyan local branch. It is therefore the Respondent’s submission that these head office recharges constitute services of a ‘managerial nature' as provided under the Kenya -UK DTA. The Kenya-UK DTA takes precedence over all other provisions of domestic law. The Respondent states that the head office recharges actually constitute services of a managerial nature and therefore solely fall under Article 14 of the Kenya-UK DTA.

i.Whether article 14 of the Kenya-UK DTA allocates taxing rights to Kenya with respect to payments for services of a managerial or professional character, where the said services were performed outside Kenya. 130. The Respondent submits that the Appellant had advanced the argument that the services to which the recharge costs were paid by the Appellant were performed wholly offshore. That consequently, the said services are exempt from taxation in Kenya in accordance with Article 14(6) of the Kenya-UK DTA.

131. The Respondent notes that the services in dispute were rendered by employees of Maersk /Total Companies and were in various categories.

132. The Respondent notes that Appellant has only averred without adducing any evidence that the services were rendered offshore even though some of the services such as the project associated services required specialized work from geologists, geoscientists and engineers. The Appellant has not proved that the said services were rendered offshore as it claims.

133. The Respondent states that the Appellant in its own correspondence stated that:-"Petroleum Sub-Contracting services so received are primarily focused on the extractive industry and include geological, engineering support with limited management services in the nature of centralized administrative support."

134. The Respondent states that it is clear that contrary to the Appellants' assertions, the said services were technical services that required physical performance in Kenya.

135. The Respondent further states that the Appellant's reliance on Article 14(6) of the Kenya-UK DTA contradicts its earlier arguments to the effect that the said services are exempt under Article 14(2) of the Kenya-UK DTA as read together with Section 10 of the ITA, or that the said services are to be taxed in accordance with paragraph 15 of the 9th Schedule.

136. The Respondent reiterates that it is very clear that what the Appellant is doing is advancing all manner of arguments whether or not they are contradictory to ensure that it does not pay tax. The Respondent prays for this Tribunal to take note of the various contradictory arguments and dismiss the same.

137. The Respondent states that in alleging that the services were rendered offshorewithout adducing evidence to that effect, the Appellant has not met the threshold of its burden of proof under Section 56 of the TPA.

138. That the Tribunal emphasized the need to discharge this burden in the case of Boleyn International Limited Vs. Commissioner of Investigations and Enforcement, TAT Appeal no. 55 of 2018 when it held that:-“We find that the Appellant at all times bore the burden of proving that the Respondent's decisions and investigations were wrong. The Tribunal is guided by the provisions of Section 56(1) of the Tax Procedures Act 2015 which states:‘In any proceedings under this part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

139. The Respondent states that nothing would have been easier than the Appellant to adduce evidence showing the place of performance of the said services.

140. The Respondent submits that its assessment of the recharge costs pursuant to the provisions of Article 14(2) of the Kenya UK DTA as read together with the paragraph 16 of the 9th Schedule was in order and the same should be upheld.

141. The Respondent submits that it has clearly demonstrated that the services offered to the Appellant were technical in nature and as such, fall within thedefinition of management or professional fees both under Article 14(3) of the Kenya-UK DTA and Section 2 of the ITA.

142. In its submissions, the Respondent relied on the following eight (8)cases:-a.Supreme Court of India, Civil Appeal 6098 of 1997; State of Bihar & Others vs Bihar Rajya…on 12 October, 2004. b.Apex Court of India Chandavarkar Sita Ratna Rao vs Ashalata S. Guram, AIR 1987SC 117. c.MJ v NK & another [2017], eKLR.d.Kenya Revenue Authority v Republic (Exparte Fintel Ltd) [2019] eKLR.e.Motaku Shipping Agencies Ltd v Commissioner of Income Tax [2014] eKLR.f.Keroche Industries Limited v Kenya Revenue Authority & 8 others [207] eKLRg.TAT Appeal No 55 of 2018, Boleyn International Limited Vs Commissioner of Investigations and Enforcement.h.TAT Appeal No 199 of 2020, Mckinsy and Company Inc Africa Proprietary Ltd vs Commissioner of Legal Services and Board Co- ordination.

Issues for Determination 143. The Tribunal having taken into consideration the pleadings, all documents and written submissions filed by the parties, is of the view that the issues falling for determination are as follows:a.Whether the Respondent erred in law and in fact in classifying the head office recharges as management fees.b.Whether the head office recharges are subject to withholding tax in Kenya.c.Whether the Respondent erred in law and in fact in subjecting the Appellant’s recharges to Withholding tax at the rate of 12. 5%.

Analysis and Findings 144. That having determined the issues falling for its determination, the Tribunal will proceed to separately analyse the issues as hereinafter.

a.Whether the Respondent erred in law and in fact in classifying the head office recharges as management fees. 145. The Appellant has submitted that during the assessment period, the branch was recharged various costs by the head office incurred in furtherance of the Appellant's oil and gas exploration operations in Kenya. That these costs included service fees relating to technical, geological, engineering and centralized administrative support provided for the benefit of the branch's operations, together with interest expenses allocated to the branch. The Tribunal notes that these costs were allocated to the branch by the head office in accordance with the Total Group's internal policy which requires service entities to invoice operating entities directly, where services are provided to operating entities.

146. The Appellant has stated that these cost allocations fall squarely within the purview of proviso (ii) to Section 10 (1) of the ITA and should therefore be considered outside the ambit of WHT in Kenya.

147. In addition to the above, the Appellant argues that even where cost allocations arising from the head office do not relate to services performed by the head office, the exclusion from WHT remains. That this position is premised on the fact that proviso (ii) to Section 10 (1) of the ITA is not conditional upon performance of the services by the head office; the only condition imposed is that the payment made, or purported to be made, be between a branch and its head office.

148. The Appellant confirmed that it is a resident of Kenya and that the head office is a resident of the UK thereby entitled to apply the provisions of the Kenya- UK DTA. The Kenya-UK DTA pronounces itself on various items of income and provides the tax treatment that ought to be accorded with respect to transactions that fall within its purview.

149. The Tribunal notes that items of income provided for under the Kenya-UK DTA include, inter alia, management fees. Management fees are defined under Article 14 (3) of the Kenya-UK DTA to mean:-“payments of any kind to any person, other than to an employee of a person making the payments, in consideration for any services of a managerial, technical or consultancy nature". (Emphasis added)

150. The Appellant in its Statement of Facts stated that head office recharges allocated to it by the head office fall within this definition to the extent that the same constitute payments in consideration for services of a managerial nature. That this confirms the applicability of Article 14 of the Kenya-UK DTA to the present tax dispute.

151. The Appellant has contended that head office recharges amount to service fees pursuant to Paragraph 15(1) of the 9th Schedule to the ITA. Paragraph 15(1) of the 9th Schedule to the ITA provides as follows:"Subject to subparagraph (3), a non-resident subcontractor who derives a fee for the provision of services (referred to in this paragraph as a "service fee") to a licensee or contractor in respect of mining or petroleum operations shall be liable to pay non-resident withholding tax at the rate specified in subparagraph (2) on the gross amount of the service fee."

152. The Appellant maintains that the head office recharges should be classified as service fees and not management fees.

153. The Respondent on the other hand states that the Appellant has admitted in its Statement of Facts and the submissions that the services offered were management fees. In Paragraph 26 of its submissions, the Respondent stated that:“in the Appellant's objection dated 5th August 2020, the Appellant in discussing the fees paid by itself to non-resident related parties stated as follows: -‘In order to perform its obligations under the PSC with the Government of Kenya, the branch receives various services from nonresident related parties. Petroleum sub-contracting services so received primarily focused on the extractive industry and included geological. engineering support with limited management support services in the nature of centralised administrative support. These services are provided directly to the Branch's head office, Total E&P International K1 Limited, from various Group entities including Total SA (France), Total E&P North Sea UK Limited (UK), Total E&P Norge (Norway) and Total E&P Denmark (Denmark). The head office thereafter allocates and recharges these costs to the relevant branch entity in Kenya. The structure is in line with the group's internal intercompany transactions policy which requires service entities within the group to invoice operating companies directly, where services are provided to operating entities’ ”

154. The Respondent has submitted that it is clear that based on the explanation provided by the Appellant, the nature of the services that were provided to it by various non-resident related entities are primarily focused in the extractive industry and are primarily technical in nature i.e. geological engineering support etc.

155. The Respondent has further submitted that with regard to services provided to the Appellant by other non-resident entities, in its objection dated 5th August 2020, the Appellant's position was that "all services were contracted directly by Total E&P International K2 Limited, the branch's head office, and thereafter allocated to the branch accordingly." The Appellant thereafter stated that "on this basis, we confirm that we are of the view that service/Management or professional fees recharged by Total E&P International k2 Limited to the branch are not subject to WHT in Kenya."

156. The Respondent has submitted that it is evident that while the Appellant acknowledged that management or professional fees were paid to other non- resident service providers, the Appellant was of the view that the said fees are not subject to WHT in Kenya.

157. The Respondent has requested the Tribunal to note that the Appellant has in its objection, Statement of Facts and Written submissions various alternative arguments as to the nature of the services to which it paid head office recharges to its head office in UK. In all the alternative arguments espoused by the Appellant, the Appellant admits to the said services being of a managerial or professional nature but then states that the fees paid for the same are not subject to tax due to various arguments.

158. The Respondent has stated that in view of the foregoing, it is clear that the services rendered to the Appellant are in the nature of management or professional fees.

159. The Tribunal notes that the Appellant’s first ground of appeal states that:-“the Respondent erred in law and fact by failing to appreciate the head office recharges allocated to the Appellant constitute management or professional fees and that the same is exempt from WHT in Kenya pursuant to Proviso (ii) of Section 10 of the Income Tax Act(ITA) which exempts management or professional fees paid by a branch to its head office from WHT in Kenya”.The Appellant therefore admits that the recharges are management fees but adds that they are exempt from WHT as they are payments to the head office.

160. It is clear to the Tribunal that even from the very documents submitted to the Tribunal by the Appellant, the Respondent did not err in law and in fact in classifying the head office recharges as management fees.

b.Whether the head office recharges are subject to withholding tax in Kenya. 161. It is not in dispute between the parties that transactions concluded between the Appellant and its head office fall within the purview of the Kenya-UK DTA as empowered by Section 41(1) of the ITA.

162. The Appellant has contended that head office recharges allocated to it by the head office fall within the definition of management services under paragraph 14(3) of the Kenya-UK DTA to the extent that the same constitute payments in consideration for services of a managerial nature. That this confirms the applicability of Article 14 of the Kenya-UK DTA to the present tax dispute.

163. The Tribunal notes that paragraph 14 (3) of the Kenya-UK DTA defines management fees as:“payments of any kind to any person, other than employee of a person making the payments, in consideration for any services of a managerial, technical or consultancy nature”

164. The Tribunal notes the Appellant’s admission to the fact that it is not in issue that Article 14 (2) of the Kenya-UK DTA grants Kenya taxing rights with respect to management fees paid to a resident of the UK to a maximum of 12. 5%. However, the Appellant refers to Article 14(6) of the Kenya-UK DTA which provides an exception to Article 14 (2). Specifically, Article 14 (6) states as follows:“Management fees shall be deemed to arise in a Contracting State when the payer is the government of that State or a political sub-division thereof, a local authority or a resident of that State, and to the extent that they are attributable to services rendered in that State. Where, however the person paying the management fees whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment in connexion with which the obligation to pay the management fees was incurred and the management fees are borne by that permanent establishment, then the management fees shall be deemed to arise in that Contracting State to the extent that they are attributable to services rendered in that State."

165. The Appellant has contended that the above stated provision of the Kenya-UKDTA limits the application of WHT on management fees in Kenya to instances where the services that give rise to the management fees arise/are performed in Kenya. It argues that in the present instance, the head office recharges that the Respondent seeks to subject to WHT in Kenya as management fees arose as a result of services performed wholly offshore and are therefore not subject to WHT in Kenya.

166. The Appellant has also reiterates that based on its interpretation of Article 14 (6), the head office recharges in dispute are only taxable in Kenya to the extent that the underlying services that gave rise to them were performed in Kenya. That where the same are performed outside Kenya, as is the case in this dispute, taxing rights are accorded fully to the UK.

167. On the other hand, the Respondent has stated that Article 14 allocates taxing rights to management fees to both states. Article 14 (2) allocates taxing rights to the contracting state in which the management fees arise and stipulates that the tax so charged shall not exceed 12 ½ per cent of the gross amount of the management fees arising there.

168. The Respondent has submitted that the Appellant's own documents state that the Appellant receives various services from non-resident related parties and that the services that the Respondent has sought to charge are directly attributable to the Appellant.

169. The Respondent has further submitted that the group recharges have been claimed by the Appellant as expenses for the Appellant in Kenya. The payments that were made were therefore for management services rendered for consumption by the Appellant in Kenya. That some of the services rendered were technical services that required to be physically performed in Kenya and that it is therefore incorrect to say that the services were not rendered in Kenya performed outside Kenya, finds that in the absence of any evidence adduced on the part of the Appellant to prove that the services were performed outside Kenya, Article 14(6) of the Kenya-UK DTA does not apply and, to that extent, the Respondent did not err in subjecting the head office recharges to withholding tax in line with Article 14(2) of the Kenya-UK DTA.

c.Whether the Respondent erred in law and in fact in subjecting the Appellant’s recharges to Withholding tax at the rate of 12. 5%. 170. The Tribunal notes that Article 14 (1) & (2) of the Kenya-UK DTA provides as follows:“(1)Management fees arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.(2)Notwithstanding Article 8, management fees may also be taxed in the State in which they arise and according to the law of that State, but where suchmanagement fees are paid to a resident of the other Contracting State who is subject to tax there in respect thereof the tax so charged in the Contracting State in which the management fees arise shall not exceed 12 1/2 percent of the gross amount of the management fees arising there."

171. The Appellant has submitted that management fees arising in Kenya and paid to a resident of the UK are only taxable in the UK. However, Kenya may impose tax on the same at a rate not exceeding 12. 5%. The language used in the DTA when setting the applicable rate is "…shall not exceed 12. 5%...". That this means that the rate may be set in the local legislation at between 0% and 12. 5%, but it is not mandatory for the rate to be 12. 5% as implied by the Respondent.

172. The Appellant has further stated that the objective of a DTA is the avoidance of double taxation; therefore, where a given source of income is exempt from tax in the DTA or by reference to the local legislation, the position should remain in order to honor the spirit of the DTA.

173. The Appellant has submitted that while it agrees with the Respondent's position that transactions concluded between itself and its head office may fall within the purview of Article 14 of the Kenya-UK DTA, it insists that in order to determine the tax treatment and the rate of tax applicable in the present circumstances, reference must be made to the local legislation. That the Respondent's attempt to impose tax at the rate of 12. 5% without reference to the local legislation amounts to a misinterpretation of the provisions of the DTA.

174. The Appellant has urged that since the payments may be taxable under Article 14 of the DTA, reference is made to local legislation for purposes of determining the applicable rate, subject to a maximum of 12. 5%. That in this case, the local legislation expressly provides that payments made by a branch to its head offices are exempt from tax under Section 10 of the ITA. That based on this, the applicable rate in this case is 0% and the application of this rate fulfils the objective of the DTA to avoid double taxation.

175. The Appellant has contended that the head office recharges by the head office amount to service fees pursuant to Paragraph 15 of the 9th Schedule to the ITA.

176. Paragraph 15(1) of the Ninth Schedule to the ITA provides as follows:“Subject to subparagraph (3), a non-resident subcontractor who derives a fee for the provision of services (referred to in this paragraph as a "service fee") to a licensee or contractor in respect of mining or petroleum operations shall be liable to pay non-resident withholding tax at the rate specified in subparagraph (2) on the gross amount of the service fee."

177. Paragraph 15(2) of the 9th Schedule reads as follows:“(2)The rate of withholding tax under subparagraph (1) is —a.for a service fee paid by a contractor, 5. 625%; orb.for a service fee paid by a licensee, 5. 625 per cent.”

178. Paragraph 15 of the 9th Schedule to the ITA imposes a burden on petroleum contractors/ licensees to withhold tax at the rate of 5. 625% with respect to service fees paid to non-resident subcontractors.

179. The Appellant has submitted that though Paragraph 15 of the 9th Schedule to the ITA is clear that fees paid to a non-resident subcontractor for services provided to a licensee or contractor in respect of mining or petroleum operations amount to service fees, and is subject to WHT in Kenya at the rate of 5. 625%, paragraph 16 of the 9th Schedule to the ITA creates an ambiguity to the extent that it seeks to levy WHT on management or professional fees paid by a licensee, which carry a similar character to service fees, at the rate of 12. 5%.

180. The Appellant has urged that it is trite law that where an ambiguity is created by tax legislation, the same ought to be interpreted in favour of the taxpayer.

181. The Respondent on the other hand has stated that Article 14 of the Kenya-UK DTA allocates taxing rights on management fees to both states and that pursuant to Article 14(2) of the DTA, management fees may be taxed in the state in which they arise, and according to the law of that state, and the tax so charged shall not exceed 12. 5% of the gross amount of the management fees.

182. On this issue, the Respondent has submitted that it subjected the recharges costs paid by the Appellant to its head office in UK to WHT at the rate of 12. 5% pursuant to article 14(2) of the Kenya-UK DTA.

183. The Respondent has submitted that it applied the rate at Paragraph 16 (d) of the 9th Schedule of ITAand utilized it in taxing the recharge cost paid by the Appellant to its head office in the United Kingdom. It further submitted that it strictly followed the law and its objection decision should therefore be upheld.

184. From the submission of both parties it is evident that it is critical that the Tribunal distinguishes the provisions of Paragraph 15 and 16 of the 9th Schedule.

185. Paragraph 15 of the 9th Schedule of ITA which is titled as “Taxation of subcontractors” states as follows:-“(1)Subject to subparagraph (3), a non-resident subcontractor who derives afee for the provision of services (referred to in this paragraph as a "services fee") to a licensee or contractor in respect of mining or petroleum operations shall be liable to pay non-resident withholding tax at the rate specified in subparagraph (2) on the gross amount of the services fee.(2)The rate of withholding tax under subparagraph (1) is —a.for a service fee paid by a contractor, 5. 625%; orb.for a service fee paid by a licensee, 5. 625 per cent.”( Emphasis added)

186. On the other hand, Paragraph 16 of the 9th Schedule of the ITAwhich is titled “Deduction of withholding tax by contractor” states as follows under 16(d):-“in the case of management, training or professional fees, twelve and a half per cent of the gross amount of the management or professional fee payable”.

187. The Tribunal finds that there is no ambiguity in the two paragraphs as Paragraph 15 refers to taxation of subcontractors while Paragraph 16 refers to deduction of withholding tax by contractors. The Appellant in this matter is a contractor and the applicable rate of withholding tax is therefore that specified in Paragraph 16(d) to the 9th Schedule of the ITA.

188. The Tribunal therefore finds that the Respondent did not err in law and in fact in subjecting the Appellant’s recharges to Withholding tax at the rate of 12. 5%.

Final Decision 189. The upshot of the foregoing analysis is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following Orders:-a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 21st May, 2021 confirming WHT of Kshs.231,813,727. 95 be and is hereby upheld.c.Each party to bear its own costs.

190. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 10TH DAY OF FEBRUARY, 2023ERIC N. WAFULA - CHAIRMANCYNTHIA B. MAYAKA- MEMBERGRACE MUKUHA - MEMBERJEPHTHAH NJAGI - MEMBERABRAHAM K. KIPROTICH - MEMBER