[2023] KETAT 98 (KLR)

Total E&P International K3 Limited v Commissioner of Domestic Taxes (Tax Appeal 397 of 2021) [2023] KETAT 98 (KLR) (10 February 2023) (Judgment)

Neutral citation: [2023] KETAT 98 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 397 of 2021

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

February 10, 2023

Between

Total E&P International K3 Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private limited liability company incorporated under the Companies Act and it is a registered taxpayer. Its principal activity is in oil and gas exploration and production.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act and 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 a desk audit on the MOEL Kenya entities and issued WHT assessments on July 7, 2020 for ksh 150,222,240. 68 which the taxpayer objected to on August 5, 2020.

4. Following various correspondences and exchange of documents between the parties, the Respondent issued its objection decision vide a letter dated May 24, 2021 confirming the assessments amounting to ksh 150,222,240. 68.

5. Aggrieved by the Respondents confirmed assessment, the Appellant filed a Notice of Appeal on 13th June, 2021 and this Appeal on July 9, 2021.

The Appeal 6. The Appeal is premised on the following grounds as captured in the Memorandum of Appeal dated July 2, 2021 and filed on the July 9, 2021:-i.That the Respondent erred in law and in fact by failing to appreciate that head office recharges allocated to the Appellant constitute management or professional fees and that the same are exempt from WHT in Kenya pursuant to the proviso (ii) 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.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 pf 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 in 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-UK 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 in fact by misinterpreting and misapplying 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 in fact by failing to appreciate that head office recharges allocated to the Appellant by its head office constitute service fees, distance 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 the Kenya-UK DTA does not expressly grant the UK taxing rights with respect to items of income of a resident of the UK.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 per the provisions of the ITA, Cap 470, laws of Kenya and genuinely demonstrated good faith throughout in relation to its tax obligations.

Appellant’s Case 7. Appellant’s case is premised on the hereunder filed documents and proceedings before the Tribunal:i.The Appellant’s Statement of Facts dated July 2, 2021 and filed on July 9, 2021 together with the documents attached thereto.ii.The Appellant’s written submissions dated February 7, 2022 and filed on February 8, 2022.

8. The Appellant made reference to Section 3(1) of the ITA, charging section, which it averred confirms that all items of income of a person, whether resident or non- resident, accrued in or derived from Kenya, was subject to tax in Kenya.

9. It further referred 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. That payment subject to WHT in Kenya include, inter alia, management or professional or training fees.

10. That however, proviso (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 ITAwhich 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”

11. That the Appellant, guided by the rules of statutory interpretation, asserted that based on the 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.

12. That specifically, the Appellant noted 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. It further noted that that these costs were allocated to the branch by the head office in accordance with the Total’s Group’s internal policy which requires service entities to invoice operating entities directly, where services are provided to operating entities.

13. That it was 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.

14. These costs allocations, the Appellant submitted that they fall squarely within the purview of proviso (ii) to Section 10(1) of the ITAand should therefore be considered outside the ambit of WHT in Kenya.

15. The Appellant added that though the aforementioned is not contested by the Respondent in its objection decision, the Appellant argued that even where cost allocation arising from the head office do not relate to services performed by the head office, the exclusion from WHT remains. That this position was premised on the fact that proviso (ii) to Section 10(1) of the ITAwas not conditional upon performance of the services by the head office; the only condition imposed was that the payment made, or purported to be made, be between a branch and its head office.

16. It averred that the Respondent’s objection decision therefore failed 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.

17. 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.

18. 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 ksh 242,206,409. 00 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.

19. That in addition, by virtue of Section 18(5) of the ITAthese cost allocations were treated as non-allowable in the branch’s self-assessment return for the year of income 2018. Section 18(5) provides as follows;“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 gain with respect to net assets or liabilities purportedly established between the permanent establishment in Kenya and the non-resident person.”

20. It stated that 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 Corporate Income Tax perspective. The Appellant therefore maintained that principal WHT demanded amounting to ksh 30,275,801. 13, being the WHT arising from inter-company cost allocations amounting to ksh 242,206,409 incurred in the year 2018, ought to be deducted from the principal tax demanded, together with attendant penalties and interest.

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. 21. The Appellant stated that the Respondent’s case was primarily based on its interpretation of Article 14 of the Kenya-UK DTA. That in view of this, the Respondent had concluded that head office recharges to the Branch were subject to WHT in Kenya at the rate of 12. 5 as management fees. That this conclusion by the Respondent was based on failure to correctly interpret provisions of the DTA and how those interact with the provision in the local legislation.

22. 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 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.”

23. 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%. that the language used in the DTA when setting the applicable rate is “…shall not exceed 12. 5%...”. That this meant that the rate may be set in the local legislation at between 0% and 12. 5%, but it was not mandatory for the rate to be 12. 5% as implied by the Respondent.

24. That further, the objective of a DTA is 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.

25. It stated 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 misinterpretation of the provisions of the DTA.

26. The Appellant averred 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 provided that payments made by a branch to its head office are exempt from tax under Section 10 of the ITA. Based on this, the Appellant submitted that the applicable rate in this case was 0% and the application of this rate fulfils the objective of the DTA to avoid double taxation.

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 27. The Appellant stated that it agrees with the Respondent’s position that transactions conducted between itself and head office fall within the purview of the Kenya-UK DTA, as empowered by Section 41(1) of the ITA.

28. That indeed Section 41(1) of the ITAempowers the Cabinet Secretary, National Treasury to conclude Double Taxation Agreement (“DTA”) 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.

29. The Appellant made reference 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”

30. 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 noted that this was not in contention in the present instance.

31. 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.

32. It stated 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 payment of any kind to any person, other than to an employee of a person making the payment, in consideration for any services of a managerial, technical or consultancy nature.

33. That in the present instance, the Appellant contended 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 management nature.That this confirms the applicability of Article 14 of the Kenya-UK DTA to the present tax dispute.

34. That further, it was 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% Article 14(2) provides as follows;“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.”

35. That the above notwithstanding, the Appellant referred to Article 14(6) of the Kenya-UK DTA which provides an exception to Article 14(2). That 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.”

36. According to the Appellant, 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. That in the present instance, the Appellant confirmed 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.

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

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 9th Schedule to the ITA and therefore are Subject to Article 24 of the Kenya-UK DTA. 38. That the Appellant acknowledges that it receives various services from non- resident parties to enable it to efficiently perform its obligations under the 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.

39. The Appellant further stated 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 therefore the head office allocates and recharges these costs to the Appellant 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.

40. According to the Appellant, head office recharges by the head office amount to service fees pursuant to Paragraph 15 of the 9th Schedule to the ITA. That Paragraph 15 of the 9th Schedule to the ITA provides as follows;“(1)Subject to subparagraph (3), a non-resident subcontractor who derives a fee 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.”

41. That in the present instance, 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. 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. That 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.

42. The Appellant asserted that it was 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. That 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 9th Schedule to the ITA.

43. The Appellant made reference to Article 24 of the Kenya-UK DTA, which provides for the taxation of items of income and not expressly dealt with under the DTA Article 24 of the Kenya –UK DTA which 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.”

44. According to the Appellant, 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 UK). Therefore, services fees payable by the Appellant to its head office ought only to be taxable in the UK.

45. That the above notwithstanding, the Appellant submitted that though Paragraph 15 of the 9th Schedule to the ITA was 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 are 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%.

46. That, 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 favor of the taxpayer.

47. That pursuant to the above, the Appellant submitted that despite the ambiguity created by Paragraphs 15 and 16 of the 9th 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.

48. The Appellant reiterated 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. That the drafters of the Kenya- UK DTA having envisaged issues such as the one in this dispute and taken cognizance that it may not be able to comprehensively cover all incomes earned or generated by contracting states through express provisions as they were innumerable.

49. The Appellant contended 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.

50. The Appellant maintained that since the income in form of service fees was payable by the Appellant to a resident of the contracting state (i.e head office, Total E&P International K3 Limited) it can only be taxed in that state (i.e the UK) by virtue of Article 24, seeing that there was no other provision that cover service fees.

51. That this position is supported by the TAT’s conclusion in the case of Mckinsey and Company Inc Africa Propriety Ltd v Commissioner of Legal Services and Board coordination Appeal no 199 of 2020 which related to the application of WHT on professional fees under the Kenya-South Africa DTA. That 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.

52. 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.

53. The Appellant maintained that since its inception, it had dutifully carried on its business in line with the statutory requirements. The Appellant was of the view that the Respondent had failed to substantiate its allegations and that it had discharged its burden of proof in relation to the confirmed assessments and objection decision in accordance with Section 56 of the TPA.

54. The Appellant submitted that Section 10 of the ITA identifies certain payments that are deemed to accrue or be derived from Kenya were paid by a resident person or a person having a permanent establishment in Kenya to any other person. That payments deemed to accrue or be derived from Kenya include payments for management of professional fees, the subject matter of the present tax dispute.

55. That in support of the provisions of Section 3 and Section 10 of the ITA, Section 35(1) of the ITA provides for the application of WHT on certain items of income deemed to accrue or be derived from Kenya where paid by any person to any non-resident person not having a permanent establishment in Kenya.

56. It averred that the rates of WHT applicable with respect to items of income subject to the WHT under Section 35 are ordinarily provided under Paragraph 3 of the Third Schedule to the ITA. That under Paragraph 3, management of professional fees accrued or derived from Kenya and paid by any person to a non- resident person should ordinarily be subject to WHT in Kenya at the rate of 20%.

57. That however, with respect to items of income of a contractor, defined under Paragraph 1 of the 9th Schedule to the ITA as ‘a person with whom the Government has concluded a petroleum agreement and includes any successor or assignee of the person’, the same shall be subjected to tax in Kenya in accordance with the provisions of the 9th Schedule to the ITA.

58. The Appellant explained that this as stated by the Respondent, and not in issue in the present dispute, is guided by Section 15(7) (e) (ivB) of the ITA which confirms that the taxable income of a contractor shall be determined in accordance with the provisions of the 9th Schedule. The Appellant made reference to Paragraph 7 of the 9th Schedule to the ITA.

59. The Appellant averred that in the present instance, it notes that it qualifies as a contractor under the 9th Schedule to the ITA, and therefore, should be subjected to tax in accordance with the provisions of the ITA, taking into consideration modifications to the applicable tax regime as contained under the 9th Schedule to the ITA.

60. That pursuant to the above, Paragraph 16 of the 9th Schedule to the ITA, which provides for the application of WHT by a contractor, seeks to modify the provisions of Section 35 of the ITA.

61. According to the Appellant, it was apparent that Paragraph 16 of the 9th Schedule as drafted by the legislature seeks to modify the application of Section 35(1) of the ITA as pertains contractors subject to the provisions of the 9th Schedule and not Section 10 of the ITA.

62. The Appellant averred that the Respondent’s assertions as captured under Paragraphs 39 to 49 of its Statement of Facts that Section 10 of the ITA is not applicable with respect to persons subject to tax under the auspices of the 9th Schedule to the ITA were misguided and fundamentally flawed.

63. That this view is arrived at on the basis that the 9th Schedule to the ITA does not seek to override the overall provisions of the ITA but rather seeks to modify specific provisions as pertains to taxation of persons engaged in petroleum exploration and production.

64. The Appellant emphasized that in the present instance, Paragraph 16 of the 9th Schedule seeks to modify the rate of WHT applicable under Section 35(1) of the ITA with respect to certain incomes being dividends, interest, royalties or a natural resource income and management, training or professional fees.

65. That Paragraph 16 does not seek to modify the rate of WHT applicable with respect to other specified incomes under Section 35(1) of the ITA, including, inter alia, a rent, premium or similar consideration for the use or occupation of property, pension or retirement annuity or winnings.

66. That similarly Paragraph 16 does not seek to modify the provisions of the parent statute to Section 35(1) of the ITA, being Section 10 of the ITA. That Section 10 provides the underpinning basis for the application of WHT to the extent that it deems certain incomes, were paid by a resident person or a person having a permanent establishment in Kenya to any other person, as income accrued in or derived from Kenya, and therefore subject to tax in Kenya.

67. That it is apparent that the 9th Schedule does not in any way hamper the operation of Section 10 of the ITA.

68. The Appellant further contended that the head office recharges allocated to it within the year of income 2018 amounting to ksh 242,206,409. 00 were added back in its 2018 tax computations in accordance with Section 18(5) of the ITA, and therefore subjected to tax at the applicable rate of 37%. That therefore by subjecting the same to WHT was inconsistent with the law and tantamount to double taxation.

69. Regarding the correct rate of tax applicable to management fees paid by branch to its head office, the Appellant while relying on Article 14(1) & (2) stated that the Respondent failed to consider the inter-play between the provisions of the KE-UK DTA and domestic legislation. That specifically, the Appellant was of the view that KE-UK DTA sets an applicable WHT rate, the same amounts to a threshold in respect to the maximum WHT that may be applied.

70. That simply stated, whilst the KE-UK DTA sets a maximum WHT rate of 12. 5%, the actual rate applied may fall anywhere between 0% and 12. 5% as determined by local legislation. To support this argument, the Appellant made reference to the provisions of Rule 4 of the Income Tax (Withholding Tax) Rules, 2001.

71. According to the Appellant, based on the interpretation of the applicable provisions of the ITA, head office recharges allocated to the Appellant by the head office should be subject to WHT at 0% pursuant to Proviso (ii) of Section 10(1) of the ITA.

72. The Appellant submitted that given that local legislation provides a 0% rate with respect to head office recharges allocated to the Appellant, the rate applied under KE-UK DTA should correctly be 0% in light of Rule 4 of the Income Tax (Withholding Tax) Rules, 2001 as opposed to the maximum rate provided by the DTA of 12. 5%.

73. On taxing rights, the Appellant while referring to Article 14 (3) of the KE-UK DTA stated that the applicability of the DTA is guaranteed by Section 41 of the ITA.

74. It submitted that the use of the phrase ‘notwithstanding any other provision to the contrary in this act or any other written law’ renders Section 41(1) a non-obstante provision that seeks to carve out its specific authority from the wider ambit of the ITA. That indeed, as captured in Stround’s Judicial Dictionary of Words and Phrases, sixth Edition, London, Sweet and Maxwell 2000 at page 1732:“Notwithstanding: “Anything in this Act to the contrary notwithstanding” is equivalent to saying that the Act shall not be an impediment to the measure…”

75. The Appellant stated that the Respondent failed to appreciate or respond to the crux of the Appellant’s argument that the import of Article 14(6) of the KE-UK DTA limits Kenya’s taxing rights with respect to management fees paid by a Kenyan resident to a UK resident, in certain instances.

76. The Appellant contended that based on its interpretation of the provisions of Article 14(6) of the KE-UK DTA, the same serves to restrict the application of WHT on management fees payable by a permanent establishment in a contracting state (i.e the Branch in Kenya) to its head office (i.e the head office in the UK) to instances where the services that gave rise to the management fees in question were physically performed in that state (i.e Kenya).

77. That in the present instance and contrary to the Respondent’s assertions, the Appellant confirms that the services that gave rise to the head office recharges currently under dispute were performed wholly offshore, and therefore should not be subject to WHT in Kenya pursuant to Article 14(56) of the KE-UK DTA.

78. According to the Appellant, in its interpretation of Article 14(6), the head office recharges that comprise the subject matter of the present dispute are only taxable in Kenya to the extent that the underlying services gave rise to them were physically performed in Kenya. That conversely, where the underlying services were performed outside Kenya, as is the present case, taxing rights with respect to the same ought to be accorded to the UK.

79. It was the Appellant’s view that the services under issue should be considered exempt from WHT in Kenya pursuant to Article 14(6). That any abrogation from the clear and express provisions of Article 14(6) would amount to a clear breach of established judicial principles.

80. On recharges relating to services of a professional or managerial character, the Appellant further submitted that it was not in issue in the present tax dispute that head office recharges allocated to the Appellant arise resultant of various services received by the Appellant from non-resident related parties, including technical, geological, engineering and Limited Centralized Administrative Support Services.

81. That it is not further in issue that payments for these services fall within the definition of management or professional fees, defined under Section 2 of the ITA as “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 however calculated;”

82. The Appellant insisted that the services that gave rise to the head office recharges under dispute may similarly be termed as ‘service fees’ by dint of Paragraph 15 of the 9th Schedule to the ITA.

83. As per the Appellant, services that gave rise to the head office recharges under dispute similarly fall within the definition of ‘service fees’ as defined under Paragraph 15 to the extent that they amount to fees paid to a non-resident subcontractor for the provision of services to a contractor in respect of petroleum operations. That this position is buttressed by the fact that services provided to the branch are in pursuit and furtherance of its petroleum exploration activities in Kenya.

84. That Paragraph 15(2) of the 9th Schedule to the ITA, as it was during the Assessment Period, imposes a WHT burden of 5. 625% with respect to service fees paid to a non-resident subcontractor.

85. According to the Appellant, the present transaction falls within the ambit of the KE-UK DTA, which provides the correct tax treatment to be accorded to various transactions concluded between residents of Kenya and the UK with a view to prevent or provide relief from double taxation, reference ought to be made to the provisions of the KE-UK DTA for guidance.

86. The Appellant asserted that it was strongly convinced that to the extent that the services that gave rise to the present dispute comprise services provided by a non- resident subcontractor to a contractor in pursuit of petroleum activities, and therefore amount to service fees, and that the same were not taxable in Kenya by dint of Article 24 of the KE-UK DTA.

87. To support its arguments, the Appellant relied on the following cases;i.The court case in Motaku Shipping Agencies Limited v Commissioner of Income Tax [2014] eKLR.ii.The court case in Keroche Industries Limited v Kenya Revenue Authority & 5 Others [2007] 2 KLR 240. iii.The Court case in Cape Brandy Syndicate v Inland Revenue Commissioners [1920] 1 KB 64iv.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. v.The dicta of Lord Donovan in Mangin v Inland Revenue Commissioner [1971] AC 739. vi.The High Court case in MJ v NK & another [2017] eKLR.vii.The decision of the Court in Okiya Omtatah Okoiti v Attorney General & 2 others; Francis K. Muthaura (Amb) & 5 others (Interested Parties) [2019] eKLR.viii.The Court case in Commissioner of Income Tax v Vstmont Power (K) Limited 2006 eKLR.

Appellants Prayers 88. The Appellant made the following prayers:i.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 Tribunal orders that the costs of this Appeal be awarded to the Appellant.

The Respondent’s Case 89. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal:i.The Respondent’s Statement of Facts dated 3rd August, 2021 and filed on the same date together with the documents attached thereto.ii.The Respondent’s written submissions dated 2nd March 2022 and filed on 3rd March 2022 together with its bundle of authorities.

90. The Respondent stated that its audit established that Maersk Oil Exploration International Kenya K1 Limited-Kenya branch (MOEIL-K1) was discharged by its head office, Maersk Oil Exploration International Kenya K1 Limited (UK) for services rendered by various Group companies.

91. 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. That Maersk Oil International Limited UK would then re-invoice Maersk International Oil International K1 Limited UK, which allocated the cost to its Kenyan Branch. That 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.

92. It averred that the services rendered by employees of Maersk/Total companies in various categories are as indicated in the table below;Service Description

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 finance, global, IT, general management

Pass-through transactions Costs incurred by TEPDK or its related parties on behalf of each other.

93. The Respondent stated that the dispute arose after it conducted an in-depth audit of the Appellant’s tax affairs and issued preliminary findings indicating instances of non-compliance with the applicable Withholding Income Tax.

94. It was the Respondent’s contention that based on the Appellant’s own documents, the Appellant was a branch 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.

95. That the Appellant was therefore a contractor whose activities would be taxed under the 9th Schedule to the Income Tax Act. That Section 15(7)(e) of the ITA provides for specified sources of income where sub-paragraph (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. The Section 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 9th Schedule; and”

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

97. The Respondent averred that Paragraph 16 of the 9th Schedule to the ITA provides for deduction of withholding tax by the contractor. That the paragraph stipulated 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 percent of the gross amount of the management of professional fees payable.

98. It added 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.

99. The Respondent added that during the audit, it noted that the services provided to the Appellant were technical in nature and specific to the Appellant’s extractive activities as described in paragraph 10. That the Appellant’s head office in UK allocated and recharged the costs for the services to the Appellant. That the Appellant therefore paid the recharges costs to its head office in UK.

100. The Respondent averred that the nature of the services offered to the Appellant are in the nature of management fees that are technical in nature which fall within the definition of management fees under both the ITA and the Kenya-UK DTA. That these services could therefore only be taxed in accordance with the 9th Schedule.

101. That Section 41 of the Income Tax Act 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.”

102. It averred that Section 41(1) was an obstante clause that gives recognition to any existing double tax agreements.

103. The Respondent contended that the Kenya-UK DTA allocates taxing rights on management fees at Article 14. That 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 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.(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. 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.”

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

105. The Respondent stated that it 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.

106. The Respondent averred that its assessment and objection decision was issued in accordance with the law and should be upheld. It stated 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.

107. That these services are technical in nature and their fees fall within the definition of management fees as defined both under the ITA and under the Kenya-UK DTA.

108. That the Respondent cited the content of proviso (ii) of Section 10 of the ITA and stated 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.

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

110. The Respondent stated that Section 15(7)(e)(ivB) 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.

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

112. That the proviso (ii) to Section 10(1) of the ITA was therefore inapplicable to the Recharge cost paid by the Appellant to its head office. It stated that in view of the presence of the Kenya UK DTA, Section 41(1), another non obstante clause mandates it to consider the DTA, notwithstanding any other provision to the contrary in the Act.

113. That consequently, the applicable provision in taxing the recharge costs was 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. That it was 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.

114. Regarding the correct rate of tax applicable to management fees paid by the branch to its head office based on the interpretation of the Kenya-UK DTA, the Respondent averred that it had correctly interpreted the provisions of Article 14(2) of the Kenya-UK DTA.

115. The Respondent stated that Article 14 allocates taxing rights to management fees to both states. That 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. 5% of the gross amount of the management fees arising there.

116. It was the Respondent’s contention 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.

117. The Respondent then submitted on the question of whether Article 14 of the Kenya-IK 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. The Respondent stated that Article 41(2) of the Kenya- UK DTA clearly allocates taxing rights to Kenya to tax management fee which arose in Kenya by virtue of the recharges that were paid by the Appellant to its head office.

118. That the Appellant’s own documents stated that the Appellant receives various services from non-resident related parties and the services that the Respondent had sought to charge were directly attributable to the Appellant, which issue was not in contention.

119. The Respondent further averred that the group recharges had been claimed by the Appellant as expenses for the Appellant in Kenya. That the payments were made were therefore for management services rendered for consumption by the Appellant in Kenya. That it noted that some of the services rendered were technical services that required to be physically performed in Kenya and it was therefore incorrect to say that the services were not rendered in Kenya.

120. It contended that the Appellant in making the argument that the services were performed outside Kenya in some essence contradicting all its earlier arguments where they were seeking to rely on Article 14(2) of the Kenya-UK DTA and Section 10 of the ITA to state that the said services were exempt under the local legislation.

121. The Respondent averred that the Appellant cannot advance such an argument in view of its earlier arguments where it seek to rely on the same DTA to state that the said charges were exempt from taxation.

122. On head office recharges relating to technical, geological, engineering and limited centralized administrative support services, the Respondent stated that the nature of the services offered were technical in nature offered under a Production sharing contract and the recharges costs for the said services would then fall squarely within the definition of management fees under Paragraph 15.

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

124. The Respondent averred that the Appellant’s argument to categorize the aforesaid services as services fees was flawed in view of the description of the services that were offered to the Appellant, that were subject to the dispute at hand.

125. The Respondent further averred that the Appellant’s argument to introduce Article 24 of the Kenya-UK DRA as the taxing article for the services subject to the Recharge costs in dispute was flawed for the following reasons;i.The Appellant had averred in its documents and Appeal that the Recharge costs were management fees that ought to be determined pursuant to Article 14(2). The Appellant couldn’t therefore aver that the same costs amount to an income that should be taxed under Article 24. ii.Article 24 of the Kenya-UK DTA caters for income that is not expressly mentioned, which is not the case herein.iii.The Respondent avers the nature of the group recharges as seen above are not service fees under the 9th Schedule to the ITA. As such, provisions of Article 24 of the Kenya-UK DTA were irrelevant.iv.In addition, the nature and form of group recharge was 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 Schedule define the group recharges as management fee.

126. The Respondent further stated that the ruling in Nairobi TAT Case of Mckinsey and Company Inc Africa Propriety Ltd v Commissioner of legal Services and Board Coordination Appeal no. 199 of 2020 does not apply to this case and the Respondent.

127. In addition, the Respondent contended that the Appellant had raised so many alternate grounds in its appeal hence contradicting its position in relation to the dispute herein. The Respondent maintained that the recharge costs made by the Appellant to its head office in the UK were subject to withholding tax at the rate of 12. 5% in accordance with Article 14 of the Kenya-UK DTA.

128. Regarding the services offered by the Appellant, the Respondent stated that it was clear that the Appellant was a contractor whose activities in the country fall under the extractive industries whose taxation was guided by the 9th Schedule to the Income Tax Act.

129. The Respondent contended that it was evident that the nature of the services that were provided to the Appellant by various non-resident related entities were primarily focused in the extractive industry and were primarily technical in nature i.e geological engineering support etc.

130. The Respondent submitted that the services rendered to the Appellant herein were services which it had no capacity to provide for reasons that those services were technical in nature and therefore required subcontractors who had the technical knowhow as well as professional skills how to work on the same for example geologists, geoscientists, engineers among others and subsequently recharged by head office for the costs incurred by the Appellant.

131. The Respondent asserted that it was clear that while on one hand the Appellant acknowledges that management or professional fees were paid to other non- resident service providers, the Appellant is on the other hand of the view that the very same fees are again not subject to WHT in the Country.

132. That it will be further noted that the Appellant had advanced various alternative arguments as to the nature of the services to which it paid head office recharges to its head office in UK.

133. That in all the alternative arguments espoused, the Appellant admitted to the said services being of a managerial or professional nature but then states that the fees paid for the same were not subject to tax due to various arguments.

134. The Respondent stated that all the issues raised by the Appellant can be crystalized into one issue namely; whether the cost recharges paid by the Appellant to its head office in the United Kingdom for services rendered to the Appellant by various entities should be subject to tax in Kenya.

135. The Respondent submitted that the services provided to the Appellant were indeed technical in nature as it involved specialized work from geologists, geoscientists, engineers which fall under professional services while pass through managerial as clearly outlined in both Section 2 of the Income Tax Act and Article 14 of the Kenya-UK DTA.

136. On the applicability of the Kenya-UK DTA, the Respondent stated that Section 41 of the Income Tax Act with regard to special arrangements for relief from double taxation gives effect to tax arrangements between the Government and any other Country and in this Appeal the Section provides a foundation for the anchor of the Kenya-United Kingdom DTA.

137. The Respondent stated that in this Appeal, there exist a Double Taxation Agreement (DTA) between Kenya and United Kingdom and as such, pursuant to Section 41 of the Income Tax Act, reference must be made to the said DTA. It explained that a DTA allocates taxing rights of various incomes to the contracting state. That this means that for every income under DTA, the DTA will stipulate which of the contracting state is to tax the same or whether both of the contracting state can tax the said income.

138. That it was therefore imperative to look at the Kenya-UK DTA and determine whether the said DTA has allocated taxing rights on the fees subject to the dispute at hand.

139. While citing Article 14 of the DTA, the Respondent stated that it must be established whether the fees paid by the Appellant to its head office in the form of recharges were management fees in accordance with the definition under Article 14(3) of the Kenya-UK DTA.

140. The Respondent submitted that based on the aforementioned definition, the services rendered to the Appellant as explained by the Appellant in their objection were primarily of a technical nature and as such, the fees paid for such services fall squarely within the definition of management fees under the Kenya UK DTA.

141. That in view of the fact that the Article 14(2) has allocated taxing rights to the state in which the said management fees arise, in this instance Kenya, then we must now look at the local legislation to establish how the said fees are taxed under the local legislation.

142. To support its arguments, the Respondent cited the provisions of Sections 2, 3 & 4 of the Income Tax Act. The Respondent stated that it means that Section 3(2)(a)(i) as read together with Section 4(f) to the Income Tax Act directs us to the 9th Schedule which states how to compute the gains or profits from any business in the extractive industry.

143. The Respondent contended that this means that for the purposes of any business in the extractive industry, taxation of any income for such a business entity must be guided by and be in accordance with the 9th Schedule. That no other section in the Act can apply to such an industry unless specifically referred to by the 9th Schedule.

144. To support its case, the Respondent further relied on the following provisions of the law, case laws and publications;i.Section 15(7) of the Income Tax Act.ii.Paragraph 7 of the 9th Schedule to the Income Tax Act.iii.Paragraph 16 of the 9th Schedule to the Income Tax Act.iv.Stroud’s Judicial Dictionary of words and Phrases 6th Edition, London, Sweet and Maxwell 2000 at page 1732. v.Black Law’s Dictionary, 9th edition, Bryan and Garner, 2009vi.Bombay Chartered Accountants Society Article on Interpretation of Tax Statutes.vii.The Bombay Chartered Accountants Society Article on the Rules of Interpretation of Tax Statutes.viii.The Supreme Court of India, Appeal (Civil) 6098 of 1997: State of Bihar & Others v Bihar Rajya.ix.The case of Union of India v M/S Exide Industries Ltd. On 24 April, 2020x.The case of Chandavarkar Sita Ratna Rao v Ashalata S. Guram, AIR 1987 SC 117. xi.The Indian Supreme Court case in Commercial Tax Officer, RajasthanvM/S Binani Cement Ltd. & Another.

145. That the Respondent’s assessments and subsequent objection decision resulting to the dispute herein were in accordance with the law and should be upheld.

Respondents Prayers 146. The Respondent prays that;a.The Appeal be dismissed with costsb.The assessments raised by the Respondent and confirmed in its objection decision be confirmed.c.The Principal taxes, interest and penalties be found due and payable as per the objection decision rendered by the Respondent

Issues for Determination 147. The Tribunal having taken into consideration the pleadings, all the documents and the 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 148. That having determined the issues falling for its determination, the Tribunal will proceed to separately analyze the issues as hereinafter.

a. Whether the Respondent Erred in Law and in Fact in Classifying the Head Office Recharges as management fees. 149. The Appellant 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 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.

150. The Appellant 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.

151. In addition to the above, the Appellant argued 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 was premised on the fact that proviso (ii) to Section 10 (1) of the ITA was 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.

152. The Appellant stated 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. 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.

153. The Tribunal noted 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)

154. It was the Appellant’s submission 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.

155. The Appellant 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."

156. The Appellant maintained that the head office recharges should be classified as service fees and not Management Fees.

157. The Respondent on the other hand averred that the nature of the services offered to the Appellant are in the nature of management fees that are technical in nature which fall within the definition of management fees under both the ITA and the Kenya-UK DTA. That these services could therefore only be taxed in accordance with the 9th Schedule.

158. The Respondent 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.

159. The Respondent 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 K1 Limited, the branch's head office, and thereafter allocated to the branch accordingly." The Appellant thereafter stated that "on this basis, wed confirm that we are of the view that service/Management or professional fees recharged by Total E&P International k3 Limited to the branch are not subject to WHT in Kenya."

160. The Respondent submitted that it was 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.

161. The Respondent urged the Tribunal to note that the Appellant in its pleadings had advanced various alternative arguments as to the nature of the services to which it paid head office recharges to its head office in UK. That in all the alternative arguments espoused by the Appellant, the Appellant admitted 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.

162. The Respondent contended that in view of the foregoing, it was clear that the services rendered to the Appellant are in the nature of management or professional fees.

163. The Tribunal noted that in the Appellant’s first ground of appeal it stated as follows:-“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 were management fees but added that they are exempt from WHT as they are payments to the head office.

164. It was 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. 165. It was not in dispute between the parties that transactions concluded between the Appellant and its head office fell within the purview of the Kenya-UK DTA as empowered by Section 41(1) of the ITA.

166. The Appellant contended that head office recharges allocated to it by the head office fell 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.

167. The Tribunal noted 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”

168. The Tribunal noted 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 referred to Article 14(6) of the Kenya-UK DTA which provides an exception from Article 14 (2). Article 14 (6) of the Kenya-UK DTA provides 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."

169. The Appellant contended that the above stated provision of the Kenya-UK DTA 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 argued 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.

170. The Appellant reiterated 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.

171. On the other hand, the Respondent 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.

172. The Respondent 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.

173. The Respondent further submitted that the group recharges have been claimed by the Appellant as expenses for the Appellant in Kenya. That 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.

174. The Respondent urged that the Appellant in making this argument that the services were performed outside Kenya is in essence contradicting all its earlier arguments where they seek 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.

175. The Respondent stated that the Appellant has only averred without adducing any evidence that the services were rendered offshore even though some of the services such as project associated services required specialized work from geologists, geoscientists and engineers and therefore required physical performance in Kenya.

176. The Tribunal 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%. 177. The Tribunal noted 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 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."

178. It was the Appellant’s submission that management fees arising in Kenya and paid to a resident of the UK are only taxable in the UK. That however, Kenya may impose tax on the same at a rate not exceeding 12. 5%. That 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.

179. The Appellant 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.

180. The Appellant stated 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 insisted 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.

181. The Appellant 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.

182. The Appellant 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.

183. 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."

184. Paragraph 15(2) of the 9th Schedule if the ITA 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.”

185. 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.

186. The Appellant 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%.

187. The Appellant submitted 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.

188. The Respondent on the other hand 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.

189. On this issue, the Respondent submitted that they 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.

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

191. From the submission of both parties it was evident that it was critical that the Tribunal distinguishes the provisions of Paragraphs 15 and 16 of the 9th Schedule of the ITA.

192. 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 a fee 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)

193. On the other hand, Paragraph 16 of the 9th Schedule of the ITA which 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”.

194. 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 to the ITA.

195. 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 196. The upshot of the foregoing analysis is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following Orders:-i.The Appeal be and is hereby dismissed.ii.That the Respondent’s Objection decision dated 24th May, 2021 confirming WHT of ksh150,222,240. 68 be and is hereby upheld.iii.Each party shall bear its own costs.

197. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 10TH DAY OF FEBRUARY, 2023. ......................................ERIC N. WAFULACHAIRMAN......................................GRACE MUKUHAMEMBER......................................CYNTHIA B. MAYAKAMEMBER......................................JEPHTHAH NJAGI KIPROTICHMEMBER......................................ABRAHAM K.MEMBER