[2025] KETAT 124 (KLR)

Waica Reinsurance (Kenya) Limited v Commissioner of Legal Services and Board Coordination (Tax Appeal E543 of 2023) [2025] KETAT 124 (KLR) (7 February 2025) (Judgment)

Neutral citation: [2025] KETAT 124 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E543 of 2023

RM Mutuma, Chair, M Makau, Jephthah Njagi, D.K Ngala & T Vikiru, Members

February 7, 2025

Between

Waica Reinsurance (Kenya) Limited

Appellant

and

Commissioner of Legal Services and Board Coordination

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated under the Companies Act of the laws of Kenya, licensed to undertake reinsurance business in Kenya, and is a subsidiary of WAICA Reinsurance Corporation PLC, a Pan African Reinsurance Corporation headquartered in Sierra Leone, with a presence in Sierra Leone, Ghana, Nigeria, Ivory Coast, Zimbabwe and Kenya. It operates as a reinsurance company offering reinsurance business to insurance companies in Africa, Middle East, and parts of Asia.

2. The Respondent is the principal officer appointed under the Kenya Revenue Authority Act and mandated with the responsibility for the assessment, collection, and accounting for all tax revenue as an agent of the Government of Kenya. The Respondent is also mandate with the responsibility for the administration, and enforcement of the statutes set out under the schedule to the said Act.

3. The Respondent undertook a compliance check on the operations, transactions and tax compliance of the Appellant for the years of income 2019 to 2021, and thereafter issued a letter of findings dated 24th January 2023 outlining its preliminary findings from the audit.

4. Following engagement between the two parties, the Respondent issued an assessment on 24th April 2023 and demanded the sum of Kshs. 103,784,965. 00, to which the Appellant objected on 23rd May 2023, and the Respondent issued its Objection on 21st July 2023 confirming assessment for Kshs. 59,220,548. 00.

5. The Appellant dissatisfied with the Respondent’s Objection Decision lodged its Appeal with the Tax Appeals Tribunal vide the Notice of Appeal dated 17th August 2023 and filed on 18th August 2023.

The Appeal 6. The Appellant filed its Memorandum of Appeal dated and filed on 1st September 2023 and set out the following grounds of appeal;a.The Respondent erred in law and fact by wrongfully imputing an agency relationship where there is none and subsequently subjecting commissions (business acquisition costs) to withholding tax;b.The Respondent erred in law and in fact by considering management fees booked in the Appellant’s audited financial statements as a net figure in its computations as opposed to the gross expense (inclusive of the applicable withholding tax and reverse charge VAT);c.The Respondent erred in law and in fact by charging withholding tax and reverse VAT to pass through costs thereby inflating its tax demand; and,d.The Respondent’s assessment lacks a legal and factual basis.

The Appellant’s Case 7. The Appellant’s case is premised on its;a.Statement of Facts dated and filed on 1st September 2023 together with the documents attached thereto; and,b.Written submissions dated and filed on the 14th May 2024.

8. The parties by a consent dated 14th May 2024 and filed on 30th May 2024 partially settled part of the assessment as follows;i.VAT on imported management fees Kshs. 2,311,553. 00;ii.WHT on management fees Kshs. 3,985,585. 50;

9. The parties therefore referred the balance of Kshs. 53,843,160. 00 being WHT on commission charged on reinsurance brokerage fees, for hearing and determination.

10. The Appellant stated that the Respondent erred in law and in fact by wrongfully imputing an agency relationship where there is none and subsequently subjecting commissions (business acquisition costs) to withholding tax.

11. The Appellant also stated that the Respondent’s assessment and demand is based on a fundamental misunderstanding of the nature of the Appellant’s business, which has resulted in an erroneous inference of an agency relationship between the Appellant and reinsurance brokers, where there is none.

12. The Appellant further stated that being in reinsurance business, it would mean, the means by which an insurance company is insured against any liability by a reinsurance company and the role of the reinsurer is to insure an insurance company against a class of risks as a means of risk management.

13. It was stated that the insurance company that pursues coverage against potential liabilities commonly is known as the reinsured, and in contrast to an insurance company that provides coverage for particular individuals or policyholders against distinct risks, a reinsurance company assumes the responsibility of insuring a category of risks through agreements recognized as treaty contracts or facultative contracts for insurance companies.

14. The Appellant averred that in its capacity as a reinsurer, it remains unaware of, and uninvolved in the contractual arrangements between the insurance company and the policyholder. Communication with the Appellant is solely facilitated by insurance companies. Consequently, these reinsurance brokers are reinsurance brokers engaged by insurance companies receive instructions from insurance companies, and consistently operate in the best interests of the insurance company, affirming their status as agents of the insurance companies. There is therefore no contracts between the Appellant and the reinsurance brokers.

15. It was averred that as a consideration, the reinsurance broker deducts their brokerage premium from the premium paid by the insurance company to the reinsurer, and therefore such direct deduction does not create an agency relationship between reinsurance companies and reinsurance brokers.

16. The Appellant cited Section 35 (1) of the Income Tax Act which provides that withholding tax on agency fees can only be collected where;“A person shall upon payment of an amount to a non-resident not having a permanent establishment in Kenya, in respect of-a.A management or professional fee or training fee …”

17. It also stated that Section 2 of ITA precisely defines management and professional fees to mean;“… a payment made to a person, other than a payment to an employee by his employer, as consideration for managerial, technical, agency, contractual, professional or consultancy services however calculated.”

18. The Appellant further stated that Section 2 of ITA defines agency fees as;“payments made to a person for acting on behalf of any other person or group of persons or on behalf of the Government and excludes any payment made by an agent on behalf of a principal when such payments are recoverable.”

19. The Appellant stated that the upshot of the above provisions is that, for a principal/agency relationship to exist, there must be a fiduciary relationship agreed on and payment considered an “agency fee” made to the agent by the principal.

20. In its submissions the Appellant submitted that WHT would only be due on payments made in respect to managerial, technical, agency, contractual, professional or consultancy services that are performed for the benefit of the Appellant by reinsurance brokers, and asserted that there was none.

21. It was further submitted that it is only in instances where the specific services listed in the forgoing paragraph above are actually performed, can a person in receipt of such services be required to withhold against the payment made in accordance with the provisions of Section 10 of the ITA which provides that WHT should be withheld and remitted;“(10)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.”

22. The Appellant further submitted that in a typical agency relationship, an agent has authority to act for his principal in all matters concerning a particular trade or business, or of a particular nature; or to do some act in the ordinary course of his trade, profession, or business as an agent, on behalf of his principal.

23. The Appellant cited the case of Commissioner of Domestic Taxes vs. WEC Lines (K) Limited ITA E084/2020 [2022] KEHC 57 KLR, where the court held;“Agency was the fiduciary relationship which existed between two persons, one of whom expressly or impliedly manifested assent that the other should act on his behalf so as to affect his relations with third parties, and the other of whom similarly manifested assent so as to act or so acted pursuant to the manifestation. The one on whose behalf the act or acts were to be done was called the principal. The one who was to act was called the agent. Any person other than the principal and the agent could be referred to as a third party.”

24. It was also submitted that in the Canadian case of Royal Securities Corp Ltd vs. Montreal Trust Company (1966) CanLII 173 (ONSC), the court listed the following as the essential conditions that have to be met for an agency relationship to be deemed;“i.the consent of both the principal and the agent;ii.the agent’s authority to affect the principal’s legal position; and,iii.the principal’s control over the agent’s actions.”

25. The Appellant submitted that the relationship between the Appellant and the reinsurance brokers did not meet any of the three conditions listed in the case of Royal Securities Corp Ltd.

26. The Appellant further submitted that the reinsurance brokers are not agents of the Appellant but are agents of the insurance companies, and the Appellant is not privy or party to any contract between reinsurance brokers and the insurance companies.

27. The Appellant submitted that there being no such relationship between the Appellant and the brokers, the Respondent’s assessment and demand for WHT where there is no relationship or payment between the Appellant and the reinsurance brokers is fatally erroneous.

28. The Appellant also submitted that it is a well-established maxim that tax should only be imposed in instances where the law explicitly intends to levy taxes upon the taxpayer. The principal has been affirmed in the case of Republic vs. Kenya Revenue Authority & Anor exparte Fontana Ltd [2014], where Odunga J. (as he then was) stated that;“In a taxing statute one has to look merely at what is clearly stated there is no presumption as to tax.”

29. It was therefore a submission of the Appellant that the Respondent has acted contrary to its mandate in confirming the withholding tax on commissions thereby overstepping its obligation by seeking to collect tax where there is no tax due.

The Appellant’s Prayers 30. The Appellant prayed to this Tribunal that;a.The Respondent’s Objection Decision demanding PAYE and VAT of Kshs. 59,220,548. 00 be set aside in its entirety;b.The Appeal be allowed with costs to the Appellant; and,c.The Honourable Tribunal be pleased to issue any other remedies that it deems just and reasonable.

The Respondent’s Case 31. The Respondent has set out its case in its written submissions dated 17th February 2024 and filed on 26th February 2024. The Respondent however, did not file its Statement of Facts therefore its case shall be considered on the basis of its written submissions.

32. The Respondent submitted that in execution of its mandate it undertook a returns review of the Appellant’s Income Tax returns for the years 2019-2021, and requested the Appellant for production of records.

33. The Respondent submitted that it issued a preliminary assessment letter vide its letter dated 8th March 2023, which the Appellant responded to vide a letter dated 22nd March 2023.

34. That the Respondent, after a careful and thorough review of the objection, issued a Notice of Assessment dated 24th April 2023 confirming an assessment of Kshs. 103,784,934 made up as follows;i.VAT on imported services (management) 8,386,353. 00;ii.WHT on management fees 11,140,782. 00;iii.WHT on foreign Retrocession premiums 27,128,478. 00;iv.WHT on agency fees 57,129,321. 00;Grand Total 103,784,934. 00.

35. It was submitted that the Appellant partially objected on 23rd May 2023 stating its grounds for objection and requesting that the whole assessment be vacated, however conceded to WHT on foreign retrocession premiums in full and partially on tax charged on management fees/shared costs.

36. The Respondent after an in-depth review of the objection and accounting for the concessions, issued an Objection Decision on 21st July 2023 amending the assessment from Kshs. 103,784,934. 00 to Kshs. 59,220,548. 00 which the Appellant appealed against.

37. However, pursuant to a consent dated 14th May 2024 the parties agreed to the settlement of the amount of Kshs. 2,311,553. 00 on VAT on imported management fees, and Kshs. 3,065,835. 00 on WHT on management fees, leaving the amount of Kshs. 53,843,160. 00 on WHT on commissions paid, for determination in this Appeal.

38. The Respondent submitted that the Appellant had averred that the Respondent erred by wrongfully imputing an agency relationship where there was none, thereby issuing erroneous withholding tax on commissions (business acquisition costs).

39. It was a submission of the Respondent that the Appellant’s argument is contrary to the industry practice of payment of brokerage fees. The Appellant did pay these brokerage fees, which constituted commissions/business acquisition fees, as represented in the Appellant’s financial statements. These payments should have been subjected to withholding tax as per Section 35 of the ITA, the Respondent added.

40. The Respondent submitted that it is clear that the assessment and Objection Decision had both legal and factual basis. That the Respondent had considered every argument of the Appellant, which is indicated by how the Appellant has conceded various amounts in the Objection Decision.

41. The Respondent further submitted that considering the facts presented, the documents adduced and arguments proffered, the assessment and Objection Decision issued were properly issued and the Appellant’s tax liability is justified.

The Respondent’s Prayers 42. The Respondent prayed that the Tribunal;a.Dismiss the Appeal;b.Uphold the Respondent’s Objection Decision dated 21st July 2023; and,c.Award the Respondent the costs of the Appeal.

Isues For Determination 43. The Tribunal having carefully considered the pleadings of the Appellant and submissions made by the parties is of the considered view that the Appeal crystalizes into one issue which commend for determination as follows;Whether the Respondent erred in charging the commissions paid on brokerage agency commissions (business acquisition fees) to withholding tax and issuing the assessment to the Appellant for the period 2019 – 2021.

Analysis And Determination 44. The issue subject of this Appeal is whether the Respondent erred in charging and assessing the Appellant to tax on commissions paid on brokerage agency commissions or business acquisition fees to WHT.

45. The Appellant has contended that the Respondent wrongfully and erroneously imputed an agency relationship where there is none, thereby issuing erroneous withholding tax on commissions for business acquisitions costs.

46. The Appellant further contended that the reinsurance broker deducts their brokerage commission from the premium paid by the insurance company to the reinsurer, and therefore such direct deduction does not create an agency relationship, between the Appellant and the reinsurance brokers.

47. It was further submitted for the Appellant that WHT would only be due on payments made in respect to managerial, technical, agency, contractual, professional or consultancy services that are performed for the benefit of the Appellant by reinsurance brokers, and asserted there was none in the instant case.

48. The Respondent submitted that the Appellant’s argument is contrary to the industry practice of payment of brokerage fees. It contended that the Appellant did pay these brokerage fees, which constituted commissions/business acquisition fees, as represented in the Appellant’s financial statements, and the same ought to have been subjected to WHT as per Section 35 of ITA.

49. Section 35 of the ITA makes provision for the deduction of tax. The relevant section in the instant case provides as follows;“35(3).Subject to subsection (3A), a person shall, upon payment of an amount to a person resident or having a permanent establishment in Kenya in respect of –(d)a commission or fee paid or credited by an insurance company to any person for the provision, whether directly or indirectly, of an insurance cover to any person or group of persons (except a commission or fee paid or credited to another insurance company);”

50. Accordingly, the Import of the foregoing provision is that commissions or fees paid by insurance companies (including reinsurance companies) to other persons, whether directly or indirectly, for provision of insurance cover to other persons, is subject to deduction for WHT.

51. Indeed, the Respondent has submitted that the Appellant’s argument is contrary to industry practice on payment of insurance brokerage fees, which submission the Tribunal has taken note of.

52. Section 2 defines “agency fees” to mean “payments made to a person for acting on behalf of any other person or group of persons, or on behalf of Government and excludes any payments made by an agent on behalf of a principal when such payments are recoverable.”

53. It is not in dispute that the reinsurance brokers place reinsurance business with the Appellant to provide reinsurance covers for particular insurance companies, for which they are paid a business acquisition fee or commission by the Appellant.

54. Though the Appellant has strenuously asserted that there is no privity of contract or agency relationship between them and the brokers, the same can be implied by conduct of the parties. The commissions are paid out of the premiums accruing to the Appellant on account of the reinsurance business placed by the brokers with the Appellant.

55. In view of the foregoing, the Tribunal is satisfied that there exists a fiduciary relationship between the Appellant and reinsurance brokers who were paid a commission, and the commissions so paid were subject to WHT in accordance with Section 35 (3) (d) of ITA cited hereinabove.

56. The Tribunal consequently finds and holds that the Respondent was justified in assessing the Appellant on the the commissions paid on brokerage agency for withholding tax for the period 2019 - 2021.

57. The upshot of the foregoing is that the Appellant’s Appeal is not merited and consequently fails.

Final Determination 58. The Appellant’s Appeal having failed the Tribunal makes the following orders;a.That the Appellant’s Appeal be and is hereby dismissed;b.That the partial consent dated 14th May 2024, filed on 30th May 2024 and adopted as a partial judgement of this Tribunal on 30th May 2024 be and is hereby confirmed.c.That the Respondent’s Objection Decision dated 21st July 2023 be and is hereby upheld, subject to variation by the partial judgement entered on 30th May 2024; and,d.The parties to bear their own costs.

59. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 7TH DAY OF FEBRUARY 2025ROBERT M. MUTUMA- CHAIRPERSONMUTISO MAKAU - MEMBERJEPHTHAH NJAGI - MEMBERDELILAH K. NGALA - MEMBERDR TIMOTHY B. VIKIRU -MEMBER