Navigating Tax Disputes: A Case Study Analysis on Withholding Tax

Background

In a recent tax dispute case before the Tax Appeals Tribunal, the Kenya Ports Authority (KPA), represented as the Appellant, contested withholding tax assessments issued by the Kenya Revenue Authority (KRA), the Respondent, relating to procurement contracts for port equipment. The Appellant, established under the Kenya Ports Authority Act, primarily operates and regulates ports and inland container depots. The Respondent, on the other hand, is responsible for tax administration on behalf of the Government of Kenya.

Following an audit, the Respondent issued withholding tax assessments totaling Kshs 1,993,582,700, alleging that payments made by the Appellant for procured equipment constituted management or professional fees subject to withholding tax. The Appellant objected to these assessments, leading to an appeal before the Tax Appeals Tribunal.

The Appeal

The Appellant’s appeal challenged the Respondent’s determination on various grounds, disputing the characterization of payments made for equipment procurement as subject to withholding tax. It argued that the equipment was fully manufactured outside Kenya, delivered to Kenya, and procured based on internal specifications, thereby not constituting taxable services.

Appellant’s Case

The Appellant contended that it procured standardized port equipment, not tailor-made services, and emphasized that no services were rendered beyond equipment delivery. Furthermore, it highlighted exemptions granted by the National Treasury for import duties, indicating that the transactions were for tangible goods, not taxable services.

Respondent’s Case

The Respondent argued that the procurement contracts constituted turnkey projects, involving design, construction, and installation works, thus subject to withholding tax as management or professional fees. It maintained that payments made to non-resident suppliers fell within the ambit of taxable services under the Income Tax Act.

Issue for Determination

The Tribunal identified the central issue as whether the Respondent erred in imposing withholding tax on the Appellant for the procurement contracts.

Analysis and Findings

Upon review of the contracts and importation documents, the Tribunal concluded that the transactions involved the procurement of tangible equipment, not taxable services. It emphasized that income tax is chargeable only on income derived from Kenya, which, in this case, did not apply to fully imported equipment.

Final Decision

The Tribunal allowed the appeal, setting aside the Respondent’s objection decision and ruling that no withholding tax was chargeable on the procurement contracts. Each party was ordered to bear its own costs.

This case serves as a notable precedent in tax law, clarifying the tax treatment of procurement contracts involving imported equipment, and underscores the importance of careful consideration of contractual terms and documentation in tax disputes.

Disclaimer: This blog post is for informational purposes only and should not be construed as legal advice. Readers are encouraged to consult us regarding their specific circumstances and legal issues.