11th September 2024…In a significant victory for businesses operating in Kenya, the Tax Appeals Tribunal (TAT) recently ruled that withholding tax does not apply to management or professional fees paid to non-resident entities under the Kenya-France and Kenya-South Africa Double Tax Treaties (DTTs).
This decision, delivered on August 30, 2024, has far-reaching implications for businesses engaging foreign marketing agents and highlights the importance of understanding DTT provisions.
The case involved an appeal by a Kenyan company (“the Appellant”) against the Kenya Revenue Authority’s (KRA) demand for withholding tax on agency fees paid to marketing agents based in France and South Africa. The KRA argued that these fees fell under the “other income” articles of the respective DTTs, granting Kenya taxing rights.
However, the TAT disagreed, stating that “the DTTs, Kenya had no taxing rights on the income received by the marketing agents, as they did not have a PE in Kenya.” The Tribunal emphasized that the “other income” article did not supersede the fundamental principle that income derived by a non-resident is only taxable in Kenya if a Permanent Establishment (PE) exists within the country.
This ruling echoes previous TAT decisions in Total Kenya Limited vs. Commissioner of Domestic Taxes and McKinsey and Company Inc. Africa Proprietary Limited vs. Commissioner of Legal Services and Board Coordination. These cases established that management or professional fees paid to non-residents are not subject to withholding tax in Kenya unless a PE is triggered.
Impact and Future Implications
According to a recently published Tax Alert by professional services consulting firm, PwC Kenya, this decision provides much-needed clarity on the interpretation of DTTs, particularly those lacking specific provisions on management or professional fees. It reinforces the principle that the existence of a PE is crucial in determining taxing rights on such payments.
The KRA’s potential appeal of this judgment, particularly in light of the High Court’s ruling in Commissioner of Domestic Taxes vs Total Kenya Limited, will be closely watched.
Key Takeaways for Businesses
Understanding DTTs is crucial: Businesses engaging foreign service providers must carefully review relevant DTTs to determine their tax obligations.
PE determination is key: The presence or absence of a PE significantly impacts the taxability of payments to non-residents.
Seek professional advice: Navigating complex tax regulations requires expert guidance. Consulting with tax professionals is essential to ensure compliance and optimize tax outcomes.
This ruling offers a welcome reprieve for businesses operating in Kenya and underscores the importance of challenging tax assessments that may not align with DTT provisions.