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Inside KRA’s plan to deny multinationals billions in tax refunds

By Dominic Omondi | June 8th 2021
Kenya Revenue Authority’s head office at Times Towers, Nairobi. [Courtesy]


In the few legal bouts that the Kenya Revenue Authority (KRA) has had with multinational enterprises on refunds on input tax, the taxman has left the ring with a swollen face.

But now, KRA has orchestrated a change in the law to turn the tide against these firms as it looks to raise revenue collection amid a widening budget deficit.

Through the Finance Bill, 2021, the tax authority hopes to deny multinationals billions of shillings in value-added tax (VAT) refunds for the export of services to their foreign-based parent companies.

In less than two years, KRA has lost at least five cases against multinationals such as logistics company Total Touch Cargo Holland, internet giant Google, LG Electronics, Oracle System, beverage maker Coca-Cola, and French-based food company Danone.

This has seen the taxman forfeit billions of shillings in VAT.

All these companies are foreign-based. A few have a subsidiary registered as a separate legal entity to do business in Kenya.

But most of them only have branches - they are not incorporated in Kenya and thus are not separate entities from their foreign-based parent companies.

At the heart of the legal fights have been the billions that have flowed from the head offices of these multinationals to their local branches.

Oftentimes, the local branches are only in Kenya to offer marketing services and liaise with customers on behalf of their parent companies.  

For marketing and advertising of their services in Kenya, these multinationals pay billions of shillings through their branches.

In the case of Google, Coca-Cola and Oracle Systems (Kenya Branch), KRA was after the money used in Kenya to market their products, including Google Translate in the case of internet giant Google.

According to KRA, such services are for products that would ultimately be consumed in Kenya and as such, should be subjected to VAT.

Legally, the export of services, just as the export of goods, is VAT zero-rated. The taxman is supposed to refund these deductions. 

Moreover, says Nikhil Hira, a tax expert who is also the director of legal firm Bowman’s Coulson Harney, the branches are not registered to do business here.

Branches in Kenya may look for customers on behalf of their parent companies, which are the ones that will supply the good or service.

The nature of some of these services offered by branches on behalf of their parent companies is in such a way that it is difficult to tell who exactly consumed the service.

Take, for example, the case between KRA and the Dutch-based Total Touch Cargo Holland (TTCH).

TTCH provides transport and handling services for its customers who import flowers and other horticultural products from Kenya to Europe.

To this end, it has a subsidiary, Total Touch Cargo Kenya (TTCK) Ltd, which is incorporated in Kenya.  

TTCK offers cooling, scanning and palletising services on behalf of the Dutch-based Total Touch Cargo Holland.

TTCK then sub-contracted Kenya Air Freight handling Ltd (KAHL) to carry out the same services. At first, KAHL would invoice TTCK, a company registered in Kenya and which is supposed to pay VAT.


But the parent company instructed KAHL to instead invoice it. With the parent company being invoiced, the service became an export and therefore zero-rated. KRA took this as a tax avoidance scheme.

Moreover, KRA reckoned, the services being offered by TTCK were consumed by Kenyan flower farmers who were then able to take their flowers safely to Netherlands.

Without these services, KRA argued in a 2018 case against Total Touch Cargo Holland, the produce would not be of “merchantable quality when it eventually arrived at the European destination,” and the farmers would lose out.

KRA lost the case not only because the tribunal found that the service was consumed outside Kenya but also because Kenyan farmers had no such contract with KAHL. On its part, TTCH had such a contract with its Kenyan subsidiary.

Mr Hira said it is a no-brainer that one pays VAT on consumption. Technically, this is known as the principle of destination which has been agreed upon under the Organisation for Economic Cooperation and Development (OECD) guidelines.

Other than services offered by multinationals, professionals, such as accountants, lawyers, doctors and engineers, also offer services to outsiders and these are deemed as exported services.

The recent case against Oracle System, a provider of internet solutions, aggravated KRA’s woes after the Tax Appeals Tribunal ruled agreed with Oracle’s argument that because its local branch was not a separate legal entity from its parent company, it could not pay VAT when it “supplied” to it. Never mind that the company was registered for VAT.

“Guided by the provisions of the VAT Act, as well as the decisions in the above cases, we are of the view that since the Appellant (Oracle Systems Kenya Branch) and its head office were not separate persons then there could not have been a supply of services as envisioned under the VAT Act. Accordingly, there was no taxable supply,” said the tribunal in a ruling made on April 16.

Stung by the loss, the National Treasury has proposed that export services be exempt from VAT, a shift from the current position where exported services are zero-rated.

Whereas in zero-rating taxpayers can claim input tax, a tax-exempt supplier can’t claim VAT they paid for an item they used to produce the final service.

This has denied the taxman billions of shillings at a time when the country is desperate to reduce its debt uptake by collecting as much revenue as possible.

But experts warn the proposal to make export of services exempt could also boomerang against KRA.

“This move is likely to deter investments in Kenya as a service centre due to the fact that the companies would not be able to recoup their input VAT,” said audit firm KPMG in an analysis of the Finance Bill, 2021.

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