The Tax Appeal Tribunal has blocked the Kenya Revenue Authority (KRA) from taxing commissions paid to international marketing agents of agricultural firm, Kakuzi, marking a major victory for firms with contracted non-resident salespersons.
The team said commissions paid to global marketing agents cannot be subjected to withholding tax, adding that KRA does not have a right to tax the agency fees or management and professional fees.
The tribunal further stated that payment to the marketing agents falls under Article 7 of the Double Tax Agreement (DTA) and KRA cannot rely on other articles stated in sections of the Agreement to demand the tax.
“Accordingly, the tribunal finds that the appellant (Kakuzi) was not required to withhold taxes on the payments it made to its marketing agents,” the tribunal chaired by Christine Muga ruled.
Kakuzi grows, packages, and sells avocados and macadamia nuts and also cultivates and sells green tea, blueberries, livestock, and commercial tree farming.
The company moved to the tribunal after the KRA issued a notice demanding a withholding tax of Sh16.2 million last year.
The agricultural company faulted the KRA by assessing withholding tax on commissions paid to its non-resident marketing agents based in South Africa- Comexa SA and Bella Frutta SA.
Kakuzi argued that Article 7 of the DTA on business profits provides that the profits of an enterprise of a contracting state shall be taxable only in that state unless the enterprise carries on business in the other contracting state through a permanent establishment.
KRA on its part said withholding tax was applicable on the professional fees paid to the related South African entity on the grounds that the Kenya-South Africa DTA did not contain an article specifically addressing management or professional fees.
According to KRA, such income should be taxed under Article 22 (3) of the Agreement, which provides that items of income of a South African resident not specifically addressed under other Articles of the DTA may also be taxed in Kenya.
The tribunal heard that Kakuzi entered into marketing agreements with agents outside the country to market its products.
Through the agreements, Kakuzi granted the marketing agent the right to market, promote, and sell the products using their best endeavours to obtain the best possible terms for the products from buyers each time they negotiated the sale.
The agents were entitled to a marketing fee of 8 percent of the gross price received from the buyer sold on behalf of Kakuzi.
According to KRA, the marketing fee paid to the agents fell within the meaning of management fees attracting withholding tax under Section 35(1)(a) of the Income Tax Act (ITA).
