KRA blocked from taxing pay of Safaricom staff seconded to Ethiopia

STEP, formed by a consortium of five companies, launched its commercial operations in Ethiopia in October 2022.

The five-bench Tribunal found that the taxes of the seconded Safaricom employees were paid through a contractual agreement with Ethiopia, which was their principal employer during the period of secondment and, therefore, paid their salaries. Safaricom also proved that the seconded employees paid taxes to the Ethiopian government.

“The sum total of the foregoing is that the Tribunal finds and holds that the Appellant had no legal obligation to deduct and account for Paye on employment income for secondees assigned to Safaricom Telecommunications Ethiopia PLC,” the Tribunal chaired by Robert Mutuma said in a decision on December 17, 2024.

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This is a major relief for Kenyan companies with ambitions for setting up businesses in the region, especially in countries without adequate human capital.

Besides Safaricom, other companies listed on the Nairobi Securities Exchange with a regional presence include KCB Group, Equity Group, East African Breweries Limited, NCBA, Co-operative Bank, and Britam Holdings.

Safaricom, as a member of the consortium Global Partnership for Ethiopia (GPE) together with Vodafone Group PLC, Vodacom Group Ltd, British International Investment (formerly Commonwealth Development Corporation), and Sumitomo Corporation, set up Safaricom Ethiopia in October 2022.

Afterward, the telcos signed a secondment agreement with the Ethiopian subsidiary that would see it second some employees, even as they remained under its employment with Safaricom footing their pension contributions, loan repayments, and other obligations. 

The KRA argued that because the seconded employees continued to be employed by Safaricom, the NSE-listed firm was expected to deduct and remit pay as you earn (Paye) to the taxman.

Part of the agreement that Safaricom entered into with the seconded employees, said that the assignee would at all times continue to “be solely an employee of the employer and the assignees shall not at any time or for any reason become a direct employee of Safaricom Ethiopia.”

The KRA latched on this, insisting that Safaricom should pay PAYE for having maintained an employer-employee relationship with the seconded workers.

“The Respondent summed up its submissions in stating that the Appellant remains the primary employer of the seconded employees, and thus the obligation to deduct and remit PAYE lies with the Appellant,” said the Tribunal in a judgment dated December 27, 2024.

“The secondment arrangement does not alter this employer-employee relationship. Payments made by the Appellant to the seconded employees are clearly emoluments paid by an employer to employees, which under Section 37 (1) of the ITA triggers the obligation to withhold PAYE,” added the judgment.

However, the Tribunal recognised that whilst the secondment arrangement did not sever the employment relationship between the taxpayer and the secondees, it was dormant during the secondment period.

“This Judgment has significant implications for businesses with seconded employees, emphasizing the importance of clear contractual terms and compliance with the tax laws of the host country to avoid double taxation and disputes with the KRA,” said audit firm PWC in a tax alert.

The KRA is in the process of appealing this ruling at the High Court.

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