M-Pesa Foundation Charitable Trust has lost a bid to block the Kenya Revenue Authority's (KRA) claim for Sh6.48 million in withheld tax on staff cost reimbursements payable to Safaricom.
The Tax Appeals Tribunal said the claim by KRA against the foundation was justified because it is equivalent to income for Safaricom which seconded staffers to the charity organisation supported by M-Pesa.
“The payment was made as consideration for a service which was the supply of employees on secondment. The view of the tribunal is that the payment was correctly treated as an income to Safaricom since it was a payment made in exchange for Safaricom providing a service. Withholding tax was therefore deductible on the payment,” the tribunal chaired by Christine Muga said.
The M-Pesa Foundation moved to the tribunal after KRA levied withholding tax on payments made to staff seconded to it by Safaricom.
The foundation argued that these payments were reimbursements for payroll costs and should not be subject to withholding tax.
KRA told the tribunal that the payments made by the M-Pesa Foundation to Safaricom were for professional and management services provided by the seconded employees, making them subject to withholding tax under the Income Tax Act.
The tax authority emphasised that the employees remained under the employment of Safaricom, thereby constituting a service arrangement between the two entities.
According to KRA, the payments were inclusive of VAT, further reinforcing their claim that Safaricom was providing a taxable service.
They also noted that the Income Tax Act defines management or professional fees as any payment made to a person other than an employee by their employer, which covered the payments in question.
For its part, the M-Pesa Foundation contended that both Safaricom and the Foundation jointly employed the seconded employees and that the payments made were simple payroll reimbursements, not fees for services rendered.
The Foundation also presented evidence showing that no markup was applied to these reimbursements, which included salaries, National Social Security Fund, and pay-as-you-earn contributions, and claimed that Safaricom did not earn any income from these transactions.
M-Pesa Foundation said that it is common practice for seconded employees to maintain their employment contracts with their primary employer, as secondment is essentially a temporary assignment to another workplace.
They further stated that secondment does not amount to a termination of employment or a permanent transfer and that once the secondment period ends, the employee returns to their original position at the primary workplace.
It added that the relationship between it and Safaricom is not one of service provider and service recipient respectively, but that of joint employers of the seconded staff.
The tribunal determined that the payments made by the Foundation to Safaricom constituted management and professional fees as defined under the Income Tax Act.
The tribunal further concluded that the nature of the secondment arrangement did not alter the fact that services were being provided and therefore the payments were subject to withholding tax.
The tribunal observed that the agreement between Safaricom and M-Pesa Foundation involved the reimbursement of costs and the secondment of employees.
It was a contractual arrangement where the payment made to Safaricom for seconding its employees was reimbursement of costs the telecom had already incurred.
“The tribunal having found that the re-charge costs were consideration for supply and that the consideration is construed to be management and professional fees finds that the Respondent did not err and that the taxes demanded are due and payable,” it said.
