The Kenya Revenue Authority (KRA) has suffered a blow after the High Court blocked it from demanding millions of shillings in taxes from LG Kenya for marketing services done by its agents.
The taxman had insisted that the marketing services are taxable supplies and thus subject to tax and the consumption of the services offered is in Kenya by the independent distributors to the Kenyan public, who buy the products.
LG Kenya said the payment for the marketing and advertising services is made by LG Dubai and not LG Kenya, and the payments cannot be deemed to be income that accrued in or was derived from Kenya and, therefore, the payments were not subject to withholding tax.
In the judgment, Justice David Majanja upheld the decision of the tax appeals tribunal, saying the marketing services are consumed by LG Dubai and not the Kenyan distributors and that such service is deemed a service exported out of Kenya, which is zero-rated for purposes of VAT.
“In any event, I agree with LG Kenya that the Output VAT was zero thus there was no obligation to register for VAT as contended by the Commissioner and thus, no wilful or gross neglect by LG Kenya to enable the Commissioner to issue an assessment past the five-year statutory period,” the judge said while dismissing the KRA’s appeal.
The KRA had issued LG Kenya with an assessment of Sh2.6 billion for the period between 2010 and 2016 in respect of corporate tax, VAT, and withholding tax.
Although the demand for corporate tax was settled, the KRA charged VAT on the taxable supplies of LG Kenya to the Kenyan market at Sh80 million.
The KRA submitted that the tax base is the actual value of the services by LG Kenya which is the profit attributed to it for the activities it performs in the Kenyan market.
The court heard that the KRA used the proportion of income attributable to the Kenyan market as the actual value of services to the same market and that this was obtained from the actual sales of Kenya as compared to the actual sales to the region.
The judge also allowed an appeal by LG Kenya, saying he did not find any rationale for the Tribunal to order the KRA to impose the relevant expenses incurred against the income accrued to withholding tax.
“As stated, WHT is only applicable to payments and not expenses, and that in any case, it is always charged on the ‘gross’ amount," the judge said.