A Chinese company has failed to block a Sh2.4 billion tax demand after the Kenya Revenue Authority (KRA) accused it of under-declaring its income through profit shifting, exaggerating hospitality expenses and excluding Chinese expatriates from the payroll.
The Tax Appeals Tribunal turned down a request by Weihai International Economic & Technical Cooperative Company Limited, a Chinese construction firm, to declare the tax demand by the KRA invalid on technicalities.
The firm, which the KRA said had won several construction tenders in Kenya, wanted the tax demand set aside on the grounds that it had not been lodged in time. Weihai said that KRA's the full objection to the company's opposition to the taxman's earlier tax demand came 127 days later, outside of the statutory time limit of 60 days.
According to the firm, the KRA's notice of objection, which was issued within the statutory timeline, was inadequate, incomplete, incomprehensible, and contained missing pages.
However, the tribunal refused to grant the request, noting that such an application would be prejudicial to the KRA.
“It is the tribunal considered view that the orders sought in this application are substantive in nature, cannot be granted at this stage as doing so would be akin to determining and granting the final orders without considering the merit of the appeal herein,” said the tribunal's five-bench members in a ruling made on September 20, 2024.
“Consequent to the above, the tribunal finds that the respondent (KRA) will suffer prejudice if the orders sought in its application are considered and granted as this action would otherwise determine the substantive appeal without according the respondent the right to be heard in a fair trial as guaranteed under Section 50 of the Constitution of Kenya,” said the tribunal which was chaired by Robert Mutuma.
Tax assessment
The KRA said that on April 18, 2023, it audited and raised assessment on the financials of Weihai for the period between 2017 and 2021 on corporate income tax, value added tax, withholding income tax, and pay-as-you-earn. The taxman demanded a total of Sh2,460,996,251 from the company, including penalties and interest.
Weihai objected to this tax assessment on May 29, 2023. The KRA issued a notice of objection on July 27, which the Chinese company said was invalid because it was incomplete, had missing pages and was incomprehensible.
In its preliminary findings, the KRA said that Weihai's Kenya branch, which had won and was executed several local construction tenders, had under-declared its income, resulting in reduced payment of income tax, including corporate income tax and withholding tax.
As the Weihai branch was a subsidiary of a foreign international company and may have had business relationships with the parent company or other related parties, its transfer pricing policy document was required to ensure that all transactions with related parties were disclosed and declared.
In its preliminary findings, the KRA also found what appeared to be a profit shifting scheme: “a review of the appellant’s withholding tax records established that Weihai was receiving interest income from amounts deposited in bank accounts maintained by the appellant (Weihai Kenya),” said the KRA.
The audit found there were unsupported surveyors’ expenses of Sh57,658,704.83 in Weihai Kenya’s books in 2018.
“Further review of this expense established that this expense could not be supported and it was in fact a valuation certificate,” said the KRA.
The KRA also noted that the taxpayer had incurred “substantially high accommodation expenses, which were not wholly and exclusively in the generation of income.”
Weihai Kenya also made several additions to plant and machinery in its accounts. This would have allowed it to claim a wear and tear allowance for tax purposes, which the KRA said had not been adequately reconciled. As a result, the wear and tear allowance was disallowed, according to the KRA.
With regard to VAT, the KRA found a discrepancy between the valuation certificates and the income declared in the VAT returns, with some valuation certificates not being declared.
The KRA's investigation also found that some Chinese expatriates were not on the company's payroll, even though the company had paid and renewed work permits for them, meaning they did not pay PAYE. The company also paid for accommodation, air tickets and security bonds for these expatriates, indicating that they were its employees.
In addition, some of the directors' fees amounting to Sh4,800,300 were not subjected to PAYE tax.
On withholding tax, a review of the company’s operations revealed that some payments to contractors, subcontractors, consultants, and other professionals were not subjected to withholding tax as required by law.
Weihai has won several tenders in Kenya. It was one of the contractors for the Kenya Towns Sustainable Water Supply and Sanitation Programme financed by the African Development Bank and it has also been constructing the Nakuru CBD roads.
