In a groundbreaking decision that could reshape tax obligations for Kenyan companies, the Tax Appeals Tribunal (TAT) has ruled that withholding tax does not apply to management or professional fees paid to non-resident entities under the Kenya-France and Kenya-South Africa Double Tax Treaties (DTTs). The decision, delivered on August 30, 2024, offers significant clarity for businesses engaging foreign service providers, particularly in marketing, and could lead to major tax savings.
TAT Ruling Favors Businesses on Withholding Tax Dispute
The case stemmed from an appeal by a Kenyan company against a Kenya Revenue Authority (KRA) demand for withholding tax on agency fees paid to foreign marketing agents based in France and South Africa. The KRA argued that these fees should be taxed under the “other income” provisions in the respective Double Tax Treaties (DTTs), which grant Kenya taxing rights on such payments.
However, the TAT disagreed, ruling that Kenya lacked taxing rights because the marketing agents in question did not have a Permanent Establishment (PE) in the country. The Tribunal underscored that the “other income” clause does not override the principle that non-resident income is taxable in Kenya only if a PE exists within its borders.
This ruling is consistent with earlier TAT decisions, such as Total Kenya Limited vs. Commissioner of Domestic Taxes and McKinsey and Company Inc. Africa Proprietary Limited vs. Commissioner of Legal Services and Board Coordination, which also concluded that payments to non-residents, including management and professional fees, are not subject to withholding tax unless there is a PE involved.
Implications for Kenyan Businesses
The ruling is a major win for Kenyan businesses that engage foreign service providers, particularly in industries such as marketing, consultancy, and professional services. Companies that make payments to non-residents in countries covered by Double Tax Treaties can breathe a sigh of relief, as they will no longer face undue withholding tax demands, provided that the service providers do not have a PE in Kenya.
According to a PwC Kenya Tax Alert, this ruling reinforces the importance of understanding DTT provisions and how they interact with local tax laws. It also highlights that DTTs take precedence over domestic tax regulations when it comes to cross-border payments.
What This Means for the KRA and Future Tax Disputes
The KRA may choose to appeal this ruling, especially in light of the recent High Court decision in Commissioner of Domestic Taxes vs. Total Kenya Limited, which upheld the importance of DTT provisions in determining tax liabilities. The appeal could set the stage for further legal clarification on the taxation of foreign service payments under international treaties.
For now, however, the ruling provides a clear roadmap for businesses and tax professionals to challenge withholding tax demands that do not align with DTT provisions. The case also underscores the importance of Permanent Establishment as a determining factor in taxing rights.
Key Takeaways for Kenyan Businesses
- Double Tax Treaties (DTTs) are Crucial: Kenyan businesses engaging foreign service providers must closely examine the relevant DTTs to understand their tax obligations. DTTs often override local tax laws, offering potential relief from withholding tax.
- Permanent Establishment (PE) is Key: The presence or absence of a PE is central to determining whether payments to non-resident entities are taxable in Kenya. Without a PE, businesses are less likely to be liable for withholding tax on such payments.
- Seek Professional Tax Guidance: Given the complexities of international tax law and DTTs, businesses should consult tax professionals to ensure compliance and optimize their tax positions.
Future Outlook
This ruling is expected to have a far-reaching impact on how Kenya treats cross-border payments for services and could lead to more companies re-evaluating their tax compliance strategies. The KRA’s potential appeal will be closely watched, but for now, the decision provides a much-needed boost to Kenya’s business community, allowing companies to engage foreign service providers without facing prohibitive tax liabilities.
As businesses continue to operate in an increasingly globalized market, the understanding and application of Double Tax Treaties will remain vital to navigating Kenya’s tax landscape effectively.
