Kenyan Tax Tribunal Rules Withholding Tax Inapplicable on Foreign Agency Fees, Providing Relief for Businesses

The Kenyan Tax Appeals Tribunal (TAT) has delivered a major ruling that is set to have far-reaching implications for businesses engaging foreign marketing agents. In a decision handed down on August 30, 2024, the Tribunal 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). This ruling provides much-needed clarity on how Double Tax Treaties are to be interpreted, especially for businesses that rely on foreign service providers.

Case Background and the KRA’s Argument

The case arose from an appeal by a Kenyan company (“the Appellant”) against a tax assessment made by the Kenya Revenue Authority (KRA). The KRA had demanded withholding tax on agency fees paid by the Appellant to marketing agents based in France and South Africa. The KRA argued that these payments were taxable under the “other income” articles of the Kenya-France and Kenya-South Africa Double Tax Treaties (Articles 21 and 22, respectively). According to the KRA, these articles granted Kenya the right to tax the fees paid to the foreign marketing agents.

The Appellant contested this position, arguing that the marketing agents did not have a Permanent Establishment (PE) in Kenya—a critical factor in determining tax obligations under the DTTs. Without a PE in Kenya, the Appellant maintained, the income received by the marketing agents was not taxable in Kenya, and therefore, no withholding tax was due.

Tribunal’s Determination and Legal Reasoning

In its ruling, the Tax Appeals Tribunal sided with the Appellant. The Tribunal held that the Kenya-France and Kenya-South Africa Double Tax Treaties do not grant Kenya the right to tax management or professional fees paid to non-resident entities unless those entities have a Permanent Establishment in Kenya. The Tribunal emphasized that the “other income” articles invoked by the Kenya Revenue Authority could not override this principle, which is foundational to international tax treaties.

The Tribunal further noted that the presence of a Permanent Establishment is crucial in determining the taxability of payments made to non-resident entities. Since the marketing agents in France and South Africa did not have a Permanent Establishment in Kenya, the payments they received could not be taxed in Kenya.

This ruling is consistent with earlier decisions made in similar cases, including Total Kenya Limited vs. Commissioner of Domestic Taxes and McKinsey and Company Inc. Africa Proprietary Limited vs. Commissioner of Legal Services and Board Coordination. In both cases, the Tax Appeals Tribunal determined that management or professional fees paid to non-residents were not subject to withholding tax unless the recipients had a Permanent Establishment in Kenya.

Implications for Businesses and the Future of Tax Law

The ruling is a significant development for businesses operating in Kenya and engaging foreign service providers. According to a Tax Alert issued by PwC Kenya, this decision clarifies the interpretation of Double Tax Treaties, especially in cases where specific provisions regarding management or professional fees are absent. It reinforces the principle that, under international tax treaties, the existence of a Permanent Establishment is key in determining whether a payment is subject to taxation.

For businesses, this decision provides a reprieve from the Kenya Revenue Authority’s aggressive tax assessments on payments made to foreign entities. Companies engaging non-resident marketing agents or other service providers should take this ruling as a reminder to carefully review the terms of relevant Double Tax Treaties to ensure compliance with their tax obligations.

However, it remains to be seen whether the Kenya Revenue Authority will appeal this decision. The possibility of an appeal is particularly significant in light of the High Court’s ruling in Commissioner of Domestic Taxes vs. Total Kenya Limited (E044 of 2021), where the High Court ruled that withholding tax is not applicable on management or professional fees paid to non-residents in the absence of a Permanent Establishment. If the Kenya Revenue Authority does pursue an appeal, it could further shape the legal landscape for businesses working with foreign entities.

Key Takeaways for Businesses in Kenya

1. Understanding Double Tax Treaties is Essential: Companies engaging foreign service providers must carefully review the relevant Double Tax Treaties to determine whether payments to non-residents are subject to withholding tax. The presence of specific provisions in treaties can significantly impact a business’s tax obligations.
2. The Role of Permanent Establishments is Crucial: The existence of a Permanent Establishment within Kenya is a key determinant in deciding whether payments made to non-residents are taxable. In the absence of a Permanent Establishment, businesses may not be required to withhold tax on payments made to foreign service providers.
3. Consult Professional Tax Advisors: Given the complexity of tax laws and the nuanced interpretation of Double Tax Treaties, businesses should seek professional tax advice to ensure compliance with international tax obligations and to optimize their tax positions. Navigating these intricate tax provisions requires expert guidance to avoid unnecessary liabilities.

The Impact on Kenya’s Business Environment

This ruling has broader implications for Kenya’s business environment, particularly for companies that rely on foreign marketing agents and service providers. By clarifying the tax obligations under Double Tax Treaties, the Tax Appeals Tribunal has provided businesses with more certainty and predictability when it comes to engaging non-resident entities.

Additionally, this decision may encourage more businesses to challenge aggressive tax assessments from the Kenya Revenue Authority, especially when such assessments do not align with the provisions of international tax treaties. The Tribunal’s reference to precedents such as the Total Kenya Limited and McKinsey and Company cases demonstrates a consistent approach to the interpretation of Double Tax Treaties in Kenya, strengthening the case for businesses seeking to avoid over-taxation.

Conclusion

The Tax Appeals Tribunal’s ruling on August 30, 2024, represents a significant victory for businesses in Kenya engaging foreign marketing agents and other service providers. By reaffirming the principle that management or professional fees paid to non-residents are not subject to withholding tax unless a Permanent Establishment exists in Kenya, the Tribunal has provided much-needed clarity on the interpretation of Double Tax Treaties.

As the Kenya Revenue Authority contemplates a potential appeal, businesses must remain vigilant in understanding their tax obligations and should continue to seek professional advice to navigate the complexities of international tax law. This decision, and any subsequent legal developments, will be closely watched by businesses and tax professionals alike.