Automated Summary
Key Facts
Dimension Data Solutions Limited (appellant) sought a refund of Kshs 23,333,200.00 in withholding tax (WHT) paid to the Kenya Revenue Authority (KRA) on management and IT services fees to its South African subsidiary, Dimension Data (Pty) Ltd (DD South Africa). The dispute centered on whether these fees fell under the Kenya-South Africa Double Taxation Agreement (DTA) Article 7 (business profits) or Article 22 (other income). The Tribunal found that DD South Africa had a permanent establishment in Kenya during the 2018 financial year, as defined by Article 5(3)(b) of the DTA, based on services rendered over 183 days. This established that its business profits were taxable in Kenya, and the WHT was erroneously withheld. The appeal was allowed, and the objection decision was set aside.
Tax Type
Withholding Tax on management and professional fees
Issues
- Whether the Respondent erred in law and fact in declining to refund withholding tax deducted with respect to management and professional fees
- Whether Dimension Data (Pty) Ltd had a permanent establishment in Kenya for the financial year 2018 under Article 7 of the Kenya-South Africa DTA
Tax Years
2018
Holdings
- The Tribunal concluded that the Respondent erred in law and fact by declining to refund the withholding tax deducted on management and professional fees. Since DD South Africa had a permanent establishment in Kenya during the financial year 2018, the Respondent's reliance on Sections 10 and 35 of the Income Tax Act (ITA) and Article 22 of the DTA was incorrect. The business profits of DD South Africa should have been taxed under Article 7 of the DTA, not under withholding tax provisions.
- The Tribunal found that Dimension Data (Pty) Ltd had a permanent establishment in Kenya for the financial year 2018 under Article 7 of the Kenya-South Africa Double Taxation Agreement (DTA). This determination was based on the services rendered by DD South Africa to the Appellant over a period exceeding 183 days, as outlined in the invoices dated between March and August 2018, which met the criteria for a permanent establishment under Article 5(3)(b) of the DTA.
Remedies
- The Respondent's Objection Decision dated 2019-09-20 is hereby set aside.
- Each party to bear its own costs.
- The Appeal be and is hereby allowed.
Tax Issue Category
- Permanent Establishment
- Tax Treaty Interpretation
- Withholding-Tax Characterisation
Monetary Damages
23333200.00
Legal Principles
The Tribunal applied the Kenya-South Africa Double Taxation Agreement (DTA), focusing on Article 7 (business profits) and Article 22 (other income). It determined that Dimension Data (Pty) Ltd had a permanent establishment in Kenya under Article 5(3)(b) of the DTA, rendering its business profits taxable in Kenya. The decision emphasized that domestic tax laws (Income Tax Act, Sections 10 and 35) must be interpreted in conjunction with the DTA, and that international commentaries (e.g., OECD) are not binding for this Agreement. The Tribunal also held that the Respondent erred in declining the refund by misapplying the DTA provisions.
Disputed Tax Amount
23333200.00
Precedent Name
Mckinsey and Company inc. Africa Propriety Itd vs Commissioner of Legal Services and Board Coordination
Cited Statute
- Income Tax Act
- Kenya-South Africa Double Taxation Agreement
- Kenya Revenue Authority Act
Judge Name
- Wambui Namu
- Tanvir Ali
- Geoffrey Karuu
- Josephine K. Maangi
- Patricia M. Anampiu
Passage Text
- The Tribunal, in the case of Mckinsey and Company inc. Africa Propriety Itd vs Commissioner of Legal Services and Board Coordination, Appeal No. 199 of 2020, held that the profits of an enterprise of a Contracting State are taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. Consequently, the Tribunal finds and holds that DD South Africa had a permanent establishment in Kenya for the financial year 2018 and is taxable in Kenya.
- The Tribunal finds that Dimension Data (Pty) Ltd had a permanent establishment in Kenya for the financial year 2018, in light of Article 7 of Kenya-South Africa Double Taxation Agreement.
- Consequently, the Tribunal finds that the Respondent erred in law and fact in declining to refund withholding tax deducted by it with respect to management and professional fees.