Automated Summary
Key Facts
The key facts involve a tax refund dispute between Dimension Data Solutions Limited (appellant) and the Commissioner of Domestic Taxes (respondent) over Kshs 23,333,200.00 withheld in 2018. The appellant, a Kenyan subsidiary of a South African company, argued that the management and IT fees paid to DD South Africa should be taxed in South Africa under the DTA, as the subsidiary had no permanent establishment in Kenya. The respondent maintained that the fees were taxable in Kenya under Sections 10 and 35 of the ITA and Article 22 of the DTA. The Tribunal determined that DD South Africa did have a permanent establishment in Kenya during 2018, leading to the conclusion that the withholding tax was erroneously deducted and the refund should be granted.
Tax Type
Withholding Tax on Management and Professional Fees
Issues
- Whether the Respondent erred in law and fact in declining to refund withholding tax on management and professional fees
- Whether Dimension Data (Pty) Ltd had a permanent establishment in Kenya for the 2018 financial year as per Article 7 of the Kenya-South Africa DTA
Tax Years
2018
Holdings
- The Tribunal allowed the Appellant's appeal, set aside the Respondent's Objection Decision dated 20th September 2019, and ruled that each party bears its own costs.
- The Tribunal found that Dimension Data (Pty) Ltd had a permanent establishment in Kenya for the financial year 2018, as defined under Article 5(3)(b) of the Kenya-South Africa DTA, rendering its business profits taxable in Kenya under Article 7.
- The Tribunal determined that the Respondent erred in law and fact by declining to refund withholding tax deducted for management and professional fees, as the services rendered by DD South Africa were part of business profits taxable in Kenya under the DTA, not subject to withholding tax under Kenyan domestic laws.
Remedies
- The Tribunal ordered that each party shall bear its own costs.
- The Appeal is hereby allowed by the Tribunal.
- The Respondent's Objection Decision dated 20 September 2019 is hereby set aside.
Tax Issue Category
- Withholding-Tax Characterisation
- Permanent Establishment
Monetary Damages
23333200.00
Legal Principles
- The Tribunal applied the principle of substance over form by determining that the tax treatment of management and professional fees should be based on the actual existence of a permanent establishment in Kenya (as per Article 5(3)(b) of the DTA) rather than the formal classification of the fees as 'management' or 'professional.' The decision emphasized the economic reality of the services rendered by DD South Africa, which led to the conclusion that the fees constituted taxable business profits under the DTA.
- The Tribunal interpreted the Kenya-South Africa Double Taxation Agreement (DTA) using a purposive approach, focusing on the DTA's objective to prevent double taxation. It emphasized that the Agreement's terms should be understood in line with its purpose, particularly applying domestic tax laws (Kenya's Income Tax Act) to determine the taxability of business profits under Article 7 of the DTA. The Tribunal held that the DTA's provisions must be read to achieve their intended effect, rather than strictly adhering to literal interpretations.
Disputed Tax Amount
23333200.00
Precedent Name
Mckinsey and Company inc. Africa Propriety Itd vs Commissioner of Legal Services and Board Coordination
Cited Statute
- Kenya Revenue Authority Act
- Income Tax Act
- Kenya-South Africa Double Taxation Agreement
Judge Name
- Josephine K. Maangi
- Geoffrey Karuu
- Wambui Namu
- Tanvir Ali
- Patricia M. Anampiu
Passage Text
- The Appellant in its Memorandum of Appeal argued that the services that DD South Africa offered are part of business profits and should not be taxed under the provisions of withholding tax. The Appellant relied on various definitions in an attempt to discern the meaning of business profits under Article 7 of the Agreement.
- The Tribunal, having considered all the circumstances herein, we are of the view that when the Appellant sought the refund for withholding tax, the Respondent ought to have refunded the same and bring to tax charge the DD South Africa's business profits under Article 7 of the DTA since the said entity had a permanent establishment in Kenya.
- 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.