Aspac International Sprl Limited v Commissioner of Legal Services & Board Coordination

(Appeal 203 of 2021) [2023] KETAT 584 (KLR) (Civ) (29 June 2023) (Judgment)
Neutral citation: [2023] KETAT 584 (KLR)

REPUBLIC OF KENYA
IN THE TAX APPEAL TRIBUNAL
CIVIL
APPEAL 203 OF 2021
E.N WAFULA, CHAIR, CYNTHIA B. MAYAKA, GRACE
MUKUHA, AK KIPROTICH & JEPHTHAH NJAGI, MEMBERS
JUNE 29, 2023

BETWEEN
ASPAC INTERNATIONAL SPRL LIMITED ....................................... APPELLANT

AND
COMMISSIONER OF LEGAL SERVICES & BOARD
COORDINATION ............................................................................... RESPONDENT

JUDGMENT

Background
1. The Appellant is a private limited liability organized and registered under the laws of Belgium.

2. The Respondent is a principal ocer appointed under and in accordance with Section 13 of the
Kenya Revenue Authority Act, and KRA is charged with the responsibility of among others, assessment,
collection, accounting, and the general administration of tax revenue on behalf of the Government of
Kenya.

3. Through a letter dated 19th June 2020, the Respondent issued the Appellant with a tax assessment
of Kshs. 1,871,495.863.00 for Corporation tax, Withholding tax and Value Added Tax for the years
under review. The amount comprised of the principal tax, penalties, and interest.

4. The Appellant replied to the assessment through a letter dated 29th June 2020. Thereafter, the
Respondent requested for additional information.

5. Upon receipt of some of the requested information, the Respondent issued assessments on 28th August
2020 to which the Appellant objected on 26th August 2020.

kenyalaw.org/caselaw/cases/view/271407/ 1
6. The Respondent wrote to the Appellant through a letter dated 16th October 2020 demanding for the
payment of the tax arrears within 14 days. The Appellant replied vide a letter dated 27th October 2020
objecting to the tax demand. The Respondent’s Independent Review of Objections Section wrote an
email to the Appellant on 21st October 2021 giving the Appellant 21 days to provide documentation
to validate its objection.

7. The parties held a meeting with the aim of resolving the matter on 20th January 2021. Vide a letter
dated 25th January 2021 the Respondent gave the Appellant 21 days to provide exemption documents
failure to which the assessments were to be conrmed.

8. The Respondent subsequently issued its objection decision vide a letter dated 31st March 2021
demanding for principal taxes amounting to Kshs. 1,948,193,149.00 together with the resultant
interest and penalties.

9. The Appellant being dissatised with the Respondent’s objection decision led this Appeal dated 30th
April 2021 and led on 3rd May 2021.

The Appeal
10. The Appeal as stated in the Memorandum of Appeal dated 30th April, 2021 and led on the 3rd May,
2021 was premised on the following grounds:

i. That the Respondent erred in law and fact by making a nding that the Appellant won
contracts for supply in Kenya when facts indicated otherwise.

ii. The Respondent erred in both fact and law in making a nding that the Appellant owned
a building site, a construction or installation project when there was no evidence to support
such nding.

iii. The Respondent erred in both fact and law by making the nding that the Appellant derived
income or prots from the projects allegedly undertaken when there was no evidence to
support such nding.

iv. That the Respondent erred in law and fact by making a nding that the Appellant was paid or
received payments directly from the buyers when there was no evidence to support this nding.

v. The Respondent erred in law and in fact by ignoring clear provisions of the contracts signed by
the parties that expressly indicated that the Appellant was not liable to payment of any taxes.

vi. The Respondent erred in law and fact by introducing its opinion on the clear provisions of
the contracts signed between the parties.

vii. By seeking to introduce explanations and meanings to clear provisions of the contracts the
Respondent fell into error.

viii. The Respondent erred in law and fact by ignoring the fact that the respective buyers in the
respective contracts were liable to pay the taxes.

ix. By seeking to countermand the contents of the legal opinion of the Attorney General of the
Republic of Kenya the Respondent fell in error.

x. The Respondent erred in law and fact by not nding that the contracts formed part of a single
transactions and were thus inseparable.

kenyalaw.org/caselaw/cases/view/271407/ 2
 xi. The Respondent erred in law and fact in coming up with a tax liability of Kshs. 1,495,706,135
which was not justied in any form.

xii. The Respondent fell into error by making a nding that the Appellant was liable to pay
withholding tax when the contracts did not provide for payment of withholding tax.

xiii. The Respondent erred in law and fact by nding that the Appellant was liable to pay VAT at
Kshs. 370,622,429 which tax was not payable.

xiv. The Respondent erred in law and fact in rejecting the Appellant’s objection.

xv. The Respondent erred in law and fact by assessing taxes payable at Kshs. 1,402,494,241.00 and
the resultant interest and penalties which assessment is an estimate and not supported by any
evidence.

The Appellant’s Case

11. The Appellant’s case is premised on the hereunder led documents and proceedings before the
Tribunal:

i. The Appellant’s Statement of Facts dated 30th April 2021 and led on 3rd May 2021 together
with the documents attached thereto.

ii. The Appellant’s Further Statement of Facts dated 29th June 2021 and led on 2nd July 2021.

iii. The Appellant’s Bundle of Documents dated 12th May 2021 and led on 11th June 2021.

iv. The Appellant’s Further List and Bundle of Documents dated and led on 14th February 2022.

v. The Appellant’s witness statement of Jacques Massart dated 9th July 2021 and led on 14th
February 2022 that was admitted in evidence on oath on 16th November 2022.

vi. The Appellant’s written submissions dated and led on 2nd December 2022.

Tax Provisions in the Agreements

12. The Appellant submitted that in order to fund infrastructure projects, the Government of Kenya
(hereinafter referred to as Kenya) borrowed funds through buyer-credit agreements between Kenya
(the borrower) and Belus Bank SA NV Belgium (the lender). The contracts, it averred, involved
provision of clean drinking water in the towns of Mavoko known as Mavoko Drinking Water Supply
Project under Tana Athi Water Services Board.

13. As part of the lending contract terms and conditions, the Appellant stated, Kenya being the borrower
and the respective water services boards being the buyers, they requested the lender to grant buyer
credit through the Appellant as a supplier for the realization of the project.

14. According to the Appellant, Kenya on the one part as a borrower and Belus Bank SA /NV of the other
part as a lender entered into agreements dated 4th October 2013 for a buyer credit facility for execution
of additional works in the framework of Iten-Tambach water supply project. It further added that
Kenya on one part as a borrower and Belus Bank SA /NV of the other part as a lender entered into
agreements dated 29th May 2017 for a buyer credit facility for realization of the Mavoko drinking water
supply project-Component A.

kenyalaw.org/caselaw/cases/view/271407/ 3
15. The Appellant added that Kenya on the one part as a borrower and Belus Bank SA /NV of the other
part as a lender entered into agreements dated 29th May 2017 for buyer credit facility for realization of
the Mavoko drinking water supply project-Component B.

16. It was the Appellant’s assertion that each of the agreements was accompanied by a legal opinion of
the Attorney-General of the Republic of Kenya who stated, inter alia, that the borrower could not
withhold or deduct any taxes from payments due to be made under the credit agreements.

17. The Appellant stated that the agreements referred to above made reference to the commercial
agreements made between the Appellant herein (the supplier) and the respective water services boards
(the buyers). These agreements, the Appellant averred, expressly provided that the supplier and its
subcontractors would not be liable to any taxes such as but not limited to, Excise Duties, VAT, Income
taxes arising in the framework of the execution of the contract.

18. It was the Appellant’s assertion that the parties entered into commercial agreements dated 27th
September 2016 and 21st November 2016 between Tana Athi Water Services Board, Kitui and ASPAC
Intl (SPRL), Brussels, Belgium. The parties also entered into Agreements dated 17th December 2014
between Rift Valley Water Services Board and ASPAC Intl (SPRL) Brussels Belgium, and on 19th
December 2012 between Rift Valley Water Services Board and ASPAC Intl (SPRL) Brussels Belgium.

19. According to the Appellant, the entire contents of the agreements point to the fact that the loans and
the disbursements were tax exempt from inception and the parties understood their obligations right
from inception. The Appellant stated that the Agreements provided thus:

“ The borrower hereby acknowledged and agreed that the Supplier and his subcontractors
shall not be liable for any taxes arising in the framework of the execution of the contract.”

20. It was further agreed, the Appellant added, that the buyer (in this case the two water companies would
seek exemption for any such taxes. If the exemption was not granted, then the buyer (not the supplier)
would be liable to pay the tax.

21. It was the Appellant’s submission that the parties are bound by the terms of the contract and the
Respondent, being an agency of the Government cannot ask the Tribunal to re-write the contract. To
buttress its position, the Appellant cited Pius Kimaiyo Langat v Co-operative Bank of Kenya Limited
[2017] eKLR as well as National Bank of Kenya vs Pipeplastic Damkolit (K) Ltd [2002]2 EA 503
where the court held that parties are bound by the terms of the contract unless there is fraud, coercion,
and undue inuence. Additionally, it is not the business of courts to rewrite contracts.
Whether the projects undertaken by the Appellant could be subject to tax and whether the demand
for Kshs 1,871,495,863.00 is justied and payable.

22. The Appellant averred that it was also understood right from inception by the Treasury of the Republic
of Kenya, a party to the credit agreement, that the projects were ocial aid funded projects nanced
by Belus Bank SA/NV of Belgium. That by a circular dated 11th December 2019 by the Cabinet
Secretary the National Treasury and Planning, at paragraph 3 the issue of taxes was discussed.

23. It was the Appellant’s assertion that the PS National Treasury, through a letter dated 12th March 2020
addressed to the Ambassador, Embassy of Kingdom of Belgium copied to the Appellant conrmed
that the ocial aid funded projects are exempted from payment of all indirect taxes except withholding
tax. This, it insists, went against the express provisions of the Agreements signed between the Appellant
and the National Treasury.

kenyalaw.org/caselaw/cases/view/271407/ 4
24. The Appellant argued that notwithstanding the fact that it was understood and agreed that the
contracts were tax exempt, the Respondent made a tax demand of Kshs 1,402,494,241.00 with
attendant interests and penalties, arising out of the aforesaid 3 contracts.

25. It was the Appellant’s submission that upon receipt of the demand, it consulted with the Foreign
Aairs, Foreign Trade and Development Cooperation of the Kingdom of Belgium who wrote
to the Cabinet Secretary for the National Treasury through a letter dated 26th June 2020. The
Cabinet Secretary replied through a letter dated 15th July 2020 indicating that the matter was under
consideration and the way forward will be communicated.

26. In a demonstration that the transactions were tax exempt, the Appellant argued, the PS National
Treasury through a letter dated 25th August, 2020, addressed to the Commissioner General KRA
explained the buyer credit contracts and who was to pay tax. The letter, the Appellant added, showed
that one of the buyers (Tanathi) had made a payment of Kshs. 63,528,884. 00 as withholding tax.
It averred that it never received a reply from the Respondent. That instead, it was served with an
outstanding tax demand dated 16th October 2020 which it replied to through a letter dated 27th
October 2020.

27. The Appellant stated that following other correspondences, and meetings it wrote a letter dated 1st
February 2021 to the National Treasury culminating in a meeting on 12th February 2021. In the
meeting it became clear to the Appellant that the National Treasury had changed its position and
seemed to side with the Respondent.

28. It contended that in line with the deliberations and in good faith, it prepared letters and contacted Rift
Valley Water Works Development Agency and Tanathi Water Works Development Agency with the
view of resolving the issue. That it also sent a letter to the PS Ministry of Water and Sanitation and
copied the letters to the Respondent. That the respective Government Agencies including PS, did not
acknowledge receipt of the letters nor have they made any reply to the letters.

29. The Appellant asserted that the dispute herein arises out of the Respondent’s misunderstanding of
the nature of the contracts and the role of the Appellant in the contracts. That the Respondent for
reasons known to it had unfairly targeted the Appellant despite the fact that the Appellant dealt with
Government agencies who were liable to pay the taxes.

30. It was the Appellant’s assertion that the National Treasury was avoiding its obligations under the
contract despite clear provisions leaving the tax authorities which is a function under it to harass the
Appellant.

31. The Appellant argued that the Respondent had not addressed any of the letters addressed to the
Commissioner General from the National Treasury but seemed determined to bring the operations of
the Appellant in the Country to a halt.

32. The Appellant reiterated that it had not led any nil returns, and at all times relied in the representations
given to it by the Cabinet Secretary National Treasury and the Honourable Attorney General of the
Republic of Kenya on the issue of the tax-exempt status of the contracts under question.

33. It was the Appellant’s averment that based on the nature of the projects and the intricate nature of the
nancing arrangements, it was single sourced by the buyers with knowledge of the National Treasury
and the parent Ministry to facilitate the undertaking and delivery of the projects.

34. The Appellant insisted that it did not receive any income in Kenya from the contracts that were entered
into in Kenya. It averred that it was a supplier through whom the lender provided buyer credit to

kenyalaw.org/caselaw/cases/view/271407/ 5
 nance and realize the two projects. The buyer being the water companies that were nanced by the
lender.

35. The Appellant submitted that the invoicing and payment process in the nancial projects was strictly
undertaken by its clients (the buyers) in the commercial contracts, who approved the invoices for the
works and facilitated the process through the Ministry of Water Resources budgetary process and the
National Treasury. That the end process would be a draw down request from the National Treasury
to the lender in this case Belus Bank SA/NV to the Appellant. Thus, the issues that are in contention
in this Appeal were squarely in the hands of the buyer, the parent Ministry, and the borrower in this
case the National Treasury.

Whether the Appellant has a branch in Kenya and whether the Assessment notices were sent to the
proper party
36. On the issue of whether the Appellant had a branch in Kenya it was the Appellant’s submission that it
did not have a branch in Kenya called Aspac Intl SPRL Limited Kenya Branch (Aspac SPRL) nor did
it have any subsidiary or any fully edged subsidiary in Kenya called Aspac International East Africa
Limited (Aspac EA). That Aspac International East Africa Limited was a separate legal entity and
separate taxpayer with no subsidiary relationship at all with the Appellant. It insisted that it only has a
certicate of compliance for a foreign company. It argued that it was thus erroneous to contend that it
had in existence a xed place of business that places it in the status of a Permanent Establishment.

37. To support its averment, the Appellant cited Clause 2 of the Buyer Credit Agreement where the
Appellant is named as a supplier and described as a limited liability company registered under the laws
of Belgium having its oces in Belgium. Further, the commercial agreement executed between the
water companies and the Appellant describes the company as ASPAC International (sprl) of Avenue
Franklin Roosevelt, 252, B -1050 Brussels Belgium. The audit ndings dated 19th June 2020 and the
assessment dated 31st March 2021 were both addressed to:

The Directors,
ASPAC International Sprl Limited (Kenya Branch)
O. Box 73146 -00100
Nairobi

38. It argued that this is a completely dierent entity from the party that contracted with the Government
and the water companies. It further added that the assessment orders in the Appellant’s bundles refer
to ASPAC Intrl Limited of P. O. Box 66060 -00800 Nairobi which is a dierent entity from the one
that contracted the Government.

39. It insisted that Aspac EA was a separate legal entity and duly registered and active taxpayer separate
from the Appellant with its own power to enter into contracts with third parties including contractors
out of the control of the Appellant with engagement and assumption of risk of its own.

40. It was the Appellant’s assertion that it had no registered oces in Kenya, other than its oces in
Belgium. It reiterated that it did not earn any income in Kenya, nor did it derive any income in Kenya.
It avers that the payments were made towards the repayment of the loan in Belgium. It insisted that
it was not paid any money in Kenya. That the tax claim is in the circumstances not proven and not
explained at all.

kenyalaw.org/caselaw/cases/view/271407/ 6
41. The Appellant argued that the legal opinion of the Honourable Attorney General was binding on the
National Treasury under which the Respondent falls and it was incomprehensible that it was the party
countermanding the opinion.

42. It was the Appellant’s assertion since the Government through the Ministry of Water and the Treasury
paid the Appellant the entire contractual sum, it had a legitimate expectation that the parties would
be bound by the provisions of the agreements that were entered into between the parties.

43. The Appellant added that by expressly agreeing that the agreements would be tax exempt and later
demanding for taxes after the conclusion of the projects, the Government and by extension, the
Respondent, violated the Appellant’s legitimate expectation that the agreements were tax exempt. To
support its argument, the Appellant cited Jane Kiongo & 15 others v Laikipia University & 6 others
[2019] eKLR where the court stated:

“ Legitimate expectation is based on legitimate representation made by an authority which

has power to make such representation that certain actions will be done in a particular way
without any qualication. Such representation gives rise to legitimate expectation and the
authority or institution is thus bound by that representation. “

44. There is no doubt, the Appellant averred, that the Government made an express representation
through the contracts signed that the Agreements were exempted from taxes. That the contracts
therefore gave the Appellant a legitimate expectation that no tax would be demanded. That the
Respondent, as an agent of the Government is therefore bound by the representation made in the
contract.

45. According to the Appellant, the Respondent acknowledged at Paragraph 41 of its Statement of Facts
as to who was obliged to seek exemptions in this case was the buyer and as to who was to make tax
payments again the buyer was to make the payments.

46. The Appellant cited Canada (Attorney General) v. Mavi [2011] 2 S.C.R. 504 where the Supreme
Court of Canada stated that:

“ (68) Where a government ocial makes representations within the scope of

his or her authority to an individual about an administrative process that
the government will follow, and the representations said to give rise to
the legitimate expectation are clear, unambiguous and unqualied, the
government may be held to its word, provided the representations are
procedural in nature and do not conict with the decision maker’s statutory
duty. Proof of reliance is not a requisite.”

47. It is the Appellant’s assertion that from the terms of the agreements, it was the water companies that
benetted from the contract. The Appellant added that in the commercial contracts, the companies
were referred to as the employers. The contracts, which were in conformity with the agreements
provided that the employer was to pay the taxes and that it was the employer’s duty and not the
Appellant’s to either seek the exemptions or pay the taxes.

48. The Appellant avers that in an acknowledgement of who was liable to pay the taxes due, Tanathi paid
to the Respondent Kshs 68,528,884. It adds that this amount is not taken in consideration in the
assessment order.

kenyalaw.org/caselaw/cases/view/271407/ 7
49. With regards to request for documents, the Appellant stated that all documents that were required
by the Respondent and were in possession and within the power of the Appellant to provide, were
provided to the Respondent. That over and above, the Appellant was available at all times to meet the
Respondent’s ocers.

The Appellant’s Prayers

50. The Appellant prayed that:

a. The Appeal be allowed in its entirety.

b. The Objection decision dated 31st March 2021 and the resultant assessment be set aside.

c. The Respondent do pay the costs of the Appeal.

The Respondent’s Case

51. The Respondent’s case is premised on the hereunder led documents and proceedings before the
Tribunal:

i. The Respondent’s Statement of Facts dated 27th May 2021 and led on 28th May 2021 together
with the documents attached thereto.

ii. The Respondent’s List of Documents dated 16th August 2021, led on 17th August 2021

iii. The Respondent’s witness statement of Eric Mwangi dated 16th August 2021, led on 17th
August 2021, and admitted in evidence on oath on 16th November 2022.

iv. The Respondent’s written submissions dated and led 30th November 2022.

52. According to the Respondent, it noted that despite being awarded some contracts in Kenya, the
Appellant was ling nil Corporation tax returns. It issued the Appellant with a tax assessment of Kshs
1,402,494,241.00 for Corporation tax, VAT and Withholding tax for the years under review.

53. It was the Respondent’s assertion that it requested for information to enable it attribute prots for the
projects in Kenya but only received partial information relating to subcontractors and proceeded to
issue assessments. The parties thereafter attempted to resolve the matter amicable but failed resulting
in the Respondent issuing an objection decision dated 31st March 2021 for a demand of Kshs
1,948,193,149.00 inclusive of penalties and interest.

54. According to the Respondent, the Appellant won and was awarded the following contracts in Kenya:

a. Sabor-Iten-Tambach Water Supply Project (Keiyo District) (“Iten 1”) worth 15,000,000 Euros

b. Construction of water pipes around Nakuru Town (“Iten 2”) worth 10,000,000 Euros

c. Recycling and supply of water from Athi River (“Mavoko”) worth 25,000,000 Euros

55. The Respondent submitted that two projects namely Iten 1 and Iten 2 had been completed while the
third project named Mavoko was 90% complete. It found that Aspac SPRL had been subcontracting
the works to various subcontractors to do all works in Kenya.

56. While citing Section 3(1) of the Income Tax Act, the Respondent asserted that the Section allows
income tax to be charged on a person whether resident or not on income that has been brought about
by any works done in Kenya. The Appellant in this case derived income from contracts entered into in
Kenya hence fell within Section 3(1) of the Income Tax Act.

kenyalaw.org/caselaw/cases/view/271407/ 8
57. According to the Respondent, there is no dispute that the Appellant had an established presence
through its Branch called Aspac Intl SPRL Limited Kenya Branch (Aspac SPRL). To support
this argument, the Respondent cited Section 2(1) of the Income Tax Act which denes permanent
establishment in relation to a person. It also averred that the Appellant also had a fully-edged
subsidiary in Kenya called Aspac International East Africa Limited (Aspac EA).

58. It was the Respondent’s assertion that the existence of a xed place of business through which Aspac
SPRL carries on its business led to its taxation as a PE. In the instant case, each of the projects
undertaken by the Aspac SPRL which consist of a building site, a construction or installation project
existed for more than six months hence the threshold for existence of a permanent establishment for
tax purposes had been met. Further, since Aspac SPRL was a registered branch in Kenya with a xed
place of business. As such, Aspac SPRL was a Permanent Establishment in Kenya.

59. Notably, the Respondent averred, Aspac SPRL had no assets or employees in Kenya but had delegated
all functions in Kenya to its subsidiary, Aspac EA, through service agreements.

60. From all the service contracts signed with Aspac SPRL, the Respondent stated, Aspac EA was
to organize and supervise the construction of the projects and also construct the pipework, the
hydro mechanical and electromechanical works. In particular, Aspac EA was required to provide the
following services:

a. Design and engineering.

b. Installation of equipment and systems and construction of structures, including the technical,
administrative, and logistic aspects linked to the execution of the project in conformity with
the laws and standards applied in Kenya.

c. Perform any other activities or tasks related to the previously mentioned services which were
necessary for the proper and timely implementation of the project.

d. The support to the Aspac Intl personnel involved in the project. AIEA will have to provide all
necessary assistance to the Aspac Intl professionals whilst on mission in Kenya.

e. The monitoring of the respect by RVWSB of all the contractual clauses (including possible
amendments and additions).

f. The follow-up of the invoices transmitted to RVWSB for payment.

g. The collection of data and information for Aspac Intl.

61. According to the Respondent, the above functions involve signicant people functions relevant to the
assumption of risk in relation to the project since they involve active decisions that were binding on
Aspac SPRL, and these functions were very critical in the execution of the projects. All these functions
were being carried out by Aspac EA at its main oce in Westlands, or site oces, which was the same
registered oce of Aspac SPRL. Furthermore, Aspac EA had been providing services exclusively to
Aspac SPRL which makes it a dependent agent PE.

62. It is not in dispute, the Respondent submitted, that Aspac SPRL was a non-resident person. However,
it was registered in Kenya under a certicate of compliance. It added that Aspac SPRL derived income
in Kenya for the period 2015-2019.

63. The Respondent denied that it ignored or misapprehended the contracts awarded to the Appellant as
claimed in the Appellant’s Memorandum of Appeal. It reiterated that Section 3(1) of the Income Tax

kenyalaw.org/caselaw/cases/view/271407/ 9
 Act brings to charge for a year of income all income of a person whether resident or non-resident which
accrued in or was derived from Kenya.

64. It averred that the Appellant was a non-resident that derived income for the projects that were carried
out in Kenya and ought to have paid the corresponding tax. That Section 18(3) read together with
the Income Tax (Transfer Pricing) Rules, 2006 requires an arm’s length determination of prots
attributable to the Kenyan operations. That further guidance on attribution of prots to a PE is
contained in the Organization for Economic Cooperation and Development (OECD) 2010 Report
on the Attribution of Prot to Permanent Establishments (OECD 2010 Report). The OECD 2010
report details the Authorized OECD Approach (AOA) which hypothesizes a PE as a functionally
separate entity taking into account the functions performed, assets used, and risks assumed by an
enterprise through the PE.

65. It was the Respondent’s submission that in assessing the tax liability of the Appellant, it reviewed the
nancing and commercial agreements and the legal opinion of the Attorney General on the credit
agreement for Sabor-Iten-Tambach water supply project Clause 10.2 of the Financing Agreement for
both Mavoko and Sabor-Iten water supply projects states as follows:

“ the borrower hereby acknowledges and agrees that the supplier and its subcontractors shall
not be liable for any taxes (such as but not limited to, excise duties, value added taxes, and
income tax) arising in the framework of the execution of the contract.”

66. The Respondent added that in the legal opinion Ref PA 04/12 dated 18th November 2013 on the
credit agreement for Sabor-Iten-Tambach water supply project, the Attorney General stated as follows
at Paragraph H;

“ As of the date hereof, Kenyan tax laws and regulations do not require the borrower to
withhold or deduct any taxes from payments due to be made by the borrower under the
credit agreement.”

67. It was the Respondent’s assertion that the above opinion only related to payments by the Kenyan
Government to the lender, Belus Bank and did not extend to payments made under the commercial
agreements between Aspac SPRL and Rift Valley Water Services Board.

68. It averred that liability payment of taxes was placed on the buyer in the nancing contract where an
exemption was not obtained. However, it added, such commercial agreement can only be enforced by
the Appellant for any tax due.

69. According to the Respondent, the Appellant was liable for withholding tax as it made payments
to its subcontractors for the execution of various contract works in Kenya amounting to Kshs.
1,870,543,526.00 but failed to withhold tax in accordance with Section 35(3) of the Income Tax Act.
Thus, the Appellant was assessed on the total amount paid to subcontractors and the resulting tax
liability due was Kshs. 81,864,584.00.

70. The Respondent submitted that the provisions of the VAT Act 2013 when the agreements were
signed required the Appellant to pay VAT on the Sabor-Iten project. It argued that at that time, the
Act did not include a clear provision for tax exemption applicable to Ocial Aid Funded Projects
(OAFPs). Furthermore, the tax exemptions in respect to OAFPs came into eect from June 2015
vide Finance Act 2015. The respective contract was signed on 18th October 2013 which was after the
commencement of the VAT Act 2013 and therefore VAT was payable for the period before June 2015.

kenyalaw.org/caselaw/cases/view/271407/ 10
71. The Respondent insisted that the liability for VAT was clearly communicated to the Appellant by
National Treasury through its exemption letters which stated as follows:

“ The funding agreement was signed on 18th October, 2013; therefore, the VAT Act does
not provide for exemption in respect of this project. Accordingly, VAT will be paid by the
implementing ministry or agency;”

That this therefore means that the Appellant ought to have charged VAT for all supplies made during
this period in accordance with Section 5 to the VAT Act 2013. It averred that from the available
records, there was no evidence that VAT was paid for this period and the same had not been provided
as requested in the Respondent’s preliminary nding letter. That the resultant tax liability was Kshs.
370,622,429.00.

72. To counter the Appellant’s argument that the agreements between Kenya and Belgium as well as the
credit and commercial agreements contained a provision on the exemption of tax, the Respondent
argued that Section 13 of the Income Tax Act cannot exempt tax. Rather, an exemption can only be
granted upon express action by the Cabinet Secretary making the exemption through a Gazette Notice.

73. According to the Respondent, the contract provided that the tax exemption needed to be sought and
was not in fact guaranteed. The Respondent cited Clause 14 of the contract which stated that:

“ the buyer shall seek exemptions for any such taxes and if exemption would not be granted,
the buyer (instead of the supplier) shall be liable to pay such taxes.”

74. It averred that Clause 14.1 (b) of the commercial agreement between Supplier (Aspac SPRL) and
Buyer (Rift Valley Water Services Board and Tanathi Water Services Board), Clause 14.1 (b) provided
as follows:

“ the contractor shall pay all taxes, duties and fees required to be paid by him under the
contract, the contract price shall not be adjusted for any of these costs except as stated in
subclause 13.7 [Adjustment for charges in legislation].”

Thus, it argued, the Appellant understood its tax position before signing all the commercial contracts.
It added that it was worth noting that all commercial contracts were signed before signing the nancial
agreements.

75. Regarding the rejection of the Appellant’s objection, the Respondent stated that it wrote to the
Appellant indicating that it needed to provide the following documents to support its objection:

a. Transfer pricing policy detailing the attribution of prots to the PE in Kenya and Aspac SPRL
in Belgium.

b. A schedule of all costs and the corresponding veriable documentary evidence for service
provided from Belgium with respect to the Kenyan projects.

c. Gazette Notice or letter from National Treasury exempting the income of Aspac SPRL from
tax.

d. All subcontract agreements and the corresponding invoices received from subcontractors with
respect to projects carried out in Kenya.

kenyalaw.org/caselaw/cases/view/271407/ 11
76. According to the Respondent, the Appellant did not provide the required documents and thus did
not discharge the burden of proof as per Section 56 of the Tax Procedures Act. Thus, the Respondent
determined the assessment to the best of its judgement as per Section 24 of the Tax Procedures Act.

77. The Respondent argued that whereas the agreements contained a clause that the Appellant was
not liable for tax, the Appellant was obligated to obtain the requisite exemptions following the
proper channels laid out in law. To support its case, the Appellant cited Leonola, J in Pharmaceutical
Manufacturing (K) Co. Ltd & Others vs. Commissioner General of the Kenya Revenue Authority &
2 Others [2014] eKLR where he stated as thus:

“ exemption from paying taxes may well be there but the same has to be from proper approvals
being obtained and it is upon the applicant to show that it has been exempted from payment
of taxes since as held in Dileep Manubhai Patel & 3 Others vs. Municipal Council of Nakuru
& Another [2014] eKLR as cited in Republic vs Kwale County Government Ex parte Kenya
Airports Authority [2016] eKLR:
“it is the duty and obligation of every person liable to pay tax to pay that respective tax, for
that is the price of modern civilization, and in particular of living in planned urban areas,
townships, and cities. It is the price of collective benets for the provision of clean water,
public lighting, roads and ancillary facilities and maintenance thereof…”

78. It was the Respondent’s submission that the Appellant had a duty to ensure that the exemptions had
been sought and given since it was a party to the agreements. It added that the Appellant was the party
being paid for the contract and therefore deriving an income and was aware of the tax obligations
provided for. It added that the onus was on the Appellant to prove that it obtained exemptions.

79. In refuting the Appellant’s claim of legitimate expectation, the Respondent argued that legitimacy
of such a claim can only be provided by statute or a legally recognized form of exemption such as a
Gazette Notice as required under the Income Tax Act. Thus, it added the Appellant’s expectation was
unreasonable since exemptions were a matter of legislative authority which resides in Parliament as
provided by the Constitution.

80. The Respondent insisted that the various letters and correspondences between the Appellant, the
Government and the Government of Belgium cannot be deemed to constitute an exemption. It adds
that the letter from the National Treasury dated 10th January 2019 states that ‘This letter is not an
exemption’. The letter went on to state that withholding taxes were due on the contract from the
Appellant. That this was followed by a letter dated 11th December 2019 from the National Treasury
giving guidelines on the payment of withholding tax on payments made to contractors working on
ocial aid funded projects. In a letter dated 10th January 2019, Treasury lists the customs duties, VAT,
import declaration duties and Railway Development Levy on motor vehicles, plant and materials and
equipment will be exempt. However, this letter does not exempt Corporation tax, VAT on goods and
services not listed and Withholding tax which the Respondent assessed the Appellant. This, it argues,
shows that if any exemption existed, it was not blanket and the Respondent only assessed the tax heads
that were included in the listed taxes.

81. It was the Respondent’s submission that the National Treasury in a letter dated 12th March 2020
addressed to the Belgian Ambassador was clear that Income tax was not exempted and would be
governed by the provisions of the Income Tax Act. In yet another letter dated 15th July 2020, the
National Treasury conrmed to the Belgian Government that the issue of taxes was a legislative issue
and the same is governed by Kenya’s Income tax laws.

kenyalaw.org/caselaw/cases/view/271407/ 12
82. The Respondent admitted that the Appellant has Withholding tax credits of Kshs. 68,528,884.00 from
Tanathi as stated in the letter dated 25th August 2020. It however stated that the credit could only be
claimed by the Appellant upon ling its returns which the Appellant had failed to do.

83. That the Appellant cannot stop the Respondent from enforcing the law and carrying out its statutory
mandate of collection of taxes. To support its assertion, the Respondent cited Henry Muthee
Kathurima v Commissioner of Lands & Another, Civil Appeal No. 8 of 2014 where the court stated
that:

“ …estoppel cannot be used to circumvent Constitutional provisions and estoppel cannot

override express statutory procedures; there can be no estoppel against a statute. (See Tarmal
Industries – v- Commissioner of Customs and Excise, (1968) E.A. 471; see also Maritime
Electric Co. Ltd v General Dairies Ltd. (1937) 1 All ER 748).

84. The Respondent insisted that as per Section 56 of the Tax Procedures Act the Appellant bears the
burden to prove that it had exemptions. It argued that the Appellant failed to discharge its burden at
the assessment stage and during the Appeal. It added that the Appellant derived income in Kenya no
matter how minimal and thus was subject to tax in Kenya.

The Respondent’s Prayers

85. Based on the above, the Respondent prayed that the Tribunal:

a. Upholds the assessment issued in the objection decision dated 31st March 2021 by the
Respondent.

b. That this Appeal be dismissed with costs to the Respondent as the same is without merit.

Issues for Determination

86. The Tribunal upon due consideration of the pleadings, documents, evidence adduced by witnesses
and the written submissions led on the part of both parties was of the view that the issues falling for
determination were as follows:

a. Whether the Appellant was exempted from tax in Kenya.

b. Whether the Appellant is liable for the demanded taxes.

Analysis and Determination

a. Whether the Appellant was exempt from tax in Kenya

87. The genesis of this dispute was the Respondent’s tax demand and subsequent objection decision
dated 31st March 2021 demanding for total taxes amounting to Kshs. 1,948,193,149.00 inclusive of
penalties and interest. The taxes comprised of Kshs. 1,495,706,135.00 being Corporation tax, Kshs.
81,864,584.00 being Withholding tax, and Kshs. 370,622,429 being VAT. The taxes arose from the
contracts that were undertaken by the Appellant in Kenya.

88. To determine whether the Respondent was justied to demand taxes, the Tribunal rst sought to
determine if the Appellant was liable to tax in Kenya.

89. The Appellant insisted that the agreements exempted it from tax. It averred that the agreements
expressly provided that the supplier and its subcontractors would not be liable to any taxes such as

kenyalaw.org/caselaw/cases/view/271407/ 13
 but not limited to, excise duties, VAT, income taxes arising in the framework of the execution of the
contract.

90. It further added that each of the agreements entered were accompanied by the legal opinion of
the Attorney-General of the Republic of Kenya who stated, inter alia, that the borrower could not
withhold or deduct any taxes from payments due to be made under the credit agreements.

91. The Respondent on the other hand denied that it ignored or misapprehended the contracts awarded to
the Appellant as claimed by the Appellant and reiterated that Section 3(1) of the ITA brings to charge
for a year of income all income of a person whether resident or non-resident which accrued in or was
derived from Kenya.

92. It averred that the Appellant was a non-resident that derived income for the projects that were carried
out in Kenya and ought to have paid the corresponding tax. That Section 18(3) of the Income Tax
Act read together with The Income Tax (Transfer Pricing) Rules, 2006 requires an arm’s length
determination of prots attributable to the Kenyan operations.

93. The Tribunal perused through one of the Buyer Credit Agreements dated 29th May 2017 and noted
that the Agreement conrms that the Appellant (supplier) had entered into a commercial contract
dated 23rd May 2017 with Tanathi Water Services Board (Buyer) for the realization of the Mavoko
Drinking Water Supply Project. Clause 10.2 of this Agreement states as follows regarding taxes related
to the execution of the project:

“ The Borrower hereby acknowledges and agrees that the Supplier and its subcontractors shall
not be liable to any taxes (such but not limited to excise duties, value added taxes and income
tax) arising in the framework of the execution of the Contract.
In accordance with clause 14 of the Contract, the buyer shall seek exemption for any such
taxes and if exemption would not be granted, the buyer (instead of the Supplier) shall be
liable to pay such taxes.”

94. A reading of the above clause indicates that the Appellant was required to obtain exemptions. Even if
it had not mentioned that it was to seek exemptions, can an agreement confer a tax exemption?

95. Article 210(1) of the Kenya Constitution 2010 provides as follows regarding exemptions:

“ No tax or licensing fee may be imposed, waived, or varied except as provided by legislation.”

96. In addition, various tax legislations provide for procedures for exemption from a tax. Under the Income
Tax Act, Section 13(1) & (2) provides as follows regarding exemption from tax;

“ (1) Notwithstanding anything in Part II, the income specied in Part I of the First
Schedule which accrued in or was derived from Kenya shall be exempt from
tax to the extent so specied.

(2) The Minister may, by notice in the Gazette, provide—

(a) that any income or class of income which accrued in or was

derived from Kenya shall be exempt from tax to the extent
specied in such notice;

kenyalaw.org/caselaw/cases/view/271407/ 14
 (b) that any exemption under subsection (1) of this section shall cease
to have eect either generally or to the extent specied in the
notice.”

97. In the case of the VAT, the VAT Act is an exclusive Act in that it taxes everything except the supplies
that are specically exempted from tax. Thus, for any supply to be exempt, it must be specically stated
to be exempt in the Schedule to the Act.

98. The import of the above provisions is that exemptions can only be granted by Parliament and that the
proper procedure must be followed. No evidence has been placed before the Tribunal indicating that
Parliament approved the exemption nor was the proedure to obtain the exemptions followed. As such,
the Tribunal can only conclude that there was no such exemption.

99. On the question of whether the Appellant had a legitimate expectation, it is well established
that legitimate expectation cannot exist where there is a violation of law. The Supreme Court in
Communications Commission of Kenya & 5 others V Royal Media Services Limited & 5 others [2014]
laid out the principles that govern legitimate expectation. It stated that: -

a. There must be an express, clear, and unambiguous promise given by a public authority;

b. The expectation itself must be reasonable;

c. The representation must be one that was competent and lawful for the decision-maker to
make; and

d. There cannot be a legitimate expectation against clear provisions of the law or the Constitution.

100. In this case, the representation was not one that could be made by the persons signing the agreement.
Further, as stated it goes against the provisions of the Constitution.

101. Consequently, the Tribunal nds that the Appellant was not exempt from tax.

b. Whether the Appellant is liable for the demanded taxes

102. A review of the contracts indicates that the Appellant won a tender in response to a proposal in which
it oered to ‘design, execute and complete the works and remedy any defects therein…’ The Appellant
was therefore being paid for providing these services.

103. It was the Appellant’s assertion that it did not make any money in Kenya. It insisted that the payments
made were made towards the repayment of the loan in Belgium and that the Appellant was not paid
any money in Kenya. It further added that it neither had a branch nor a subsidiary in Kenya.

104. The Respondent on its part insisted that the Appellant operated in Kenya and had a permanent
establishment in Kenya and was therefore subject to tax under the Kenyan law.

105. Tax liability is governed by various provisions of the various tax laws in Kenya. The Tribunal will
address the question of each tax liability under the Income Tax Act and the VAT Act.

kenyalaw.org/caselaw/cases/view/271407/ 15
i. Corporate Tax
106. Under the Income Tax Act, Section 3(1) of the Income Tax Act provides that:

“ Subject to, and in accordance with, this Act, a tax to be known as income tax shall be charged
for each year of income upon all the income of a person, whether resident or non-resident,
which accrued in or was derived from Kenya.”

107. Section 10 of the Income Tax Act further provides that:

“ (1) For the purposes of this Act, where a resident person or a person having a
permanent establishment in Kenya makes a payment to any other person in
respect of -

(a) a management or professional fee or training fee…

the amount thereof shall be deemed to be income which accrued
in or was derived from Kenya.”

108. The Appellant derived its income from the services it rendered the various employers as outlined in the
Agreements. It is the various employers that were making these payments as they were the beneciaries
of the services. It matters not that the amounts were in a bank in Belgium. The essence was that the
payments would only be received by the Appellant upon authorisation of the employers. Accordingly,
the amounts which were professional fees, were paid by a person resident in Kenya (the employers) and
as such the income was derived from Kenya as per Section 10 of the Income Tax Act.

109. Section 34 of the Income Tax Act as read together with the Third Schedule provides for dierent
rates of tax for various entities including the rate of tax for a non-resident company with a permanent
establishment in Kenya. Does the Appellant in this case have a permanent establishment?

110. Section 2 of the Income Tax Act (during the period under review) dened PE as:

“ permanent establishment" in relation to a person means a xed place of business and

includes a place of management, a branch, an oce, a factory, a workshop, and a mine, an
oil or gas well, a quarry or any other place of extraction of natural resources, a building site,
or a construction or installation project which has existed for six months or more where that
person wholly or partly carries on business:

111. The Appellant in its submissions as well as witness statement, denied having a branch or a subsidiary
but conrmed that it did have a certicate of compliance. The Appellant stated thus in its submissions:

“ The Appellant does not have a branch in Kenya or a fully edged subsidiary. The appellant
has only a certicate of compliance for a foreign company.”

112. Section 975 of the Companies Act in dealing with registration of foreign companies provides that upon
application for registration, a foreign company is issued with a certicate of compliance. This has the
eect of registering a branch of the foreign company in Kenya.

113. Since the Appellant had a certicate of compliance, it is clear that if fell within the scope of PE.
Accordingly, its income is taxable at the rate of 37.5% as provided in the Third Schedule as read together
with Section 34 of the Income Tax Act.

kenyalaw.org/caselaw/cases/view/271407/ 16
114. Accordingly, the Tribunal nds that the Appellant was liable for corporate tax during the period under
review.

ii. Withholding tax

115. The Appellant avers that it subcontracted the works to other entities in Kenya. Since the Appellant
has a PE in Kenya, it nds itself caught by the provisions of Section 35 which require it to withhold
on any payments it makes to these subcontractors. In this case, the Appellant failed to do so. Section
39A provides that where a person fails to withhold, that person is liable for the tax that ought to have
been withheld. It is, however, instructive that the said Section came into eect in 2019. Prior to this the
provision was couched under Section 35(6) of the Income Tax Act which was repealed by the Finance
Act 2016. Thus, between the periods 2016 and 2019 the Appellant cannot be held liable for the tax it
failed to withhold as the provision imposing the obligation was not in eect.

116. The Tribunal therefore nds that the Appellant was not liable to withhold the taxes for the period
during which the provision was deleted.

iii. VAT
117. Whether the Appellant is liable for VAT is determined by the provisions of the VAT Act 2013. Section
34 of the VAT Act provides the threshold for registration for VAT. The Section state as follows:

“ (1) A person who in the course of a business—

(a) has made taxable supplies or expects to make taxable supplies, the
value of which is ve million shillings or more in any period of
twelve months; or

(b) is about to commence making taxable supplies the value of which

is reasonably expected to exceed ve million shillings in any
period of twelve months, shall be liable for registration under this
Act and shall, within thirty days of becoming so liable, apply to
the Commissioner for registration in the prescribed form.”

118. The Agreements placed before the Tribunal indicate that the Appellant met this threshold as it made
more than Kshs 5 million in a year and thus was required to register for VAT. The Appellant has not
provided any evidence to show why it ought not to have been registered since it was making taxable
supplies in Kenya, and yet it met the registration threshold.

119. Section 34(7) of the VAT Act allows the Commissioner to register a person who has met the threshold
and such registration is supposed to take eect:

…from the beginning of the rst tax period after the person is required to apply for
registration, or such later period as may be specied in the person’s tax registration
certicate.

120. The Tribunal reiterates the holding in Cape Brandy Syndicate V Inland Revenue Commissioners
(1920) 1KB as applied in TM Bell V Commissioner of Income Tax (1960) EALR 224 where Roland
J stated as thus:

“ …. In a taxing Act, one has to look at what is clearly said. There is no room for intendment
as to a tax, nothing is to be read in, nothing is to be implied. One has look into the language

kenyalaw.org/caselaw/cases/view/271407/ 17
 used… If a person sought to be taxed comes within the letter of the law he must be taxed,
however great the hardship may appear to the judicial mind to be. On the other hand, if the
Crown seeking to recover the tax cannot bring the subject within the letter of the law, the
subject is free, however apparently within the law the case may otherwise appear to be…”

121. Accordingly, the Tribunal nds that the Commissioner was justied in registering the Appellant and
demanding the VAT that the Appellant ought to have charged.

Final Decision
122. In view of the foregoing analysis, the Tribunal determined that the Appeal is partially allowed and the
Orders that accordingly recommend themselves are as follows: -

i. The objection decision issued on the 31st March 2021 be and is hereby varied as follows;

a. The conrmed demand for Corporate tax and VAT is hereby upheld.

b. The conrmed demand for Withholding tax is hereby set aside

ii. Each party to bear its own costs.

123. It is so ordered.
DATED AND DELIVERED AT NAIROBI THIS 29TH DAY OF JUNE, 2023
………………………
ERIC N. WAFULA
CHAIRMAN
………………………………
CYNTHIA B. MAYAKA
MEMBER
………………………………
GRACE MUKUHA
MEMBER
…………………………
ABRAHAM KIPROTICH
MEMBER
………………………………
JEPHTHAT NJAGI
MEMBER

kenyalaw.org/caselaw/cases/view/271407/ 18