Paragraph 32, Part II of the First Schedule of the VAT Act, 2013 provides that exportation of taxable services are exempt. This means that companies exporting services are not be able to claim input VAT incurred in the supply of exported services.
Paragraph 32 was introduced in the Finance Act 2021 at a time where KRA has a different interpretation from the taxpayers on what constitutes an export of service.
This article gives a brief history of cases that have flown from this debacle leading up to the recent high court appeal by Google Kenya Ltd who lost a VAT refund claim case to KRA at the Tax Appeal Tribunal.
- Commissioner of Domestic Taxes V Total Touch Cargo Holland (2018) – “Total Touch Case”
In this case the Commissioner determined that the services provided were local supplies and therefore could not be classified as exported services, contradicting an earlier position taken in December 2011, where the services were classified as zero rated.
The Total Touch Cargo Kenya (Total Touch) then appealed to the VAT tax tribunal challenging the interpretation of the commissioner directing them to pay VAT at the rate of 16%.
The tribunal agreed and determined that the services were exported out of Kenya and therefore zero rated. The Commissioner appealed the decision, arguing that since the services of scanning, cooling and palletizing were performed in Kenya, they are services offered within the country, thus not exported and subject to VAT; moreover, the fact that the person paying for the services was based in Holland is immaterial. The services performed in the country then, could not be exported services.
Total Touch however, stated that all the services performed by Kenya Air Freight Handling Ltd (Kenya Air) were in fact exported within the meaning of the act and the consumers were outside Kenya.
The High Court noted that the services were consumed by a foreign company and ultimately consumed by the buyers of the horticultural produce who were outside Kenya. The court dismissed the argument posited by the Commissioner averring that since the location in which the services was carried out was Kenya, they were local services and subject to tax.
- Panalpina Airflo Limited V Commissioner Of Domestic Taxes (2018) – “Panalpina Case”
In the Panalpina case, Panalpina Airflo Limited (Panalpina) was contracted by Airflo BV Company that is incorporated in Netherlands for logistical processes to operate as a transport and freight for Airflo BV clients who export horticultural produce from Kenya. Panalipina applied for VAT refunds on account of supplying exported services, which were zero rated for VAT purposes. The Commissioner rejected the Panalpina’s VAT refund claim on the basis that the services it provided were not exported services.
Panalpina objected the rejection for a zero rate tax refund on basis that the services it provided to its parent company in Netherlands were exported services as they were consumed outside Kenya. The issue of determination was whether Panalpina’s services were exports.
The Commissioner argued that, the services provided by the Panalpina were logistical and did not qualify as ‘exported services’ but the standard rate of 16% that it is the flowers that were rather exported.
The High Court held that the services provided by Panalpina qualified as exported services. It stated that, the logistical services provided were to specifically facilitate exports whose consumption was outside Kenya and it benefitted buyers that were also outside Kenya. Thus the parent company was the final consumer and the beneficiary of the service.
- Coca-Cola Central East And West Africa Limited V. The Commissioner Of Domestic Taxes (2019)- “Coca Cola Case”
CCCEWA argued that the marketing and promotional services rendered by it were services rendered to Coca Cola Export, a non-resident based in the USA, hence the exported services.
CCCEWA argued that the services were exported outside Kenya’’ and therefore should be zero-rated in line with the VAT Act.
CCCEWA also stated that KRA failed to observe the ‘’destination principle’’ as per OECD guidelines.
KRA through its Commissioner of Domestic taxes asserted that these supplies of services amounted to local sales, therefore chargeable to VAT.
The High Court relied on the OECD guidelines on cross border supply of services and the contractual arrangement between the CCCEWA and its non-resident related entity.
The High Court considered the services as exported services, hence, zero rated.
In determining the question of whether the service is exported or not, the test is based on the location of use or consumption of that service.
- Google Kenya Ltd. V Commissioner Of Domestic Taxes (2021) “Google Case”
Google has recently appealed the Tax Appeal’s Tribunal’s decision at the High Court in Kenya on a similar matter regarding the nature if marketing services. KRA has not yet responded to the suit. The appealed decision disallowed a VAT refund claimed by google on the grounds that its services were consumed in Kenya and not exported.
KRA had conducted a VAT refund audit to verify the tax compliance status of the Google for the period between February 2010 and February 2013 which informed the decision to disallow the VAT refund claims of Kshs. 58,753,106. The case just like these previous precedent is based on the nature of services, in this case, provided to Google Inc. (USA) and Google Ireland.
Google claims that the services provided to Google Inc. were Research and Development (R&D) services and those offered to Google Ireland were marketing and support services and since they were provided to related non-resident entities, they were exported services and subject to VAT at zero rate as was the law at the time which informs their VAT refund claims. It is key to note that Google Kenya entered into a direct B2B (business to business) contract with Google Ireland for the services provided.
KRA claims that R&D services were not consumed in Kenya and that the impact of the R&D services were felt by the final consumer of the services who were locals hence no export of services took place. They argue that the Appellant localized Google Inc’s content to enhance local user experience. It is also of the opinion that the impact of the marketing and support services per agreement with Google Ireland lay with the consumer who was convinced to utilize the product and not the payer and therefore the advertisements in Kenya were consumed in Kenya.
The tribunal ruled in favour of KRA. The judgment introduced a layer of complexity and uncertainty regarding VAT on exported services even though there have been previous decisions as highlighted above where it was decided that marketing support services are exported services.
Conclusion
In the Total Touch Case, Panalpina Case and the Coca Cola Case, the High Court established that the services were exported services.
This then begs the question. In the Google Case, will the high court overturn the tribunal decision or uphold it?
We will continue monitoring developments on this matter and keep you updated. However, in the meantime please feel free to contact your usual
Sabare Brian
Phoebe Njoga