Green Mango Investment Limited v Commissioner of Domestic Taxes [2024] KETAT 1253 (KLR)

Green Mango Investment Limited v Commissioner of Domestic Taxes (Tax Appeal E100 of 2023) [2024] KETAT 1253 (KLR) (9 August 2024) (Judgment)

Neutral citation: [2024] KETAT 1253 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E100 of 2023

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, AK Kiprotich & T Vikiru, Members

August 9, 2024

Between

Green Mango Investment Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a company incorporated in Mauritius and acts as a holding company for its subsidiaries and affiliates in Africa and India.

2. The Respondent is a principal officer appointed pursuant to Section 13 of the Kenya Revenue Authority Act (KRA), Act No. 2 of 1995, and KRA is empowered to enforce and administer provisions of written laws set out in Section 5 as read together with the First Schedule of the KRA Act.

3. The dispute herein arose in the course of an audit conducted on RentWorks East Africa Limited, an affiliate of the Appellant.

4. On 15th November 2022, the Respondent issued Corporation tax assessments for the period 2017 to 2021, bringing to charge the gains from business resulting in a tax liability of Kshs.698,551,593 inclusive of penalties and interests.

5. The Appellant, objected to the Respondent's tax demand and assessment notices in a letter dated 15th December 2022.

6. The Respondent issued its objection decision on 12th February 2023 upholding the assessment on principal tax amounting to Kshs. 488,683,983. 00

7. The Appellant, dissatisfied with the Respondent’s objection decision, lodged a Notice of Appeal at the Tribunal on 12th February 2023.

The Appeal 8. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal dated 23rd march 2023 and filed on 24th March 2023:a.That the Respondent erred in law and in fact in holding that the Appellant is a resident in Kenya and charging Corporation tax on the Appellant's revenue.b.That the Respondent erred in law and in fact in its finding that the management and control of the affairs of the Appellant was exercised in Kenya in any particular year of income under consideration.c.That the Respondent erred in law and in fact by failing to find that the Appellant's management and control were exercised in New Zealand, where its sole shareholder and director, Mr GoodalI, resides and makes strategic decisions regarding the Appellant's primary business as a holding company of various worldwide investments.d.That the Respondent erred in fact and in law in finding that the management and control of the Appellant was exercised by Rentworks EA's director, Mr Taljaard, in Kenya for the years of income 2017 to 2020 while Mr Taljaard was only appointed as a nominee director of the Appellant in April 2021, not making strategic or management decisions of the Appellant.e.That the Respondent erred in fact and in law in charging Corporation tax on the Appellant who does not carry on any business in Kenya and the Appellant's income that was not accrued or derived in Kenya contrary to Sections 3, 4 and 4A of the Income Tax Act.f.That the Respondent erred in fact and in law in finding that the Appellant's business was conducted in Kenya through the Appellant's shareholding in its Kenyan affiliate, Rentworks EA Limited, disregarding the fact that the Appellant and Rentworks EA Limited are separate legal entities as against the principal of separate corporate legal personality.g.That the Respondent erred in fact and in law in finding that the Appellant was managed and controlled in Kenya through the Appellant's director's, Mr Taljaard's activities in the Appellant's Kenyan affiliate, Rentworks EA limited, disregarding the fact that the Appellant and Rentworks EA Limited are separate legal entities as against the principal of separate corporate legal personality.h.That the Respondent erred in law and in fact in finding that the Appellant lacked the manpower to deliver management services to Rentworks EA Limited, disregarding the fact that its director, Mr. Glenn Goodall, has significant qualification and extensive experience to provide the management services to Rentworks EA limited.i.That the Respondent erred in law and in fact in concluding that part of the Appellant's income constituted lease rental income without having any basis for that conclusion.j.That the Respondent erred in fact and in law in relying on OECD Transfer Pricing Guidelines and principles to the revenue of the Appellant that is a non-resident company with no transaction with a related non-resident related party to warrant the application of transfer pricing rule, guidelines or principles.k.That the Respondent erred in law and, in fact, in disregarding the evidence provided by showing that the Appellant’s central and effective management control is not exercised in Kenya and that the Appellant’s revenue was not income accrued or derived in Kenya.l.That the Respondent erred and misdirected itself in upholding the appointment of Mr. Johannes Taljaard as the Appellant's tax representative, whereas the Appellant does not have any tax obligation and is not required to register under any tax law in Kenya.m.That the Respondent erred and misdirected itself in upholding the appointment of Mr. Johannes Taljaard as the Appellant's tax representative, whereas the Mr. Taljaard is not in possession or control of any assets of the Appellant that can be recovered to offset tax payable by the Appellant if any.

Appellant’s Case 9. The Appellant’s case is premised on the hereunder filed documents: -a.Its Statement of Facts dated and filed on 24th March 2023. b.Its Written Submissions dated 20th September, 2023 and filed on even date.

10. The Appellant averred that in establishing whether an entity is tax resident in Kenya, the first port of call is the Income Tax Act ("ITA"). It submitted that Section 2 of the ITA outlines the three tests for determining tax residency of a body corporate. That the relevant part provides as follows:“resident", when applied in relation—(b)to a body of persons, means—i.that the body is a company incorporated under a law of Kenya; orii.that the management and control of the affairs of the body was exercised in Kenya in a particular year of income under consideration; oriii.that the body has been declared by the Cabinet Secretary, by notice in the Gazette, to be resident in Kenya for any year of income;”

11. The Appellant averred that for a company to be duly incorporated in Kenya, it has to comply with the provisions of the Companies Act 2015, and be issued with a certificate of incorporation that demonstrates its compliance.

12. The Appellant submitted that the first test is inapplicable in the circumstances as GMI is a holding company duly incorporated in Mauritius as an Authorized Company (previously, a category 2 Global Business Company).

13. The Appellant posited that if a company is declared as tax resident by the Minister, its residency status can be confirmed by the gazette notice published. That GMI has not been declared as a tax resident by the Minister.

14. The Appellant submitted that the second test for determining residency based on the "management and control of the affairs of the company" is not straightforward as the term has not been defined in the ITA. That consequently, in the absence of a definition of what amounts to management and control, guidance is sought from other jurisdictions.

15. The Appellant averred that in the United Kingdom, the test has been reframed as "where the central management and control actually abide”. That this test is determined by reference to the unique circumstances and facts peculiar to the case.

16. The Appellant relied on the case of Calartta Jute Mills Co Ltd v Nicholson and Cesena Sulphur Co. Ltd v Nicholson (1876) LR 1 Exch D 428, where the court stated that:“the court was of the view that the place of central management and control is the place where decisions concerning strategic policy and direction of the company are taken.”

17. The Appellant further relied on the case of De Beers Consolidated Mines Ltd v Howe [1906] AC 45S. S TC 198. In which Lord Loreburn observed that:“The decision of Chief Baron Kelly and Baron Huddleston, in the Calcutta Jute Mills v Nicholson and the Cesena Sulphur Co. v Nicholson, now thirty years ago. involved the principle that a Company resides, for purposes of Income Tax [now Corporation Tax], where its real business is carried on. Those decisions have been acted upon ever since. I regard that as the true rule; and the real business is carried on where the central management and control actually abides. It remains to be considered whether the present case falls within that rule. This is a pure question of fact, to be determined, not according to the construction of this or that regulation or by law, but upon a scrutiny of the course of business and trading.”

18. The Appellant averred that the De Beers Consolidated Mines Ltd v Howe case was instrumental in cementing the principle that a company is resident where the real business is carried. That the real business is carried out where the central management and control abides and not where trading operations reside. That hence, management and control of the business need not be in the same place where the actual trading activities and operations of the company are conducted.

19. The Appellant submitted that the CMC test seeks to identify where fundamental and strategic decisions concerning the company are made as opposed to the place where day to day profit earning activities are undertaken

20. The Appellant further relied on the case of Unit Construction Co Ltd v Bullock (1960] AC 351; where the Court was also of the view that:“…the issue of management and control is purely a question of fact to be determined upon scrutiny of the course of business and trading.”

21. The Appellant postulated that the OECD Model Tax Convention on Income and on Capital 2017 takes a fairly similar approach to management and control. That it considers the place of effective management (POEM) and provides at Article 4 Paragraph 3 that in determining whether a person would be deemed to be a resident, the factors to be considered include the place of effective management, the place where the company is incorporated and any other relevant factors. That the commentary in this Paragraph expounds on this point at Paragraph 24. 1 as follows:“Para. 24. 1 Competent authorities having to apply paragraph 3 would be expected to take into account of various factors, such as where the meetings of the person's board of directors or equivalent body are usually held, where the chief executive officer and other senior executives usually carry out their activities, where the senior day-to-day management of the person is carried on, where the person '5 headquarters are located. which country's laws govern the legal #atus of the person, where its accounting records are kept, whether determining that the legal person if a resident of one of the Contracting States but not of the other would carry the risk of an improper use of the provisions of the Convention, etc. "

22. The Appellant averred that the OECD commentary notes that, all the relevant facts and circumstances must be examined to determine the place of effective management. That the Guidelines explain that the place of effective management will ordinarily be the place where the most senior person or group of persons, i.e., the board of directors, makes its decisions.

23. Additionally, the Appellant submitted that the OECD commentary clarifies that an entity might have more than one place of management, but it can have only one place of effective management at any one time. That if the key decisions are made at more than one location, then the company's place of effective management will be the place where those decisions are predominantly made.

24. The Appellant averred that the various factual tests have to be applied, including by the Respondent, to identify a company's management and control regardless of whether it applies the CMC or the POEM test. That these are:

i. Day to day operations of GMI 25. The Appellant averred that GMI is an investment holding company that manages various shareholdings and business interests worldwide. It submitted that it has business portfolios in multiple jurisdictions, such as in Kenya, Zambia, and South Africa.

26. The Appellant averred that it owns and controls shareholding interests in its subsidiaries and affiliates and that it is not actively involved in the business operations of any of its affiliated companies.

27. The Appellant submitted that each subsidiary/ affiliate, being a distinct corporate entity, operates on its own and that the entities have different operations as broken down by the Appellant in its Statement of Facts. That Mr. Goodall, as the sole shareholder and controlling director of GMI, makes decisions that specifically touch on GMI’s shareholding/investments in each entity.

ii.The types of decisions and mode of decision-making 28. The Appellant averred that Mr. Goodall, the sole shareholder and director of GMI, is a citizen and tax resident of New Zealand. The Appellant submitted that Mr. Goodall provided a copy of his passport and a letter from his tax advisors in New Zealand, confirming that he is indeed a resident and duly complies with his tax obligations both in his personal capacity and in relation to GMI.

29. The Appellant averred that the Respondent issued an assessment covering the period between 2017 and 2020, when Mr. Goodall was, and still is, a resident of New Zealand and both Mr. Jimmy Wong and Mr. Mike Mootien were nominee directors of GMI from DTOS Limited, GMl's registered agent, who were resident in Mauritius.

30. The Appellant submitted that Mr. Goodall solely made all decisions regarding GMI in relation to its affiliates and subsidiaries, including the acquisition and disposal of investment holdings, selling and acquisition of assets, approval and rejection of budgets, approval of significant capital expenditure, re-organizing of subsidiaries, approval of major sales and supplier contracts, approval for funding and risk management.

31. The Appellant averred that Mr. Johannes Taljaard only became a director of GMI in April 2021 following the change in Mauritian law requiring that an Authorised Company registered under Section 71 A of the Mauritian Financial Services Act that is controlled by a person who is not a citizen of Mauritius and has its place of effective management outside Mauritius and due to the conversion, the existing directors, Mr. Jimmy Wong and Mr. Mike Mootlen resigned, and Mr. Goodall appointed Mr. Taljaard in their place.

iii.Shareholder's Influence and nature of business 32. The Appellant relied on the case of Laerstate BV vs. HMRC (2009) UKFlT 209 TC; where the court held that:“a company incorporated in the Netherlands was centrally managed and controlled by its sole shareholder and director in UK who made policy. strategic and management decisions. The court further noted that the second directors were only limited to signing documents and dealing with routine and mundane matters such as accounts. Consequently. the company was resident in UK as its directors and sole shareholder exercised control and management while in UK.”

33. The Appellant further relied on the Court of Appeal decision in the case of Trevor Smallwood Trust v HMRC [2010] EWCA Civ 778 wherein it made the following observation regarding the place of effective management:“I emphasize the adjective 'effective. In my opinion it is not sufficient that some sort of management was carried on in the Republic of Ireland such as operating a bank account in the name of the trustees. 'Effective' implies realistic, positive management. The place of effective management if where the shots are called to adopt a vivid transatlantic colloquialism. "

iv. The residency of the Company's directors/the place where decisions were made 34. The Appellant submitted that during the assessment period (2017-2020), none of GMl's directors was a resident in Kenya: that Mr. Goodall is a citizen and resident of New Zealand while Mr. Jimmy Wong and Mr. Mike Mootien are residents of Mauritius.

35. The Appellant averred that GMl's place of central and effective management and control was in New Zealand where Mr. Goodall normally resides and makes strategic policy and decisions concerning GMl's business interests globally.

36. The Appellant submitted that none of the board meetings ever took place in Kenya, and that Mr. Johannes Taljaard, who the Respondent has referred to as the reason why management and control is exercised in Kenya, was not a director during the period under assessment.

37. The Appellant averred that GMI is a holding company with investments in various entities globally and in Kenya. That GMI holds a 43. 3% shareholding in Rentworks EA. The Appellant submitted that GMI does not engage in any business in Kenya as it is only a shareholder in Rentworks EA and its involvement in the said company is only limited to its passive investment therein.

38. The Appellant submitted that a company is a separate legal entity from its shareholders and directors. The Appellant relied on the case of Securex Agencies Kenya Limited vs Kenya Revenue Authority (2014) eKLR where the court cited with approval the case of Salomon vs Salomon and Company Limited (1897) AC that:“A company is a distinct legal entity independent from its members and directors. "

39. The Appellant averred that the Respondent disregarded the fact that GMl and Rentworks EA Limited are two entities with distinct corporate personalities, and instead, it lumped the two entities together and resorted to making generalized statements that GMl as a whole, derived its income from the business activities of Rentworks EA.

40. The Appellant averred that Mr. Johannes and Mr. Glenn met with the Respondent on 23rd May 2022 in the course of an audit of Rentworks EA where they explained to the Respondent the relationship between GMI and Rentworks EA. The Appellant submitted that the directors clarified that GMI was only a shareholder of Rentworks EA and that GMl being a separate entity its management and control was being exercised from New Zealand.

41. The Appellant relied on the case of Unlgate Guernsey Ltd and Unigate Overseas Ltd v McGregor (HMIT) (1995) Sp C 55; where the Court found that:“the subsidiaries were resident in Bermuda and Sark respectively and not in the UK as HMRC had tried to argue. The two subsidiaries were independent and were not merely rubberstamping instructions received from UK-based parent company.”

42. The Appellant submitted that the assessment of Corporation tax is purportedly based on the provisions of Section 3(1) and 3(2) (a) (i) of the Income Tax Act (ITA) and the assumption that GMI received income from lease rentals.

43. The Appellant submitted that Kenya operates a source-based tax system. That as such, for any income to be taxable in Kenya, it must be accrued in or derived from Kenya as provided for by Section 3(1) of the ITA, which is the charging Section for income taxes which states as follows:“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."

44. The Appellant, therefore, submitted that for a person to be subjected to tax under the ITA, the person's income must be attributable to a Kenyan source, i.e., accrued in or derived from Kenya. The Appellant relied on the case of Motaku Shipping Agencies limited v. Commissioner of Income Tax [2014) eKLR where Justice Kasango reiterated the position that:“From Section 3(1) of the Income Tax Ad, It is clear that subject to the provisions of the Act, the income of a person, whether resident or non-resident, is chargeable to income tax provided that the Income accrued in or was derived from Kenya.Therefore, income of a person cannot be subject to income tax unless it is income which was accrued in or was derived from Kenya”.".... It is clear that the income should be ascertained to have accrued or derived from Kenya before any income tax can be levied. By bring to tax funds which are not accrued or derived from Kenya, the Commissioner's action is misconstrued and contrary to the Kenyan Income Tax Act. "

45. The Appellant averred that it clearly explained that its income during the period under assessment was obtained from its investments globally and that the only income derived from Kenya, that is from Rentworks EA, are dividend income and management fees, for which tax was duly withheld and remitted at non-resident rates by Rentworks EA. Further, the Appellant submitted that the income was only a small fraction of its total revenue between 2017 and 2020.

46. The Appellant averred that in issuing the assessment on its entire revenue, the Commissioner was purporting to subject income accrued in and derived from several countries outside Kenya to taxation in Kenya, contrary to the clear provisions of the Income Tax Act.

47. The Appellant averred that the Respondent through its assessment dated 15th November 2022 appointed GMl's director in Kenya, Mr. Johannes Taljaard as the tax representative of GMI in accordance with Section 15 and 16 of the Tax Procedure Act.

48. The Appellant submitted that in appointing Mr. Johannes Taljaard, the Respondent failed to specify the Section upon which it relied in appointing him as a tax representative.

49. The Appellant submitted that whereas the Respondent has the power to appoint any person as a tax representative, in exercising such powers, the Commissioner is required to act lawfully, reasonably and procedurally fairly in accordance with Article 47 of the Constitution and Section 4 of the Fair Administrative Action Act.

50. The Appellant relied on the case of Keroche Industries Limited vs. Kenya Revenue Authority & 5 Others Nairobi HCMA No. 743 of 2006 (2007 KLR 240 for the preposition that:“it is now an accepted principle in this field of law that statutory powers and duties must be exercised and performed reasonably. "

51. The Appellant submitted that the blanket reference to Section 15 as the basis for appointing the two reeks of bad faith and lacks sufficient grounds for appointment. Further, the Appellant averred that the actions go against a well-established canon of certainty in taxation. That this principle has been affirmed in Obbo & Another vs. Attorney General Petition No 71 of 2014 (2015) eKLR, where the principle has been affirmed, it was held that:“blatant inconsistency leaves the Petitioners and taxpayers at large position of uncertainty as to what is applicable to them in respect to Income Tax Act... Inconsistency is not only unlawful but also contravenes the cardinal rule of legislation, and more so fiscal policies and legislation that legislation must be clear and certain. "

52. The Appellant further relied on the case of R vs. TheCommissioner of Domestic Taxes ex-parte Barclays Bank of Kenya Ltd (Miscellaneous Application 1223 of 2007) wherein it was held that:“the Respondent is obligated by law to state with clarity its claims and state how the transaction falls within the terms of statute. The Respondent cannot exercise its duty like a trawler in the deep sea expecting to catch all the fish by casting its net wide."

53. The Appellant submitted that the only viable provision that the Respondent could have purported to rely on is Section 15(1) (i) of the Tax Procedures Act, which provides as follows:“in the case of a non-resident person, if that person is controlling the non-resident person’s affairs in Ken, including a manager of a business of that non-resident person."

54. The Appellant averred that the Respondent failed to demonstrate both in its assessment and objection decision the role played by Mr. Johannes Taljaard to bring him within the provisions of Section 15(1) of the Tax Procedures Act.

55. The Appellant submitted that Section 16(5) of the Tax Procedures Act provides that the tax payable by a tax representative shall be recoverable only to the extent of the income or assets of the taxpayer that are in the possession or control of the tax representative and that Mr. Johannes Taljaard does not own, control or possess any income or assets of GMI and as such it would be unable to satisfy such obligations.

56. Consequently, the Appellant submitted that the appointment of Mr. Johannes Taljaard is unlawful, contrary to the provisions of the law and an exercise in futility.

57. The Appellant relied on the case of Kutima Investments Limited vs. Muthoni Kihara & Another (2006} eKLR where the Court of Appeal held that:'The general principle in law is that courts should not act in futility. An order of this Court in favour of the Applicant will not add anything. "

Appellant’s Prayers 58. The Appellant prayed that the Tribunal be pleased to issue the following Orders:a.The Appeal herein be allowed, and the Respondent's objection decision dated 12th February 2023, tax assessment dated 15th November 2022 and preliminary findings dated 22nd June 2022 be struck out in entirety;b.A declaration be and is hereby made that the Appellant is not tax resident in Kenya.c.The Respondent, its employees, agents or other persons purporting to act on its behalf be barred and/or estopped from demanding or taking enforcement steps towards recovery of principal tax, penalties and interest on the Respondent’s demand as stipulated above.d.The Respondent be and is hereby restrained from appointing a tax representative for the Appellant and Mr. Taljaard’s appointment as a tax representative of the Appellant be and is hereby revoked.e.The costs of this Appeal be borne by the Respondent.f.The Tribunal be at liberty to grant any other or further remedies that it deems just and reasonable in the circumstances.

Respondent’s Case 59. The Respondent’s case is premised on its Statement of Facts dated 20th April 2023 and filed on 24th April 2023.

60. The Respondent averred that as enjoined by Section 24 of the TPA, it is not bound by information provided by the Appellant in its returns, that it is at liberty to assess for additional taxes based on any other available information.

61. The Respondent submitted that Section 2 of the Income Tax Act provides that“resident" when applied in relation­(b)to a body of persons, means-(ii)that the management and control of the affairs of the body was exercised in Kenya in a particular year of income under consideration; or”

62. While 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.”

63. The Respondent averred that Section 3(2)(a)(i) provides that:“Subject to this Act, income upon which tax is chargeable under this Act is income in respect of-a.gains or profits from-i.any business, for whatever period of time, carried on;”

64. The Respondent submitted that the documents provided that for the period under review, the Appellant’s income was in relation to management fees, lease rentals, and dividends.

65. The Respondent averred that the Appellant had signed a contract with Rentworks EA to provide the following services:i.The financial modelling of leases to determine residual values of assets and lease periodsii.Develop a benchmark for sale or rent-back optioniii.Scenario analysis of contracts with government and state agencies and other related services.

66. The Respondent averred that GMI did not have employees in Mauritius that could deliver the management services; therefore, the logical conclusion was that GMI's management fee income was attributable to the employees in its Kenyan affiliate.

67. The Respondent submitted that while the Appellant claimed that any income declared in Mauritius had already been taxed in the source jurisdiction, it was not able to provide documents to support the claim that the lease rental income had already been taxed in Kenya.

68. The Respondent submitted that GMI financials indicated that the company had no assets to lease out, so it was not in a position to conduct any leasing business in Mauritius. That it could therefore be inferred that the lease rental income was accrued by the other affiliates of GMI, RentWorks EA, located in Kenya and RentWorks India, PVT located in India.

69. The Respondent submitted that it applied the residency test, which is a factual test to determine the tax residency status of GMI. That in this regard, the circumstances relevant to identify the location of a company's management and control include but are not limited to;i.Where the company's meetings, including its director's meetings, are heldii.The residency of the company's directorsiii.The residency of the company's shareholders

70. The Respondent averred that during the meetings, the directors stated that board meetings were held in Kenya atleast three or four times annually, and the Appellant failed to provide evidence that the locations of the meetings were outside of Kenya.

71. The Respondent submitted that the directors present in Mauritius are nominee directors who have no voting power on key strategic decisions of the company. The Respondent averred that it was therefore inclined to determine that the meetings were held in Kenya by the directors, Mr. Goodall and Mr. Taljaard, thus establishing management and control of the company in Kenya.

72. The Respondent averred that the Appellant failed to provide any evidence to show that the strategic decisions were made in Mauritius or that any directors travelled to Mauritius for all the board meetings.

73. The Respondent averred that the OECD Transfer Pricing Guidelines require that the allocation of profits should be aligned with the economic activities that produced the profits. The Respondent further submitted that this provision is to the effect that the income earned by the Appellant was rightfully assessed in Kenya since the economic activities were conducted in Kenya through Rentworks EA.

74. The Respondent submitted that it is a requirement under Section 15 (1) of the Income Tax Act that for an expense to be allowed for tax purposes, that expense must have been incurred wholly and exclusively for the production of income taxable in Kenya.

75. The Respondent submitted that, given that there were no employees or active economic activities in Mauritius, the costs were disregarded due to a lack of support that the expenses were incurred wholly and exclusively in the generation of their income.

76. The Respondent averred that the Income Tax (Transfer Pricing) Rules, 2006 at Paragraph 9 empowers the Commissioner to, where necessary, request a person to whom these rules apply for information, including books of accounts and other documents relating to transactions where transfer pricing is applied.

77. The Respondent averred that the tax representative, Mr. Johannes Taljaard, who is the director of Rentworks EA and GMI’s director in Kenya, was appointed in accordance with Section 15 (A) of the Tax Procedures Act, which provides that;“Where a person required to appoint a tax representative in accordance with subsection (1) fails to do so, the Commissioner may appoint a tax representative for that person, and the tax representative so appointed shall have the duties and obligations specified under Section 15. ”

78. The Respondent submitted that the Appellant failed to meet the burden of proof contrary to Section 56(1) of the Tax Procedures Act, which provides that in any proceedings, the burden shall be on the Appellant to prove that a tax decision is incorrect.

79. The Respondent submitted that it is empowered under Section 59 of the Tax Procedures Act to require the production of documents and information to enable the Commissioner to ascertain the tax liability of a person.

Respondent’s Prayers 80. The Respondent prayed the Tribunal to find that: -i.The Respondent's Objection decision issued on 12th February 2023 demanding a sum of Kshs.488,683,983. 00 as properly issued and to uphold the same.ii.This Appeal be dismissed with costs.

Issue For Determination 81. The Tribunal having considered the pleadings of both parties and the Appellant’s submissions is of the considered view that the issue that calls for determination is Whether the Appellant was liable to taxation in Kenya in the period of 2017 – 2020.

Analysis And Determination 82. The Tribunal having determined the issue that falls for its determination proceeds to analyse it as hereunder.

83. The Appellant submitted that the assessment of Corporation tax was purportedly based on the provisions of Section 3(1) and 3(2) (a) (i) of the Income Tax Act (ITA) and the assumption that GMI received income from lease rentals.

84. The Appellant submitted that Kenya operates a source-based tax system. That as such, for any income to be taxable in Kenya, it must be accrued in or derived from Kenya as provided for by Section 3(1) of the ITA, the charging Section for income taxes which states as follows:“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."

85. The Appellant while relying on the case of Motaku Shipping Agencies Limited v. Commissioner of Income Tax [2014) eKLR where Justice Kasango, submitted that for a person's income to be subjected to tax under the ITA, the person's income must be attributable to a Kenyan source, i.e., accrued in or derived from Kenya.

86. The Appellant averred that it clearly explained that its income during the period under assessment was obtained from its investments globally and that the only income derived from Kenya, that is from Rentworks EA, were dividend income and management fees, for which tax was duly withheld and remitted at non-resident rates by Rentworks EA.

87. The Appellant averred that in issuing the assessment on its entire revenue, the Commissioner was purporting to subject income accrued in and derived from several countries outside Kenya to taxation in Kenya, contrary to the clear provisions of the Income Tax Act.

88. On its part, the Respondent posited that documents adduced showed that the Appellant’s income was in relation to management fees, lease rentals, and dividends yet the Appellant did not have employees in Mauritius that could deliver the management services neither did it own assets to lease out hence the logical conclusion was that the Appellant’s management fee and lease income were attributable to employees and assets in GMI’s affiliates including its Kenyan Affiliate, RentWorks E.A.

89. Section 3(1) of the Income Tax Act provides as follows regarding income chargeable to tax in Kenya:-“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.”

90. The Respondent’s assessment of Corporate income tax upon the Appellant is anchored on the premise that in the absence of evidence that the Appellant’s income was derived outside Kenya then it was derived in Kenya through its Kenyan Affiliate RentWorks E.A.

91. The Respondent argued further that RentWorks E.A and the Appellant had an agreement for provision of management consultancy services and that since the Appellant did not have employees in Mauritius to deliver the service, the Respondent on that basis that concluded that the services were conducted by RentWorks E.A in Kenya on behalf of the Appellant.

92. The Tribunal finds that the Respondent's submission is based on assumption and neither anchored in law nor based on terms of the consultancy agreement. The Tribunal relies on its holding in TAT No. 466 of 2020 TBEA Company Limited vs Commisioner of Domestic taxes where it stated that:“The Tribunal appreciates that the interpretation of contracts is not an invitation to rewrite them but rather an invitation to discern the intentions of the parties so as not to interfere with the 'freedom of contract'. This view was expressed by Lord Hoffman in Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10 where the court stated that: -': .. The court has no power to improve upon the instrument which it is called upon to construe, whether it be a contract, a statute, or articles of association. It cannot introduce terms to make it fairer or more reasonable. It is concerned only to discover what the instrument means ... It is the meaning which the instrument would convey to a reasonable person having all the background knowledge which would be reasonably available to the audience to whom the instrument is addressed "

93. The Tribunal in its analysis of the documents presented by the Appellant notes that the Appellant had affiliates in various countries including Kenya, India and Zambia who corresponded with the Appellant’s sole shareholder Mr. Goodall on the running of the Appellant’s business. The Respondent was therefore not justified in reaching the conclusion that the Appellant lacked capacity to conduct its business outside Kenya.

94. The Appellant explained that being a holding company it did not conduct any business in Kenya directly and that the only income earned from Kenya was dividend from its Affiliate RentWorks E.A for which withholding tax was deducted and remitted by RentWorks E.A.

95. Section 3(i) of the ITA is unequivocal that for income to be taxed in Kenya it must have been derived in Kenya, the Tribunal observed that there was no evidence pointing to the Appellant having income generating activities in Kenya.

96. The Respondent’s supposition that the Appellant derived income in Kenya through its Affiliate hence it is taxable in Kenya is an overreach by the Respondent given that the Appellant and its affiliate are distinct legal entities liable to be taxed separately.

97. The Tribunal therefore finds that the Respondent was not justified in the assessment of Corporation tax on the Appellant.

Final Decision 98. The upshot of the foregoing analysis is that the Appeal is meritorious and the Tribunal accordingly proceeds to make the following Orders: -a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 12th February 2023 be and is hereby set aside.c.Each party to bear its own costs.

99. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF AUGUST, 2024ERIC NYONGESA WAFULACHAIRMANCYNTHIA B. MAYAKA DR. RODNEY O. OLUOCHMEMBER MEMBERABRAHAM K. KIPROTICH DR. TIMOTHY B. VIKIRU MEMBER MEMBER