Palladium Development and Consultancy Limited v Commissioner of Domestic Taxes [2024] KETAT 104 (KLR)

Palladium Development and Consultancy Limited v Commissioner of Domestic Taxes (Tax Appeal 734 of 2022) [2024] KETAT 104 (KLR) (Civ) (2 February 2024) (Judgment)

Neutral citation: [2024] KETAT 104 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tax Appeal 734 of 2022

RM Mutuma, Chair, BK Terer, EN Njeru, M Makau & W Ongeti, Members

February 2, 2024

Between

Palladium Development And Consultancy Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited liability company incorporated in Kenya under the Companies Act whose principal business is carrying out projects in Kenya aimed at supporting sustainable development and devising smart development solutions in different sectors. The Appellant alleged that it operates on a not-for profit basis.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, the Authority 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. The Appellant was incorporated in 2017. Thereafter, it inherited operations including employees of Futures Group Global Outreach Limited. The holding company is Palladium Group Holdings LTD (UK) incorporated in the United Kingdom, which holds 99% of the company’s equity.

4. The company’s income comprises of grants from Palladium Group Holdings Ltd (UK). Income is recognized based on costs incurred by the company during each year.

5. The Appellant was selected for a return review (desk-review) to confirm the correctness of tax payments made and self-assessed returns filed through iTax for PAYE and withholding taxes and review company operations considering that it had been noted, during tax compliance certificate process that it did not have a valid Income Tax Exemptions Certificate.

6. A pre-assessment notice dated 9th September 2021 was sent to the Appellant with preliminary review issues and list of the relevant records/explanations required from the taxpayer to take the case to conclusion.

7. The Appellant disputed the assessment by filing a notice of objection dated 27th December 2021. The Respondent issued an objection decision dated 31st May 2022.

8. Aggrieved by the Respondent’s Objection decision, the Appellant filed an appeal at this Tribunal vide a Memorandum of Appeal dated 13th July 2022.

DIVISION - The Appeal 9. The Appeal is premised on two grounds of appeal as stated in the Memorandum of Appeal as follows:-a.That the Respondent erred in law by imposing withholding tax on an approach that contravenes the applicable Sections of the Income Tax Act, international instructions, best practices and Kenyan jurisprudence; andb.That the Respondent erred in law and fact in charging Pay as You Earn on variances between IT2C returns filed on iTax and by charging Pay as You Earn on employees classified as consultants.

The Appellant’s Case 10. The Appellant set down its case in;a.Its Statement of Facts dated 13th July 2022 and filed on 14th July 2022 together with the documents attached thereto.b.Written submissions dated 21st March 2023 and filed on even date.

11. The Appellant stated that the Respondent undertook a general inspection on the Appellant’s books of accounts for the years 2018 and 2021 to ascertain the level of tax compliance and determine if there were any tax exposures. This process was set in motion through the Respondent’s letter dated 13th April 2021.

12. According to the Appellant, while taxation of pension contributions and minimum tax were cleared, the Respondent established findings for additional withholding tax and PAYE relating to loan from related group companies, consultancy fees and professional services payments, employees classified as consultants as well as non-reconciling items between salaries and wages as per IT2C filed and staff cost as per the monthly iTax returns.

13. A notice of preliminary findings was issued on 9th September 2021 and on 29th November 2021 additional assessments were issued.

14. The taxes assessed included withholding tax amounting to Kshs. 2,053,006. 00 and PAYE amounting to Kshs. 37,974,179. 00.

15. Upon receipt of the assessment, the Appellant filed a notice of objection dated 27th December 2021. The Respondent then issued an objection decision on 31st May 2022 confirming additional assessment amounting to Kshs. 40,027,185. 00.

16. The Appellant stated that the Respondent did a reconciliation between staff costs as per iTax and expenses in the IT2C Corporation tax returns for the years 2019 to 2020 and established variances. The Respondent contended that the Appellant provided the payroll expense reconciliations but failed to provide additional information requested to support one of the reconciling items in the payroll described as other payroll expense of Kshs. 65,103,140. 00 and Kshs. 13,986,035. 00 for the years 2019 and 2020, respectively.

17. The Appellant averred that the Respondent reviewed PAYE returns and withholding tax remittances on iTax and noticed some individuals appearing on the payroll as employees as well as under withholding tax as consultants.

18. It averred that the Respondent further reviewed the contracts of engagement between the Appellant and the consultants which depicted employer and employee relationship.

19. In addition, the Respondent indicated that the Appellant did not provide evidence to demonstrate that consultants remitted taxes to KRA and taxing the same would result to double taxation.

20. It submitted that the Respondent highlighted some of the terms of engagement between the Appellant and the consultants which according to the Appellant did not meet the threshold being consultants but employees.

21. The Appellant stated that according to the Respondent, the terms of engagement indicated existence of control exercised between the Appellant and the consultants as follows:i.That the integration of the consultants into teams clearly depicts an employer-employee relationship. All reviewed contracts between the company and consultants reveals that once the taxpayer engaged the said ‘consultant’ they are all integrated into teams.ii.Each ‘consultant’ agreement clearly indicates details of the project director, operations director, team leader and details of the person the ‘consultant’ should contact in case of emergency. This shows the worker is subject to control. He/she lacks independence that is expected if the same individuals are to operate like independent contractors/consultants.iii.The company carters for the ‘consultants’ travelling costs e.g. travel per diem. In this case the worker is ordinarily an employee.iv.That there is a continuing relationship between the ‘consultants’ and the Appellant. The work is performed at frequently recurring intervals indicating that an employer -employee relationship exists.v.The individuals are paid on daily rate basis pointing to an employer –employee relationship. A review of the ‘consultants’ agreement provided clearly indicated that each consultant has fixed daily rates.

22. The Appellant contended that the Respondent also classified email addresses used by the consultants as intangible tools to facilitate the performance of work as they are in the name of the company unlike consultants who should have their own.

23. According to the Appellant, the Respondent also reviewed the part of expenses under project related expenses (Note 4 of the audited accounts) and established that they were expenses whose payments attracted withholding tax.

24. That it averred that the Respondent compared the resulting liability on the qualifying payments against withholding tax paid on iTax and established an underpayment of tax.

25. The Appellant submitted that the Respondent further indicated that the Appellant failed to provide relevant documentation for the costs reimbursement and proof that withholding tax payments were made.

26. The Appellant asserted that the Respondent also indicated that a review of the financial statement confirmed that the Appellant received loans from related group companies.

27. It contended that the Respondent requested for the loan agreements from the Appellant which were not availed on explanation that they were not loans but excess of grants and donations from the group companies erroneously described as loans in the audited financial statements.

28. The Appellant stated that the Respondent requested the Appellant to provide an affidavit to support the claimed error in the financial statement which was not provided.

29. Further the Appellant stated that the Respondent requested the Appellant to provide a tax exemption certificate to support exemption of the said grant income but was not availed.

30. According to the Appellant, issues for determination are as follows:i.Whether reconciliation discrepancies between Income tax returns and the PAYE returns on iTax should be subjected to further taxation;ii.Whether the terms of engagement between the Appellant and the consultants exposes them to being classified as employees thus subjecting their income to PAYE as opposed to withholding tax;iii.Whether the project related costs qualify as consultancy fees which should be subjected to withholding tax or not;iv.Whether withholding tax should apply on grants received from Palladium International LLC classified erroneously as loans by the Appellant in audited financial statements;v.Whether Palladium Development and Consultancy Kenya Limited should make an application for tax exemption Certificate with the Commissioner considering that its income is purely comprised of grants/donations or exempted from tax by the Memorandum of Understanding between the Kenyan Government and the United states of America (USAID) ant the United Kingdom (UKAID) is sufficient for the said exemption purposes.

31. With regards to Pay as You Earn Tax-reconciliation of staff costs (IT2C & iTax), the Appellant relied on Section 3 of the Income Tax Act which states as follows:“3. Charge of tax

(1)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.(2)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;(ii)Any employment or services rendered.’

32. The Appellant also relied on Section 37 of the Income Tax Act which provides:“(1)An employer paying emoluments to an employee shall deduct therefrom, and account for tax thereon, to such extent and in such manner as may be prescribed.”

33. The Appellant also relied on Section 15(2) (o) of the Income Tax Act which provides for amounts that be allowed against income in relation to pension contribution as follows:“any sum contributed in such year of income by an employer to a national provident fund or other retirement benefits scheme established for employees throughout Kenya by the provisions of any written law.”

34. The Appellant stated that Section 16 (2) (d) of the Income Tax Act analyses pension contribution that are not allowable against income as follows:“Any sums contributed to a registered or unregistered pension, saving, or provident scheme or fund, except as provided in section 15(2)(o), or any sum paid to another person as a pension.”

35. Further, the Appellant stated that Section 22A of the Income Tax Act provides extent to which deductions in respect of contributions to be registered pension or provident funds can be allowed.

36. According to the Appellant, Section 31 (2) and (4) of the Tax Procedures Act 2015 provides room for a taxpayer to amend an original assessment within five years of filing the return, which provides:“(2)A taxpayer who has made a self-assessment may apply to the Commissioner, within the period specified in subsection (4) (b) (i), to make an amendment to the taxpayer's self-assessment.”

37. The Appellant averred that Income Tax Act defines a contract of service as follows“Contract of service” means an agreement, whether oral or in writing, whether expressed or implied, to employ or to serve as an employee for any period of time, and includes a contract of apprenticeship or indentured learnership, under which the employer has the power of selection and dismissal of the employee, pays his wages or salary and exercises general or specific control over the work done by him; and for the purpose of this definition an officer in the public service shall be deemed to be employed under a contract of service;’

38. The Appellant relied on Section of the Employment Act 2007 to define employee, employer and contract of service as follows:‘“employee” means a person employed for wages or a salary and includes an apprentice and indentured learner;“employer” means any person, public body, firm, corporation or company who or which has entered into a contract of service to employ any individual and includes the agent, foreman, manager or factor of such person, public body, firm, corporation or company;“contract of service” means an agreement, whether oral or in writing, and whether expressed or implied, to employ or to serve as an employee for a period of time, and includes a contract of apprenticeship and indentured learnership but does not include a foreign contract of service to which Part XI of this Act applies.’

39. The Appellant relied on the case of Everret Avaiation Limited vs. Commissioner of Domestic Taxes in which it was concluded that there are various tests to be employed when there is doubt whether a person is an employee or a contractor. One of those tests is whether the person’s duties are integral part of the employer’s business. The greater the direct control of the employee by the employer, the stronger the ground for holding it to be a contract of service. The question whether the person was integrated into the enterprise or remained apart from and independent of it has been suggested as an appropriate test. The factors relevant in a particular case may include, in addition to control and integration:i.The method of payment;ii.Any obligations to work only for that employer, stipulations as to hours, overtime, holidays etc;iii.Arrangement for payments of income tax and national insurance contributions;iv.How the contract maybe terminated;v.Whether the individual may delegate work;vi.Who provides tools and equipment; andvii.Who, ultimately, bears the risk of loss and the chance of profit.

40. The Appellant stated according to Section 2 of the Income Tax Act, ’consultancy’ fees are part of ‘management fees.’ The law reads as follows:‘“management or professional fee” means any payment made to any person, other than a payment made to an employee by his employer, as consideration for any managerial, technical, agency, contractual, professional or consultancy services however calculated.’

41. According to the Appellant, there are various components of definition of ‘management and professional fees’ are:i.Consultancy fees: means payments made to any person for acting in an advisory capacity or providing services on a consultancy basis. Examples include consultancy fees for such services as taxation, system review and computerisation. The term consultancy fee was clarified in the case of Stanbic Bank of Kenya vs Kenya Revenue Authority High Court case. Lady Justice Wendoh attended to this by referring to the Oxford English dictionary and stating that:”…a consultancy is defined as …’expert advice that a company or person is paid to provide on a particular subject.’’ii.Contractual fees: means payment for work done in respect of building, civil or engineering works.iii.Training fees: means a payment made in respect of a business or user training services designed to improve the work practices and efficiency of an organization, and includes any payment in respect of incidental costs associated with the provision of such services.iv.Professional fees: means payment made to any person for acting in a professional capacity of scheduled (in the fifth schedule of ITA). The professional include doctors, dentists, accountants, legal professionals, architects, quantity surveyors, engineers, valuers, public secretaries and veterinary surgeons.v.Managerial: managerial fees are fees made to a person who provides managerial services. Such services would involve controlling things or people.vi.Technical: technical services involve the practical use of machinery or are connected to skills needed for a particular job or subject matter of set off law or rules. This understanding is derived from oxford advanced learners dictionary and was referred to by Justice Nyamu in the Stanbic Bank of Kenya v Kenya Revenue Authority [2009] eKLR).vii.Agency: Section 2(1) of the Income Tax Act defines agency as means ‘payments made to a person for acting on behalf of any other person or group of persons, or on behalf of the Government and excludes any payments made by an agent on behalf of a principal when such payments are recoverable.’

42. In respect of withholding tax, the Appellant relied on Section 16 (3) of income tax act which defines loans as follows:“all loans” means loans, overdrafts, ordinary trade debts, overdrawn current accounts or any other form of indebtedness for which the company is paying a financial charge, interest, discount or premium;’

43. According to The Appellant, Section 2 of the Income Tax defines deemed interest as follows:“deemed interest” means an amount of interest equal to the average ninety-one day Treasury Bill rate, deemed to be payable by a resident person in respect of any outstanding loan provided or secured by the non-resident, where such loan is provided free of interest.’

44. The Appellant stated that application of withholding tax on deemed interest is only applicable where the person is controlled by a non-resident person or together with not more than four other persons and where the company is not a bank, or a financial institution licensed under the Banking Act Cap 488 of the laws of Kenya.

45. The Appellant relied on the provisions of Section 2 which defines control in relation to a person as follows:“‘Control’ in relation to a person means-a.that the person, directly or indirectly, holds at least twenty per cent of the voting rights in a company;b.a loan advanced by the person to another person constitutes at least seventy per cent of the book value of the total assets of the other person excluding a loan from a financial institution that is not associated with the person advancing the loan;c.a guarantee by the person for any form of indebtedness of another person constitutes at least seventy per cent of the total indebtedness of the other person excluding a guarantee from a financial institution that is not associated with the guarantor;d.the person appoints more than half of the board of directors of another person or at least one director or executive member of the governing board of that person;e.the person is the owner of or has the exclusive rights over the knowhow, patent, copyright, trade mark, licence, franchise or any other business or commercial right of a similar nature, on which another person is wholly dependent for the manufacture or processing of goods or articles or business carried on by the other person;f.the person or a person designated by that person—i.supplies at least ninety per cent of the supply of the purchases of another person; andii.upon assessment, the Commissioner deems influence in the price or other conditions relating to the supply of the purchases of another person;g.the person purchases or designates a person—i.to purchase at least ninety per cent of the sales of another person; andii.upon assessment, the Commissioner deems influences in the price or any other conditions of the sales of another person;h.the person has any other relationship, dealing or practice with another person which the Commissioner may deem to constitute control.”

46. The Appellant averred that it operates a pension scheme where it contributes 10% of the staff basic pay for in addition to the ordinary statutory contributions of Kshs. 200 per employee towards NSSF. Individual staff are also free to contribute to the pension scheme on voluntary basis.

47. The Appellant’s pension contribution is treated as non-cash benefit subject to tax to each of the affected staff on the payroll since it is an amount that is paid directly to the pension scheme on behalf of the staff and the Appellant is a not-for profit organisation.

48. According to the Appellant, while filing the PAYE returns, pension contributions was not captured correctly for the period under review as stipulated in Section 22 of the Income Tax Act. To rectify this error, the Appellant is in the process of amending all the affected PAYE returns according to Section 31 of the Tax Procedures Act 2015. However, the amendment did not affect PAYE amount paid since the same has been computed correctly according to the tax law.

49. The Appellant further stated that it had submitted staff costs (payroll) for one of its projects via its old sister company by the name Futures Group Global Outreach Limited for the period January to September 2019 which also contributed to the variances.

50. The Appellant averred that the other staff cost causing variances between iTax PAYE returns and IT2C are the non-payroll expenses such as staff medical cover, National Industrial Training Authority (NITA) expenses, professional fees, visa fees, staff training fees and workers compensation related to insurance cover. These expenses were supported with ledger and documentation and accepted by the Commissioner at the review level.

51. Going by the above facts, the Appellant prays that the assessment of PAYE reconciliation of staff cost IT2C and iTax be set aside.

52. According to the Appellant, it operates its business in form of projects which runs for specific periods with certain specific objectives. As such, the Appellant have a mix of both employees as well as consultants.

53. The Appellant averred that once a project is over, the term of employees in those projects also come to an end. The Appellant also stated that at times, it has projects that require some of the experienced former employees who are engaged on consultancy basis.

54. The Appellant averred this is differentiated in terms of engagement between the Appellant and the respective consultants. Some of the terms used in the consultancy agreements between the Appellant and the consultants include but not limited to the following:i.Consultants are not regulated on the numbers of hours worked and are supposed to submit a timesheet for the number of hours worked subject to set limit per engagement.ii.The consultants are issued with a scope of work which they are expected to stick to as they offer their services as agreed.iii.The consultants are supposed to issue an invoice for work performed in a certain period for them to be paid for their service based on a daily rate broken down into hourly rates with no other benefits attached.iv.The consultants are expected to issue progress report to the team leader or operations manager from time to time based on their scope of their work.v.The consultants bear their own risk associated with the provision of the services under the agreement;vi.The consultants are expected to use their own tools and equipment necessary for providing the services.vii.The consultants are usually free from engaging in multiple and changing clients thus not restricted in offering services to one client.viii.The consultants are also reimbursed incidental expenses incurred for the purposes of performing their services but must be fully supported by an invoice or a receipt; andix.The Consultants are also responsible for their own taxes other than these the Appellant is directly responsible for ie withholding tax deducted at source.

55. Based on the above, it is the Appellant’s case that there is no control exercised between the two parties. Furthermore, the Appellant stated that the consultants are not subject to the rules and procedures of the Appellant but are self-regulated if they are within the scope of work given in the agreement thus no integration on their part.

56. The Appellant disputed the Respondent’s assertion that some of the Appellant’s consultants are given tools of work that is Ms Jacqueline Kavuma who has been issued with a company email address. The Appellant maintained that email address is allocated to the consultant for efficient monitoring and identity of consultant and provision of just one tool (i.e email) does not override all other factors and considerations of an independent consultant.

57. The Appellant argued that the tax assessment is tantamount to double taxation in that the Appellant deducted and accounted for withholding tax on payments to the consultants and the consultants subsequently paid KRA all additional taxes on the payments received. The Appellant further averred that there is no evidence that these payments were not made.

58. Consequently, the Appellant prayed that the assessment of withholding tax on employees classified as consultants be set aside.

59. The Appellant asserted that it reimburses the consultants incidental costs by them while offering their consultancy services per the service agreement which is a common practice with all consultants. The Appellant stated that the reimbursements are fully supported by either invoices or receipts and relate to either transport, meals, accommodation etc.

60. The Appellant asserted that the reimbursed expenses are never part of the services agreements due to the nature of the Respondent’s business as it has projects spread in different parts of the Country or they are required to do field visits whose expenses could not be anticipated at the point of entering the engagement. They are claims to recover legitimate expenses and do not form part of its income.

61. The Appellant further argued that some of the highlighted amounts do not qualify as professional fees and neither are they reimbursements to consultants. The Appellant averred that those expenses include Nairobi City Council Special Pass, work permit processing and advertising expenses.

62. The Appellant maintained that those expense that fell within the definition of professional, management and consultancy fees, withholding tax was deducted and remitted to the commissioner according to the law and is also captured on iTax.

63. Consequently, the Appellant prayed that the assessment of withholding tax on consultancy fees be set aside.

64. According to the Appellant, the Appellant’s Head Office, Palladium International LCC has contracts with donors of the funds in the United States and United Kingdom to implement projects in Kenya and Africa in general.

65. The Appellant has registered by its Head Office with pure intention of implementing its objectives in Kenya and other Countries in Africa.

66. According to the Appellant, it implements its objectives in forms of projects that run for a period between two to three years and that these projects are run based on a budget which must be approved by Palladium International LLC with certain objective as directed by donors of the funds.

67. It is the Appellant’s case that it requests for funds from Palladium International LCC based on a budget which runs for a period of 12 months. Where the funds are received in the middle of the year for a certain project, a portion of the grant received will still be unutilised by the end of the financial year of the Appellant thus carried forward to the subsequent period as surplus.

68. The Appellant stated that for years 2018 and 2019, the surplus amount was erroneously classified as loans from group companies (Palladium International LCC) in the audited financial statements.

69. The amount declared as loan accounts owing to related parties balances of Kshs. 4,348,195. 00 and Kshs. 13,795,049. 00 for 2018 and 2019, respectively are indeed bank balances arising out of the cash unspent as at the close of the financial year end.

70. According to the Appellant, the income of Palladium Kenyan entity comprises grants from Palladium International LLC the head office based in the USA and does not receive any loans. The Appellant maintained that the description in the financial statements as loans from related party was incorrect and that this was explained to the Respondent.

71. It is the Appellant’s case the business and operating model of Palladium Kenya is that of preparing budgets monthly based on the specific projects and funding needs and that once the budgets are prepared are sent to the Head Office for approval and a funding request is made for cash disbursements.

72. To offer a clear and simple explanation of how the 2019 balance of Kshs 13,795,049. 00 is arrived at, the Appellant relied on income and expenditure account which are the figures contained in the financial statements.

73. For project HPP Kenya as an example, the unutilised cash of Kshs 2,831,324 is computed below:Description Amount In Kshs

Total funds available/requested for 195,078,322

Total funds spent during the year (192,246,998)

Unspent cash in petty cash 9,086

Unspent cash in bank 2,822,238

Variance NIL

74. The Appellant also stated that the surplus of the project grant in 2018 and 2019 were utilised in the year 2020 and thus the reason the amount does not appear in 2020 audited financial statements. Consequently, the Appellant argued that it did not receive loans from Palladium International LCC but grants.

75. The Appellant averred that according to tax law, application of deemed interest applies to interest free loans received from foreign related parties but not on grants.

76. Based on the above facts, the Appellant prayed that the assessment of withholding tax on deemed interest be set aside.

The Appellant’s Prayers 77. The Appellant prayed for the Honourable Tribunal to find that:a.The Appeal be allowed;b.The Respondent’s assessment and resultant decision be set aside.

The Respondent’s Case 78. The Respondent’s case is premised on its:-a.Statement of Facts dated and filed on 16th August 2022b.Written submissions dated 27th February 2023 and filed on 28th February 2023.

79. In response to Appellant’s contention on reconciliation of staff costs as per payroll and expenses in the audited accounts for the year 2019 and 2020, the Respondent responded as here under:

80. That the Appellant provided payroll expense reconciliation and one of the reconciling item was payroll expense of Kshs 65,103,140. 00 and Kshs 13,986,035. 00 for the years 2019 and 2020.

81. According to the Respondent, the Appellant explained that the other payroll expense relates to other payroll costs like excess pension for staff not captured in iTax by PAYE and the same was paid accordingly.

82. The Respondent stated that it requested for detailed breakdown of this expense that PAYE was paid as per the claim but the Appellant failed to provide the requested information.

83. The Respondent averred that it is the duty of the Appellant to keep documents and provide the documents whenever required. Consequently, the Respondent relied on Section 23(1)(b) of the Tax Procedures Act which provides as follows:“A person shall maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained.”

84. The Respondent asserted that it is empowered by Section 59 of the Tax Procedures Act 2015 to require production of records for the purposes of obtaining full information in respect of the tax liability of any person. The Respondent maintained that the Commissioner was correct and the taxpayer was under an obligation to produce records.

85. With regards to payment of individuals as employees and consultants, the Respondent responded as hereunder:

86. The Respondent stated that the Appellant has not demonstrated that amount of taxes due has already been paid thus it will result in double taxation. The Respondent also argued that the Appellant did not provide evidence to show that the consultants remitted taxes paid to KRA and taxing the same would amount to double taxation.

87. The Respondent relied on the Employment Act 2007 which defines contract of service as an agreement, whether oral or in writing, whether expressed or implied, to employ or to serve as an employee for any period of time, and includes a contract of apprenticeship or indentured learner.

88. The Respondent relied on the case of Ready Mixed Concrete (South East) Limited vs. Minister of Pensions and National Insurance which according to the Respondent, clarified the factors to consider in determining whether one was an employee and therefore under a contract of service as where:i.The servant agrees to provide his own work and skill by providing services for this matter, in consideration of wages or other remuneration.ii.The servant agrees that in performance of that service they will be subjected to the master’s control. Control includes the power of deciding the things to be done, the way in which it shall be done, the means to be employed in doing it, the time and place where it shall be done.iii.The contract of service complies with the terms of an employment agreement. This entails complying with statutory requirements in the Employment Act including minimum wage, provision for leave and payment of income tax.

89. Further, the Respondent relied on the case of Kenya Hotel and Allied Workers Union vs. Alfajiri Villas wherein the court analysed the difference between an employee under the Employment Act and an independent contractor. The court held:“a true independent contractor are that the contractor will be a registered taxpayer, will work his own hours, runs his own business, will be free to carry out work for more than one employer at the same time, will invoice the employer each month for his/her services and be paid accordingly and will not be subject to usual employment” matters such as the deduction of PAYE (tax on income), will not get annual leave, sick leave.”

90. The Respondent averred that the consultants were employees of the Appellant because they were under the control of the Appellant which can be demonstrated as follows:a.That integration of consultants into teams clearly depicts an employer employee relationship. All reviewed contracts between the company and the consultants reveal that once the taxpayer engages the consultant they are integrated into teams.b.Each consultant clearly indicates details of the project manager, operations director. Team leader details of person the consultant should contact in case of emergency. According to the Respondent, this shows the worker is subject to direction and control of the Appellant.c.The company caters for the consultant travelling costs e.g. per diem. According to the Respondent, this means it’s an employee not a consultant.d.The continuing relationship between the Appellant and the consultants. The work is performed frequently recurring intervals indicating that an employer-employee relationship.e.The individuals are paid on daily rate basis pointing to an employer-employee relationship. The Respondent stated that a review of the consultant agreement provided clearly indicated that each consultant has fixed daily rates.

91. Therefore, the Respondent maintained that the contracts depict that there was employee-employer relationship.

92. With regard to professional fees-project related costs, the Respondent maintained that the Respondent requested for documents from the Appellant but the Appellant did not avail the documents. The Respondent also stated that relevant documents for cost reimbursements and withholding taxes was asked which was never availed by the Appellant to demonstrate that cost reimbursement have been done.

93. With regard to Palladium International –LLC Loan interest, the Respondent stated that the financial accounts for the year 2019 the company had a loan from Palladium International LLC. The Respondent also averred that under the statement of Financial Position, Statement of Cash flow, financial instruments, loans from a group of companies and related party transactions all indicated that the above amounts related to loans from Palladium International LLC, the holding company. The Respondent further averred that there was no withholding tax deducted and paid in respect to the loan.

94. The Respondent also averred that it reviewed the financial statements and confirmed that the Appellant declared loans from a group of companies. The Appellant claimed that the declared loans were made in error. The Respondent also stated that the Appellant was requested to provide an affidavit to support the claimed error in the financial statement which was never provided. According to the Respondent, the Appellant was also requested to provide a tax exemption certificate which was never availed.

95. Consequently, the Respondent reiterated that the assessments were issued within the provisions of the Tax Procedures Act.

The Respondent’s prayers 96. The Respondent, therefore, prayed that the Tribunal:a.Dismisses the Appeal with cost; andb.Uphold Objection Decision dated 31st May 2022 be upheld.

Issues For Determination 97. The Tribunal having considered the Memorandum of Appeal, the parties’ Statements of Facts, and submissions, puts forth the following issues for determination:a.Whether the Appellant is liable to pay taxes in Kenya;b.Whether the reconciliation discrepancies between income tax returns and pay as you earn returns on iTax should be subjected to further assessments;c.Whether the consultants should be classified as employees thus subjecting their income to pay as you earn as opposed to withholding tax;d.Whether reimbursement of project related costs to consultants qualify as consultancy fees subjected to withholding tax or not; ande.Whether the withholding tax on deemed interest should apply on grants/loans received from Palladium International LLC.

Analysis And Findings 98. The Tribunal wishes to analyse the issues as herein-under.a.Whether the Appellant is liable to pay taxes in Kenya

99. The Appellant submitted that it is not liable to pay taxes in Kenya because it is exempted from tax by the Memorandum of Understanding (MOU) between the Kenyan Government and the United states of America (USAID) and the United Kingdom (UKAID) is sufficient for exemption purposes. On the other hand, the Respondent submitted that the Appellant is liable to pay taxes unless a tax exemption certificate is availed.

100. The Appellant described itself as a limited liability company incorporated in Kenya under the Companies Act whose principal business is carrying out projects in Kenya aimed at supporting sustainable development and devising smart development solutions in different sectors. The fact that the Appellant is limited liability company incorporated in Kenya, the Appellant, prima-facie, has legal duty pay taxes unless there is a tax exemption.

101. Since the Appellant asserted that there is a Memorandum of Understanding which exempts it from taxes, the Tribunal examined the said Memorandum as availed by the Appellant. The said Memorandum was signed on 8th December 2004.

102. The MOU has a Clause and a Schedule exempting a number of implementing organisations from tax. It is vital to note that the Appellant is not listed as one of the implementing organisations.

103. Notwithstanding that the Appellant is not listed as one of the implementing organisations, there is a way through which the Appellant could be covered under the said MOU. The only way is provided for under Section 3. 1 of the MOU and that involves USAID entering into a contract or other instruments with public and Non-governmental Organisations (Partners) as USAID deems appropriate. When such contracts or instruments are entered into, Section 3. 2 of the MOU provides that USAID will notify the Government of Kenya and the Government of Kenya shall deem such additional partners as having same status as those listed under the annex to the said MOU.

104. It then follows that since the Appellant is not listed in the annex, then the Appellant had to adduce contracts or instruments entered into between itself and the USAID. This, the Appellant did not do. There is no contracts or instruments on record indicating that the Appellant is covered under the MOU between Kenya and USAID. Therefore, the Tribunal finds that Appellant is not covered under the MOU between Kenya and USAID.

105. The Respondent submitted that it requested the Appellant to provide tax exemption certificate but the Appellant failed to do so. Since the Appellant did not avail the tax exemption certificate, and since the Appellant is not covered under the MOU between Kenya and USAID, then Appellant is liable to taxation even if the Appellant’s principal business is carrying out projects in Kenya aimed at supporting sustainable development.

106. Consequently, the Tribunal finds and holds that the Appellant is liable to pay taxes in Kenya.

b. Whether the reconciliation discrepancies between income tax returns and pay as you earn returns on iTax should be subjected to further assessments 107. The Tribunal has observed that one of the reconciling item was payroll expense of Kshs. 65,103,140. 00 for the year 2019 and Kshs. 13,986,035. 00 for the year 2020. According the Appellant other payroll expense relates to other payroll costs like excess pension for staff not captured in iTax by PAYE. The Appellant also submitted that other non-staff costs such as medical covers, NITA expenses, Visa fees, professional fees, training fess, workers compensation relating to insurance among other costs caused the variances.

108. The Respondent submitted that whereas the Appellant provided payroll expense reconciliation, the Respondent submitted that it requested for detailed breakdown of expenses that PAYE was paid as per the claim but the Appellant failed to provide the requested information. The Respondent further submitted that it is the duty of the Appellant to keep documents and provide the documents whenever required as provided for under Section 23 (1) (b) of the Tax Procedures Act.

109. The Tribunal has perused the letter dated 13th April 2021 from the Respondent wherein the Respondent requested for a detailed reconciliation/explanation regarding variances. In the said letter, the Respondent also requested for a general ledger and Memorandum and Articles of Association for the years 2019 and 2020. The Tribunal also examined the Respondent’s letter dated 9th September 2021 and note that Respondent requested the Appellant to provide additional documents and records to support the claims. The Tribunal has also perused the Respondent’s letter dated 29th November 2021 and note that the Respondent informed the Appellant that it had failed to provide records and breakdown to support other payroll expenses.

110. With regards to documentation, Section 51 (3) (c) of the Tax Procedures Act provides as follows:“A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if— all the relevant documents relating to the objection have been submitted.’’

111. It is this Tribunal’s view that the above mentioned letters were reminding the Appellant to provide documents in support of the notice of objection.

112. The Tribunal has perused the documents that the Appellant filed in support of this Appeal. The Tribunal notes that whereas the Appellant has provided payroll, there is no breakdown to assist the Tribunal to determine payroll expense of Kshs. 65,103,140. 00 for the year 2019 and Kshs. 13,986,035. 00 for the year 2020. The Tribunal has also analysed the availed documentary evidence and notes that the amounts in documents are not attempting to explain payroll expense of Kshs. 65,103,140. 00 for the year 2019 and Kshs. 13,986,035. 00 for the and 2020. The gap between the expenses in the payroll and the amount of money in Appellant’s documentary evidence is just huge.

113. The Appellant also submitted that other non-staff costs such as medical covers, NITA expenses, visa fees, professional fees, training fees, workers compensation relating to insurance among other costs caused the variances. The Tribunal has taken time study and analyse the evidence provided by the Appellant. Unfortunately, there is no evidence on record for other non-staff costs such as medical covers, NITA expenses, visa fees, professional fees, training fees, workers compensation relating to insurance among other costs as the Appellant submitted. The only evidence on record is travel and accommodation expenses.

114. Travel and accommodation expenses have nothing to do with non-staff costs such as medical covers, NITA expenses, visa fees, professional fees, training fees and workers compensation relating to insurance. In short, there is no evidence.

115. The Appellant further stated that it had submitted staff costs (payroll) for one of its projects via its old sister company by the name Futures Group Global Outreach Limited for the period January to September 2019 which also contributed to the variances. The Tribunal has assessed the said payroll and found that the said payroll is not dated rendering evidentiary value and the credibility of the said document questionable.

116. Section 23 (1) of the Tax Procedures Act provides as follows on record-keeping‘‘A person shall—a.maintain any document required under a tax law, in either of the official languages;b.maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained; andc.subject to subsection (3), retain the document for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law.’’

117. Section 23 (1) of the Tax Procedures Act requires the taxpayer to not only keep records, but to keep those records for a period of five years from the end of the reporting period to which it relates unless otherwise specified by applicable law. The assessments and issuance of the objection decision were done within 5 years therefore, the Appellant cannot allege loss of documents due to effluxion of time.

118. The Tribunal agrees with the Respondent’s assertion that the taxpayer has a duty in law to prove that a tax decision is wrong. This is well provided for under Section 56(1) of the Tax Procedures Act. To this end, Section 56 (1) of the Tax Procedures Act provides that,“in any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.’’

119. The Tribunal is also guided by the provisions of Sections 107 and 109 of the Evidence Act which provides as follows:‘‘107. Burden of proof.(1)Whoever desires any court to give judgment as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist. 109. Proof of particular fact.The burden of proof as to any particular fact lies on the person who wishes the court to believe in its existence, unless it is provided by any law that the proof of that fact shall lie on any particular person.’’

120. The Tribunal observes from the foregoing, that the Appellant had a duty to avail evidence of offset payroll expense of Kshs. 65,103,140. 00 for the year 2019 and Kshs. 13,986,035. 00 for the year 2020. The Appellant failed to discharge this mandate.

121. Whereas the Appellant provided huge payroll data, the Appellant failed to break down and pin-point variances. It then follows that there is payroll but nothing is useful in it to assist the Appellant’s case. If anything, the payroll data contains evidence against the Appellant as will be demonstrated.

122. Consequently, the Tribunal finds and holds that the Respondent did not err in how it handled reconciliation discrepancies between income tax returns and Pay As You Earn returns on iTax.

c. whether the consultants should be classified as employees thus subjecting their income to pay as you earn as opposed to withholding tax; 123. One of the issues that the parties have disagreed upon is whether the Appellant’s consultants should be treated as employees or independent contractors. The Respondent submitted that the consultants are not independent contractors but are employees of the Appellant therefore they are subject to PAYE and not withholding tax. The Respondent argued that the consultants are employees because they are controlled by the Appellant. They are integrated into the Appellant’s employment, the Appellant caters for consultant travelling costs such as per diem, the work is performed frequently recurring intervals, individuals are paid on daily basis and that some like Jacqueline Kavuma was issued with Appellant’s official email address.

124. On the other hand, the Appellant maintained that the company has consultants with consultancy agreements. The Appellant submitted that the company operates on projects and once a project ends some of the employees are converted to consultants to benefit from their experience. The Tribunal takes the view that this could be one of the reasons that has caused the confusion in Appellant’s human resource.

125. Therefore, it is necessary for this Tribunal to determine whether the consultants are independent contractors and engaged under contract for service or are employees engaged and under contract of service. Determining this issue will also determine all issues to do with taxes related to consultancy, withholding tax thereon and PAYE.

126. Section 2 of the Employment Act No. 11 of 2007 defines "contract of service" as; -“an agreement, whether oral or in writing, and whether expressed or implied, to employ or to serve as an employee for a period of time, and includes a contract of apprenticeship and indentured learnership but does not include a foreign contract of service to which Part XI of this Act applies.’However, the Act does not define what contract for service is.

127. In Benjamin Joseph Omusamia v Upperhill Springs Restaurant [2021] eKLR the court held that; -“a Contract for service can be said to be a contract by which a person, contractor or service provider makes a commitment to another person, the client, to carry out material or intellectual work or to provide a service for a price or fee. Its characteristic being that the contractor is free to choose the means of performing the contract and no relationship of subordination exists between the contractor or the provider of service and the client in respect of such performance.’

128. Suffice to state that contract for service is not subject to provisions of Employment Act No. 11 of 2007 while contract of service is subject to provisions of Employment Act.

129. Section 2 of the Employment Act defines "employee" as“a person employed for wages or a salary and includes an apprentice and indentured learner.”

130. The Appellant has maintained that the consultants were not employees but independent contractors. The Appellant adduced a total of six (6) Consultancy agreements for the following individuals:i.Jacqueline Kavuma;ii.Bernard Mitto;iii.Inviolata Wanyama Nafula;iv.Lucy Nganga;v.Sylvester Ooko Ochieng; andvi.Stephen O. Osewe.

131. The Tribunal has keenly analysed the said consultancy agreements. The question is: does availability of an express consultancy mean that contractor-client relationship is established?

132. In Kenya Hotel and Allied Workers Union vs. Alfajiri Villas. The court analyzed the deference between an employee under the Employment Act and an independent consultant as thus:-“a true independent contractor are that the contractor will be a registered taxpayer, will work his own hours, runs his own businesses, will be free to carry out work for more than one employer at the same time, will invoice the employer each month for his services and will be paid accordingly and will not be subject to usual ‘employment’ matters such as the deduction of PAYE, will not get annual leave, sick leave.”

133. In Benjamin Joseph Omusamia v Upperhill Springs Restaurant [2021] eKLR court observed that; -“the tests that courts have employed over years, include, the control test – assessing the presence or absence of control a manager or supervisor might or might not have over their worker, the fourfold test – control, ownership of the tools, chance of profit, risk of loss, lastly the integration test, developed in Stevenson Jordon and Harrison Limited v MCdonald and Evans [1952], the approach looks at whether the service being provided by the worker is an integral part of business done on behalf of the business but not integrated into the business.”

134. The Tribunal has taken time to examine the availed consultancy agreements. Some of the key points to note are as follows:i.Under the ‘scope of work’ Clause: the agreements indicate that the company retains the right to direct the consultant in writing from time to time; the agreement contains a close stating that, ‘the timesheet will include the number of productive hours the consultant has worked on daily basis.’ This is contrary to what the Appellant submitted that the consultants are not regulated on number of hours and that they are not under control.ii.Under consideration and payment terms clause, the consultant is supposed to submit an invoice or invoices to be paid for work done. Contrary to the Appellant own submissions that the consultants are supposed to provide invoices for them to be paid, the Appellant did not provide a single invoice in the names of the consultants Jacqueline Kavuma; Bernard Mitto; Inviolata Wanyama Nafula; Lucy Nganga; Sylvester Ooko Ochieng; and Stephen O. Osewe.iii.The Consultancy agreements have a termination clause providing that any of the parties can terminate the agreement by giving a 30 days written notice.iv.The agreement have a clause on incidental allowances (per diems) when out of station on official travel for the company.

135. The above few facts point to one fact, that is possible that the individuals were under control of the Appellant throughout.

136. Contrary to the Appellant own submissions that the consultants are supposed to provide invoices for them to be paid, the Appellant did not provide a single invoice in the names of the consultants Jacqueline Kavuma; Bernard Mitto; Inviolata Wanyama Nafula; Lucy Nganga; Sylvester Ooko Ochieng; and Stephen O. Osewe. The Tribunal takeas the position that, in absence of those key documents that would demonstrate that the consultants are independent contractors, the Appellant has failed to convince that the named are consultants as alleged.

137. In the case of Maurice Oduour Okech vs. The Chequered Flag Limited the court held, inter alia, that the documents produced, local purchase orders and payment vouchers were documents used in contract for services. In this case, the Appellant failed to provide invoices in the names of the consultants Jacqueline Kavuma; Bernard Mitto; Inviolata Wanyama Nafula; Lucy Nganga; Sylvester Ooko Ochieng; and Stephen O. Osewe. It is vital to note that the invoices that the Appellant adduced are not related to these aforementioned six consultants under the consultancy agreement but relate to employees of the Appellant.

138. The Tribunal has also perused various payrolls as adduced by the Appellant. The following quick facts are evident:i.The January 2019 payroll indicates that Sylvester Ooko Ochieng is employee number 1194449 whose basic pay is Kshs 307,410 with NSSF contribution of Kshs 200;ii.The January 2019 payroll indicates that Mitto Bernard is employee number 1194241 whose basic pay is Kshs 425,210 with NSSF contribution of Kshs 200;iii.The January 2020 payroll indicates that Iviolata Nafula Wanyama is employee number FGAU010 whose basic pay is Kshs 365,079 with NSSF contribution of Kshs 200.

139. Whereas the Appellant claims that the consultants are independent contractors, the above facts indicate that they are on Appellant’s payroll. whereas the Appellant alleged that the company take over employees of a sister company, and whereas the Appellant alleged that some employees cease being employees of the company and retained as consultants, the Appellant failed to specify the employees that the Appellant inherited from the sister company, the dates it inherited those employees. In addition, the Appellant failed to specify the names of the employees whose employment was terminated leading to their appointment as consultants.

140. The provisions of Sections 107 and 109 of the Evidence Act, Cap 80 of the laws of Kenya are well within our minds. The Appellant did not discharge the evidentiary burden this provision of the law of evidence placed upon it. In addition, pursuant to Section 56(1) of the Tax Procedures Act, the Appellant has a duty to establish that the Respondent’s decision is wrong. The Tribunal is of the view that the Appellant has failed to discharge this duty in relation to whether the individuals are independent contractors or employees.

141. The Tribunal has observed that the Respondent allowed the Withholding tax that was paid by the Appellant. It then follows that the Appellant has to pay the difference between the PAYE that was not paid and the Withholding tax that was paid.

142. Consequently, whereas the Appellant filed consultancy agreements, this Tribunal finds and holds that the individuals cited in those agreements were under control of the Appellant and are to that extent employees of the Appellant. As such, the Appellant was supposed to pay PAYE in relation to those employees and not withholding tax. d. Whether reimbursement of project related costs to consultants qualify as consultancy fees subjected to withholding tax or not; 143. The Appellant asserted that it reimburses the consultants incidental costs by them while offering their consultancy services per the Service agreement which is a common practice with all consultants. The Appellant stated that the reimbursements are fully supported by either invoices or receipts and relate to either transport, meals, accommodation etc. On the other hand, the Respondent maintained that the Respondent requested for documents from the Appellant but the Appellant did not avail them. The Respondent also stated that relevant documents for cost reimbursements and Withholding taxes was requested for but the Appellant did not avail them to demonstrate that cost reimbursement have been done.

144. The Appellant further argued that some of the highlighted amounts do not qualify as professional fees and neither are they reimbursements to consultants. The Appellant averred that those expenses include Nairobi City Council Special Pass, work permit processing and advertising expenses. On the other hand, there is also a schedule of project costs as prepared by the Appellant and without actual invoices or receipts.

145. Interestingly, it is necessary to note that legal fees is one of the professional fees that is subject to withholding tax under Income Tax Act. However, the Appellant did not avail invoices or receipts to indicate how it dealt with such services.

146. The Tribunal has perused the documents availed by the Appellant and noted that the Appellant did not provide documents to support its case.

147. The Tribunal therefore finds that the reimbursement of project related costs to consultants qualify as consultancy fees subjected to withholding tax and suffice to reiterate that consultancy fees are taxable.

e. Whether the withholding tax on deemed interest should apply on grants/loans received from Palladium International LLC. 148. Regarding this issue, the Respondent submitted that the financial accounts for the year 2019 the company declared a loan from Palladium International LLC. In addition, the Respondent also submitted that under the Statement of Financial Position, Statement of Cash flow, financial instruments, loans from a group of companies and related party transactions all indicated that the amounts related to loans from Palladium International LLC, the Appellant’s holding company. The Respondent further submitted that the Appellant did not avail Withholding tax deducted and paid in respect to the loan.

149. On the other hand, the Appellant disputed this submission and claimed that the declared loans were made in error and that the Appellant does not receive loans but relies on grants from holding company. However, what is interesting is that when the Appellant was requested to provide an Affidavit to support the claim of an error in the financial statement, the Appellant did not provide the Affidavit.

150. The Tribunal has analysed the Appellant’s financial documents and notes that indeed the Appellant received a loan from its holding company. Whereas the Appellant has argued that loans were declared in error, the Respondent requested the Appellant to swear an Affidavit to clear the doubts but the Appellant failed.

151. It is important to note that pursuant to Section 10 as read with Section 16 of the Income Tax Act, interest and deemed interest may or may not be taxed depending on material facts. It is upon a taxpayer to demonstrate that deemed interest is not taxable. However, in this case, apart from failing to provide an Affidavit as requested, the Appellant was required to provide loan agreements but the Appellant failed to do so. It then follows that the Appellant failed to demonstrate that Respondent’s decision is wrong.

152. Consequently, the Tribunal finds that the Respondent did not err in charging withholding tax on deemed interest on grants/loans received from Palladium International LLC on deemed interest.

Final Decision 153. The upshot to the foregoing analysis is that the Appeal is not meritorious and the Tribunal consequently makes the following Orders;-a.The Appeal be and is hereby dismissed.b.The Objection decision dated 31st may 2022 be and is hereby allowed.c.Each party to bear its own costs.

154. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 2ND DAY OF FEBRUARY,2024ROBERT M. MUTUMACHAIRPERSONBoniface K. Terer Elisha NjeruMember MemberMakau Mutiso Dr Walter OngetiMember Memeber