In a tax alert dated February 2022, PwC says “Tax law must be validly enacted and enforced. Failure to which creates an illegality. Where tax laws are prescriptive, there is no room for intendment or inference.”

In its Judgement issued on 31 January 2022, in a case pitting KRA, who were appealing an earlier ruling of the tax appeals tribunal, against W. E. C. Lines (K) Limited (WEC Kenya), the court declared the regulations “null and void” owing to procedural invalidity in their enactment.

The court found that the VAT Regulations, 2017 were never tabled before the National Assembly as required by the Statutory Instruments Act, 2013 in section 11, which states that “Every Cabinet Secretary responsible for a regulation-making authority shall within seven (7) sitting days after the publication of a statutory instrument, ensure that a copy of the statutory instrument is transmitted to the responsible Clerk for tabling before parliament.”

The appeal was against a case in which KRA was ordered by the Tax Appeals tribunal to pay WEC Kenya Ksh 6.4 million in VAT refunds.  The Kenyan limited liability company is the sole shipping agent of WEC Lines BV (WEC BV), a Dutch company engaged in the maritime transportation of goods. WEC Kenya represents WEC BV in operations related to its shipping business in Kenya.

WEC Kenya filed a VAT refund application for the period February 2015 to January 2018 attributable to zero-rated exported services supplied to WEC BV. KRA rejected the respondent’s application on 18 April 2018 citing the following on grounds that the services provided by WEC Kenya were consumed in Kenya, given that the company provides services to the clients of WEC BV located in Kenya.

KRA further argued that Regulation 13 of the VAT Regulations, 2017 which deals with exported goods and services, did not apply to the services supplied by WEC Kenya. KRA argued that the standard rate of tax, 16%, applied on the supplies made by WEC Kenya as opposed to the zero rate.

The Tribunal ruled that, as defined by the contract between WEC Kenya and WEC BV, the Dutch company was the sole consumer of the services provided by the respondent, on the basis that there were no agreements between WEC Kenya and the Kenyan importers.

While upholding the tribunal’s ruling, the high court indicated that there was no dispute that the respondent was an agent of WEC BV. As such, any contract made by WEC Kenya and third parties as contemplated by that agency relationship is, in fact, a contract between that third party and WEC BV. Therefore, there was no exclusive contract to speak of between the local importers of goods and WEC Kenya. As such, no services were offered from WEC Kenya to the importers.

PwC further says the judgement underpins the Privity of “contract is a sacrosanct legal doctrine that has not always been considered by the KRA when making decisions affecting taxpayers or when arguing its case before various tribunals.

In their interpretation of the ruling, PwC says “neither the KRA nor any third party has the jurisdiction to rewrite contracts between freely contracting parties. It follows, therefore, that parties are free to constitute the rights and obligations within the wording of their contracts.”

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The alert cites a High Court judgment delivered on 16^th December 2021, as part of a recent trend that shows that courts are willing to consider the process, application, and implications of amendments to legislation and to ensure that the Constitution is upheld.

The judgement relates to a case in which the Association of Kenya Insurers (AKI) filed a petition against the Kenya Revenue Authority over the implementation of the Tax Laws Amendment Act, 2020 which came into effect on 25^th April 2020. The new law introduced VAT on insurance brokerage and agency services by removing the services from the list of VAT exempt services under the First Schedule of the VAT Act.

In its ruling, the High Court found that “paragraph 10 of part II of the First Schedule to the Value Added Tax Act as amended by the Tax Laws Amendment Act, 2020 is unlawful and unconstitutional. The effect of the amendment was to impose Value Added Tax (“VAT”) on insurance agency, insurance brokerage and securities brokerage services.”

AKI in their petition argued that the introduction of VAT at a standard rate on insurance and brokerage services will affect the compliance of insurance companies with the provisions of the Insurance Act by breaching the prescribed limits on management fees to be charged by insurance companies as imposed by the Insurance Act.

They also cited a lack of adequate public participation, openness, accountability, and dissemination of relevant information in the legislative process and a breach of several articles of the constitution including 10 (2)(a), 10 (2) (d), 27 and 201 (a)(b)(i) of the Constitution of Kenya, 2010.

KRA challenged the petition claiming the association’s lack of capacity to enter a petition, jurisdiction of the high court and argument that laws emanating from parliament enjoyed an irrefutable presumption of constitutionalism.

While the court dismissed AKI’s claims on inadequate public participation, it found that among the practical effects of the amendment, the most relevant was the actual cost of the imposition of VAT on insurance brokerage and agency services would be borne by the members of AKI.

This would controvert the spirit of the Constitution, by creating a situation full of uncertainty and unpredictability. In practice, the Court noted that the VAT expense would increase the management expenses of the insurance companies above the limits prescribed by the Insurance Act.

PwC says “This is a welcome judgment and is a relief to the insurance and securities brokerage sectors as standard VAT will not be applicable on insurance brokerage, insurance agency and securities brokerage services.”

KRA has appealed against the Judgement at the Court of Appeal. In the absence of stay orders, the High Court judgment remains binding on the KRA and taxpayers alike.

Several questions however arise following the judgement rendered by the High Court; Can taxpayers seek refunds for the tax paid during the period within which an unconstitutional statute was in force to when conservatory orders were issued? Can taxpayers who had continued to fully comply with the amendment obtain a refund of the VAT paid to the KRA?

According to PwC, these questions raise remedial issues that were not deliberated by the Court. Further, the judgment rendered by the Court was not explicit in stating that a refund should be made to taxpayers who had made the VAT payments to the KRA, however, there are probable grounds for a refund application on the basis that the law was null and void, meaning that the tax ought not to have been paid in the first place. Affected taxpayers may consider pursuing a refund with the KRA.

The post PwC Encourages Taxpayers to Challenge Financial Laws that Infringe on their Constitutional Rights appeared first on Biz Post Daily.

During the operations that commenced on the night of 31st January 2019, an estimated 21 million counterfeit excise stamps and 312,000 liters of illicit products valued at shillings 1.2b in estimated tax were seized. Arrangements are in progress to seal the premises to enable in-depth investigations into the racket.

Africa Spirits is a licensed manufacturer of portable spirits including Glen Rock, Legend Black, Blue Moon, Legend Brandy, Gypsy King, and Furaha.

A Production Manager at the factory was arraigned in court and detained for seven days to facilitate further investigation. The Directors of the Company and other senior management are being sought.

This operation is part of the Government ongoing campaign against illicit trade aimed at ensuring compliance with tax and consumer protection laws.

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