Sinopec International Petroleum Services Kenya Limited v Commissioner Legal Services and Board Coordination (Tax Appeal E308 of 2024) [2024] KETAT 1860 (KLR) (17 December 2024) (Judgment)
Neutral citation:
[2024] KETAT 1860 (KLR)
Republic of Kenya
Tax Appeal E308 of 2024
E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, AK Kiprotich & G Ogaga, Members
December 17, 2024
Tribunal finds and holds that the Appeal lacks merit and consequently makes the following Orders; -
a.
The Appeal be and is hereby dismissed.
b.
The Respondent’s Objection decision dated 5th February 2024 be and is hereby upheld.
c.
Each party is to bear its own costs.Tribunal finds and holds that the Appeal lacks merit and consequently makes the following Orders; -
a.
The Appeal be and is hereby dismissed.
b.
The Respondent’s Objection decision dated 5th February 2024 be and is hereby upheld.
c.
Each party is to bear its own costs.
Between
Sinopec International Petroleum Services Kenya Limited
Appellant
and
Commissioner Legal Services And Board Coordination
Respondent
Judgment
Background
1.The Appellant is a company registered as a taxpayer within the Republic of Kenya holding a Personal Identification Number and was in the business of provision of petroleum, gas and petrochemical engineering and hiring of drilling pipes before it closed its operations in Kenya six years ago, after an unsuccessful oil exploration venture.
2.The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Parts 1 and 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.
3.The Respondent carried out an audit into the tax affairs of the Appellant and issued it with tax assessments for WHT on deemed interest for the period 2019 to 2022 on 7th November 2023 totaling to Kshs. 219,327,813.
4.The Appellant objected to the assessments on 7th December 2023 and the Respondent issued its Objection decision dated 5th February 2024, confirming the assessments issued and demanding payments from the Appellant of the tax liability amounting to Kshs 219,327,813.
5.The Appellant, dissatisfied with the decision made by the Respondent, lodged the Notice of Appeal at the Tribunal dated and filed on 1st March 2024.
The Appeal
6.The Appellant lodged the Memorandum of Appeal dated and filed on 14th March 2024 wherein the it raised the following grounds of appeal (sic):a.The Respondent erred in law and fact by issuing and confirming a tax assessment based on the acquisition of a capital asset which was transferred to the Appellant by an unrelated third party at arm’s length and which acquisition had been approved by the government department including the Ministry of Energy and Ministry of Finance.b.The Respondent erred in law and fact in considering the value of the oil rig booked in the Appellant’s books of account of Kshs 1,002,922,440.00 as a loan yet it was the value of the oil rig purchased and transferred to the Appellant with full knowledge of the Respondent.c.The Respondent erred in law and fact by holding the value of the unpaid purchase price booked as a liability in the Appellant’s books as a loan and erroneously deeming interest for purposes of computing withholding tax.d.The Respondent erred in law and fact by misconstruing the provisions of Section 10 as read with Section 35 of the Income Tax Act in relation to the determination of deemed interest and proceeded to erroneously assess withholding tax on a creditor entry in the Appellant's balance sheet.e.The Respondent erred in law and in fact when it demanded more taxes on the machinery transferred to the Appellant, yet the Appellant subject to the refusal by the Respondent to exempt the Appellant from payment of these taxes during the transfer in 2013, paid all the taxes demanded by the Respondent which were amounting to Kshs 197,313,768.86 for the transfer of the oil rig to the Appellant.f.The Respondent erred in law and fact by deeming the facilitation fees paid by the Appellant’s parent company, Sinopec Jianghan Petroleum Administration, as management fees and erroneously proceeded to asses withholding tax therefrom.g.The Respondent erred in law and fact in classifying the facilitation fees paid on expenses incurred by the Appellant as management and technical fees thus misconstruing Section 10 as read together with Section 35 of the Income Tax Act on deduction of Withholding Tax from payments made to a non-resident person.h.The Respondent erred in law and fact by assessing withholding tax on debt booked with the Appellant's balance sheet as a liability and deeming the liability to relate to management fees while no management or any other related services were offered to the Appellant by the parent company.i.The Respondent erred in law and fact by disallowing the expenses incurred by the Appellant and all explanations and documentation provided by the Appellant in support of their objection and proceeding to confirm the tax assessments.j.The Respondent erred in law and fact by disregarding the income returns filed by the Appellant and all explanations and documentation provided by the Appellant in support of their objection and proceeding to confirm the tax assessments.k.The Respondent erred in law and facts by exercising its powers arbitrarily, capriciously and in bad faith by issuing unfounded and unreasonable assessments to a taxpayer who has not been operational in the last six years.l.The Respondent erred in law and in fact by making an assessment beyond the statutory period prescribed in law of 5 years for making an assessment and keeping documents and purporting to assess tax on transactions which were carried out more than 10 years ago.
The Appellant’s Case
7.To further expound on the Appeal, the Appellant relied on its Statement of Facts dated and filed on 14th March 2024 with a bundle of documents filed thereto and Written Submissions dated 30th September 2024 and filed on 16th October 2024.
8.The Appellant stated that the Respondent raised additional assessments for the period 2019 to 2022 without conducting a proper audit or investigations on the Appellant's books of accounts and records.
On WHT on deemed interest on the alleged loan from CNOOC Africa Limited
9.The Appellant stated that contrary to the assertions by the Respondent it never obtained any loan from CNOOC Africa Limited (hereinafter “CNOOC). That CNOOC was contracted by the Government of Kenya to prospect for oil and natural gas in Block 9 of the Anza basin and Block L2 of the Lamu basin on 26th April 2006 and imported petroleum drilling equipment and for the exploration it was exempted from import duty, VAT and other levies.
10.That CNOOC later abandoned its exploration activities in Kenya after drilling Bogal 1-1 Well which was unsuccessful. Upon the abandonment of the exploration activities, CNOOC resolved to take the rig equipment back to China but at the Ministry of Energy’s request and encouragement, the oil rig was retained in the country for future oil and gas exploration campaigns.
11.The Appellant averred that it was later awarded a drilling contract by Vanoil Energy Limited and was to commence mobilization in November 2012 but it did not have a rig and other drilling equipment so it approached CNOOC with the intention of acquiring the rig from it.
12.That negotiations were successful and CNOOC and the Appellant entered into a sale transfer agreement for the rig.
13.That CNOOC having abandoned its exploration activities in Kenya requested the Ministry of Energy to facilitate the transfer of the rig to the Appellant, who was interested in the purchase of the oil rig, exempt from all duties, taxes and IDF vide a letter dated 5th October 2012.
14.That the Ministry of Energy requested the Ministry of Finance on 7th November 2012, to exempt the Appellant from the taxes in line with the understanding that oil companies get VAT and other tax exemptions on goods, equipment and items imported to the country for the purpose of carrying out oil exploration.
15.That the Appellant having been subcontracted by Vanoil Energy to drill the wells in two blocks, CNOOC allowed the Appellant to use the rig before it was shipped back.
16.That this helped to reduce costs in mobilization and demobilization thus benefiting the country in case of a discovery if the request by CNOOC to have the drilling rig transferred to the Appellant was granted.
17.The Appellant stated that it proceeded to personally request the Respondent to exempt it from all taxes in the transfer of the oil rig vide a letter dated 11th December 2012.
18.That the Respondent on 13th December 2012, responded to its request and emphasized that the exemption of the taxes was only issued to CNOOC and is not transferable to another party and thus the Appellant was required to pay the due taxes.
19.That the Respondent informed CNOOC Africa of the taxes due on 25th April 2013 before the transfer was effected to the Appellant and the Respondent informed it on the schedule of the payment plan of the taxes assessed on 16th May 2023.
20.The Appellant stated that it had agreed to purchase the oil rig from CNOOC on credit and was to pay the purchase price once it was successful in the oil exploration.
21.The Appellant averred that the Black law dictionary defines a loan as “a contract by which one delivers a sum of money to another, and the latter agrees to return at a future time a sum equivalent to that which he borrowed”.
22.The Appellant stated that its debt on the account of the above definition cannot and should not have been categorized as a loan as it has no intention of returning the oil rig that it purchased on credit from CNOOC, and the Respondent erroneously proceeded to assume the facts and interpreted the same while ignoring its clarification.
23.That the Respondent’s decision to calculate deemed interest on the alleged loan is grossly improper because deemed interest can only arise from a loan or financial assistance and not in the form of a regular debt as was the case between it and CNOOC.
24.The Appellant stated that it is not controlled in any way by CNOOC and is an independent company that independently purchased on credit the oil rig from CNOOC with an intention to pay with the proceeds from the oil exploration whose plans were distorted when the Government chose one company to proceed with the oil exploration.
25.That the assessment in relation to WHT on deemed interest is thus erroneous in the circumstances.
On WHT on alleged management and professional fees.
26.The Appellant averred that the Respondent erred in assuming that the costs it incurred in transporting the oil rig were paid to its parent company, Sinopec Jiaghan Petroleum Administration and thereby concluding that the parent company offered management and professional fees which was then to be subjected to Withholding tax at 20%.
27.That its parent company did not participate in the transportation of the oil rig as the transportation was done by unrelated third parties who were paid the transportation fees from funds disbursed from the parent company.
28.It was thus its view that the debt in relation to the parent company did not relate to any professional or management services provided to the Appellant, but rather from facilitation fees paid to the transporters by the parent company on behalf of the Appellant.
29.The Appellant asserted that during the period it operated in the Country, its parent company did not provide any services and the only transaction between the two companies was in relation to the transportation fees paid by the parent company on its behalf.
On Disallowed Expenses.
30.The Appellant stated that in disallowing the expense it incurred the Respondent failed to consider all the documentation and information it had provided.
31.That as such, the disallowance of the expenses was done contrary to Sections 15 and 16 of the Income Tax Act which provides that all expenses incurred in the exploration are deemed to be business-direct expenses and thus deductible.
On assessment made beyond the prescribed 5 years
32.The Appellant averred that it was not able to trace some of the documents in relation to the assessment period because it was issued beyond the statutory period of 5 years required by law to keep documents as per Section 23 of the Tax Procedure Act.
33.The Appellant identified the following issues for determination in this Appeal:-i.Whether the Respondent erred in failing to disallow the capital allowances relating to wear and tear claimed by the Appellant during the period under review.ii.Whether the Respondent erred in charging Withholding tax on the deemed interest on the unpaid purchase price of the rig.iii.Whether the Respondent erred in charging Withholding tax on intercompany account balances with Sinopec Jianghan Petroleum Administration.iv.Whether the Respondent erred in issuing assessments beyond the five-year statutory limit and requiring the Appellant to provide documents for a period beyond the mandatory statutory period for keeping documents.
34.The issues identified for determination were urged by the Appellant thus:
35.The Appellant stated that its claim for wear and tear relates to a rig which the Appellant purchased from CNOOC Africa Limited in a process which the Respondent herein approved upon assessment of additional VAT and import duty on the machinery. That as such the existence of the assets being depreciated is not in question as the acquisition was approved by the Respondent.
36.That the Respondent had failed to consider all the documentation and information it had provided as was stated in Republic v Kenya Revenue Authority; Proto Energy Limited (Exparte) (Judicial Review Application E023 of 2021) [2022] KEHC 5 (KLR) (24 January 2022) (Judgment)
Whether the Respondent erred in charging Withholding Tax on the deemed interest on the unpaid purchase price of a rig.
37.The Appellant stated that the Respondent on April 25, 2013, informed CNOOC Africa of the taxes due before the transfer was effected to the Appellant and on 16th May 16 2013, the Respondent informed the Appellant of the schedule of the payment plan of the taxes assessed.
38.The Appellant submitted that all the taxes assessed during the purchase amounting to Kshs 197,313,768.86 were paid within the stipulated period and the Respondent in a letter dated February 28, 2014, confirmed the payment of the taxes payable for the oil drilling equipment.
39.The Appellant stated that when it purchased the oil rig from CNOOC, it was agreed that the payment of the purchase price would be made once it was successful in the oil exploration.
40.That the Respondent’s decision to calculate deemed interest on the purchase price was grossly erroneous and mistaken and should not be left to stand.
41.That deemed interest can only arise from a loan or financial assistance and not in the form of a regular contract payable as was the case between the Appellant and the CNOOC.
42.The Appellant averred that it is not controlled in any way by CNOOC and is an independent company that independently purchased the oil rig from CNOOC with the intention to pay with the proceeds from the oil exploration whose plans were distorted when the Government chose one company to proceed with the oil exploration and thus failed to realize any income from its oil exploration venture thus failing to pay CNOOC.
Whether the Respondent erred in charging Withholding Tax on the alleged payables to Sinopec Jianghan Petroleum Administration.
43.The Appellant asserted that its parent company did not participate in the transportation of the rig as the transportation was done by unrelated third parties who were paid the transportation fees from funds disbursed from the parent company.
44.That that there is no evidence that the transportation costs were paid to the Appellant’s parent company.
45.That the debt in relation to the parent company does not relate to any professional or management services provided to the Appellant, but rather an inter-company balance in the form of financial assistance.
46.That the said inter-company balance was booked in the Appellant's books of accounts in 2013 when the acquisition of the rig took place thus making the assessment 10 years down the line which was beyond the prescribed period for the Respondent to make an assessment and for the Appellant to provide supporting documentation.
Whether the Respondent erred in issuing assessments beyond the five-year statutory limit.
47.The Appellant took the view that the assessments by the Respondent grossly violated the express provisions of the TPA in relation to the mandatory statutory timelines for keeping tax records by the Appellant as well as for making assessments by the Respondent as was stated in Commissioner of Domestic taxes v Airtel Networks Kenya Limited (Income tax Appeal E062 of 2022) [2023] KEHC 25059 (KLR) (Commercial and tax) (10 November 2023).
48.The Appellant submitted that the entries subject to this assessment in dispute were entered into their financial records more than 10 years ago when the rig was acquired. That the assessments were time-barred and contrary to Section 31(4) of the Tax Procedures Act as it covers entries which have been sitting in the Appellant’s balance sheet for more than 10 years.
49.That it purchased the oil rig in 2012 as evidenced by the correspondence between it and the Respondent.
50.That the Appellant did not raise any concern of gross or willful neglect, fraud or evasion to justify the the assesement beyond the five-year statutory period
51.That it is a trite law that tax statutes are subject to strict interpretation with no room for intendment as was emphasized in Republic vs. Commissioner of Domestic Taxes Large Tax Payer’s Office Ex-Parte Barclays Bank of Kenya LTD [2012] eKLR.
Appellant’s Prayers
52.The Respondent prayed that this Tribunal be pleased to: -i.Allow this Appeal.ii.Set aside the Respondent’s Objection decision dated 7th November 2023.iii.Award costs of this Appeal to the Appellant.
Respondent’s Case
53.In response to the Appeal, the Respondent filed a Statement of Facts dated and filed on 17th April 2024 together with Written Submissions dated 8th November 2024 and filed on 11th November 2024 together with authorities attached thereto.
54.The Respondent’s response to the Appellant’s identified issues for determination was as follows.
i. On whether the assessment was correctly raised and should be upheld?
55.The Respondent reiterated that the confirmation of assessment was issued in conformity with the provisions of the law.
56.The Respondent stated that its decision was justified in law since the capital asset in question was transferred to the Appellant by a related third party a fact which the Appellant acknowledges in its letter to the Permanent Secretary Ministry of Energy dated 5th October, 2012.
57.That the Appellant stated that Sinopec JHPA and Sinopec International Service (Sinopec SIPS) are sister companies under Sinopec and that in 2010, SIPS established a branch in Kenya called “Sinopec Kenya.”
58.That the Appellant had transactions with its non-resident parent entities, CNOOC Africa Limited and Sinopec International Petroleum Service Corporation therefore the Respondent was justified in charging, the transfer of the capital asset in question at arm’s length.
59.The Respondent took the view that it is important to note that the exemption of taxes is on a case basis. That the tax exemption letter from the Treasury Ref: CONF. 1/06 dated 26th June 2008 was granted solely to China National Offshore Oil Corporation (CNOOC) who is the current importer and not to the Appellant.
60.That additionally, this exemption is not transferable to another party, therefore, the exemption of all taxes for the transfer of the capital asset to the Appellant was not approved by the Ministry of Finance.
61.That although Paragraph 30 Part B of Fifth Schedule to the East African Community Customs Management Act (EACCMA) 2004, provides for exemption of taxes on Machinery, Spares and Inputs imported by a licensed company for direct and exclusive use in oil, gas and Geothermal exploration upon recommendation by a competent authority of a Partner State, Section 119 of the EACCM Act provides for payment of taxes on any goods which were imported free of taxes upon transfer/ disposal of such goods to another party.
62.That the Respondent could not facilitate the transfer of this equipment from (CNOOC) who is the current importer to the Appellant without payment of due taxes.
63.The Respondent stated that the Appellant has admitted that Kshs. 2,002,922.40 is indeed a debt owed to CNOOC Africa Limited on the purchase of the rig, which confirms the Respondent’s position.
64.The Respondent posited that Section 2 of the ITA defines deemed interest as 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.
65.That further Section 16 (ja) (1) of the ITA provides for deemed interest to apply to loans advanced to the company by a non-resident associate of the non-resident company controlling, the resident company where the person is controlled by a non-resident person alone or together with not more than four other persons.
66.The Respondent stated that the Appellant and CNOOC Africa Limited are related companies with CNOOC being a non-resident company and the Appellant acknowledges this in its letter to the Permanent Secretary Ministry of Energy dated 5th October, 2012.
ii. Whether the Respondent erred in raising the assessment on Inter-Group expenses owed to Sinopec Jianghan Petroleum Administration Limited.
67.The Respondent stated that the amount in question is an intra-group recharge to the non-resident related entity, Sinopec Jianghan and it thus qualifies as management and technical fees.
68.That its letter of assessment dated 7th November 2023 indicated the basis of assessment of Withholding tax on the amounts payable to Sinopec Jianghan Petroleum Administration Limited and that it was informed by the Appellant’s response that the amount related to facilitation fees on the transportation of the rig and other costs related to the rig.
69.The Respondent averred that it requested supporting evidence to support the nature of these facilitation fees but this was not provided. That due to the limitation of information, the Commissioner deemed the amount as relating to management and professional fees relating to services received from its parent entity.
70.The Respondent stated that the Appellant did not provide documents to justify its assertions and that the documents provided by the Respondent were considered.
71.That the expenditure claimed by the company is not for the production of business income. That the Appellant has not generated any business income during the period under review, hence, it cannot justify the claim for WHT in the production of business income.
iii. Whether the Appellant discharged its burden of proof:
72.It is the Respondent’s assertion that the Appellant failed to discharge its burden of proving that the Respondent erroneously placed the value of the unpaid purchase price booked as a liability in the Appellant’s books as a loan and deeming interest for purposes of computing withholding tax.
73.That the Appellant failed to discharge its burden of proof as envisaged in Section 56 of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal’s Act.
iv. Whether the assessment issued by the Respondent was within the statutory timeline;
74.The Respondent stated that it relied on Sections 52 and 54 of the ITA that provide for the filing of an income tax return and the documents to include in the return. That the issues giving rise to the assessments herein were dealt with in the year 2019-2022 balance sheet and the tax returns thereof.
75.The Respondent affirmed that the assessment returns in question were for the income earned in 2019-2022 with the last report being 30th June 2023; The Respondent's additional assessments were issued on 7th December 2023 this shows that its additional assessments were within the five years’ period provided under the law that the Respondent can amend assessments under Section 31(4) of the Tax Procedures Act (TPA) 2015.
v. Whether The Respondent Correctly Disallowed The Capital Allowance Deduction Claimed in The Years Under Consideration.
77.The Respondent posited that the Appellant did not generate any income from the said plant and machinery for the period 2019 to 2022 as admitted by the Appellant in the letter found on page 31 of the Respondent’s Statement of Facts wherein, it stated as follows:
78.That under Sections 15(1) and 16 (1) (a) of the ITA, the Appellant should not be allowed to make these deductions because the Appellant has not used the purported assets to generate an income in the years under consideration.
vi. Whether the Respondent correctly deemed interest on interest fee loans advanced to the Appellant by the related entity.
79.The Respondent averred that its review of the Appellant’s records for the period under consideration indicated that it owed CNOOC Africa Limited Kshs 1,002,922,440.00. That CNOOC Africa Limited did not charge any interest on this outstanding amount.
80.The Respondent stated that the Appellant and CNOOC Africa Limited are related companies with CNOOC being a non-resident parent company, that the Appellant acknowledges this in its letter to the Permanent Secretary Ministry of Energy dated 5th October 2012 where the Appellant clearly stated that Sinopec JHPA and Sinopec International Service (Sinopec SIPS) are sister companies under Sinopec and that in 2010, SIPS established a branch in Kenya called “Sinopec Kenya”.
81.That the loan in question was interest-free and from related non-resident persons and hence its justification in charging Withholding tax on deeemed interest based on its prescribed rates for each period.
Application of the provisions to the current facts
82.The Respondent contended that the Appellant has no intention of returning the oil rig that it purchased from CNOOC and that they have also not fully paid CNOOC the debt that is captured in its books as a debt.
83.That it follows that the amounts declared in the Appellant’s Financial Statements under liabilities as due to the related party are indeed a form of indebtedness and hence fall within the definition of loans.
84.The Respondent averred that it was guided in charging tax by Section 35(1) (e) of the Income Tax Act which allows it to impose WHT on deemed interest on the payables to related parties and as supported by the Court of Appeal in Kenya Revenue Authority vs Republic (Exparte Fintel Limited) [2019] eKLR
85.The Respondent urged that the Appellant’s failure to avail the loan agreements covering the indebtedness shows that it does not intend to pay back the amounts owed to the related non-resident party. That this view was supported by the High Court in Lordship Africa Management Limited V Commissioner of Investigation & Enforcement (Income Tax Appeal E022 & E037 of 2020) [2021] KEHC 286 (KLR) and the Tribunal in TAT No. E112 of 2023: Avipro East Africa Limited V Commissioner Domestic taxes.
vii. Whether the Respondent correctly brought to charge the Intergroup recharge to the Non–resident–related entity.
86.The Respondent posited that the Appellant booked an intragroup expense amounting to Kshs 539,332,216.00 payable to Sinopec Jiangham Petroleum Administration Limited. That the Appellant indicated that the amount related to “facilitation fees’ incurred during the transportation of the rig and other costs related to the rig.
87.It was its observation that the intra-group charges to the non-resident related entity, and quality, as management and technical fees based on the explanation expressed by the Appellant. That the Appellant did not provide any evidence to support the alleged facilitation fees and other costs.
88.That Section 24(2) of the Tax Procedures Act, allowed it to use any information available to it in making its assessment which was the case herein. That in this case the Appellant’s own financial statement recognizes the indebtedness and no evidence of WHT of the facilitation fees has been provided.
viii. Whether the assessment issued by the Respondent was within the statutory timeline
89.The Respondent affirmed that the assessments return in question were for the income earned in 2019-2022 with the last reporting being 30th June 2023. That its additional assessments were issued on 7th December, 2023 thereby making its additional assessments fall within the five-year period provided under the law.
90.That the fact that the Appellant took loans 12 years ago or bought the rig over 12 years ago does not make the interest chargeable per year on income fail to relate to the year in which it is chargeable.
Issues For Determination
91.Having examined the Memorandum of Appeal, the Parties’ Statements of Facts together with the documentary evidence filed therewith the Tribunal is of the considered view that the issues falling for determination are as follows:i.Whether the Appellant’s transactions were tax exempt.ii.Whether the Respondent issued its assessment beyond the statutory limit period of 5 yearsiii.Whether the Respondent erred in its assessment of WHT on payables to Sinopec Jianghan Petroleum Administration.iv.Whether the Respondent erred in its assessment of WHT on deemed interest against the Appellant on unpaid purchase of rig.
Analysis And Determination
92.Having identified the issues falling for determination, the same shall be determined as hereunder:-
i. Whether the Appellant’s transactions were tax exempt.
92.The Appellant alleged that its transactions were tax-exempt considering that CNOC had allegedly been given tax exemption in regards to the oil rig that the Appellant had purchased for purposes of oil exploration in Kenya.
93.The Respondent asserted that the Appellant had not been issued with any exemption certificate and thus this ground of appeal does not lie.
94.The Appellant had an obligation under Section 30 of the TPA to prove that it was indeed exempt from taxation. The only way to prove this assertion was by production of its tax exemption certificate. This evidence was not provided.
95.It is also trite that exemption certificates are not transferable or capable of being shared. Each taxpayer must always get its own exemption certificate if it intends to rely on it to limit its tax liability. The Appellant’s reliance on CNOOC’s tax exemption certificate to claim tax immunity was thus a futile effort. Its exemption could only have arisen if it had an exemption certificate that was executed under its name as is provided under Paragraph 30, Part B of the Fifth Schedule of EACCMA that provides as follows:
92.It is thus clear that whereas an exemption could be obtained for the oil rig, the Appellant was required to process and obtain exemption letters per consignment from the Ministry of Energy and Petroleum (MoE&P) and the National Treasury.
93.In the absence of such an exemption certificate, it was required to pay for the rigs upon purchase. Section 119 of the EACCMA is emphatic that a taxpayer must pay taxes on any goods which were imported free of taxes upon transfer/ disposal of such goods to another party as was the case in this Appeal. It reads as follows:
92.The Appellant’s failure to prove its case thus meant that it was not exempt from taxation and the Respondent was thus justified in issuing its additional assessments.
ii. Whether the Respondent issued its assessment beyond the statutory limit period of 5 years
92.The Appellant averred that the assessment that was done by the Respondent in 2023 related to its tax affairs more than 10 years ago in 2013 when it purchased the rig which was beyond the 5-year statutory limit period.
93.The Respondent averred that its assessment related to the period between 2019 and 2022 and was thus lawful as envisaged in Section 31(4)(b) of the TPA which provides as thus:
92.Section 23 of the TPA also speaks to aspects of time. It provides as follows:
92.The law is thus clear that a tax assessment has an expiry period of 5 years within which it should be concluded except in cases of fraud where Section 31(4) (a) of the TPA provides that the Respondent is required to at the very least demonstrate a case of gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer as was stated in the case Commissioner of Domestic Taxes v Airtel Networks Kenya Limited (supra), where Mabeya J had the following to say about the provisions of Section 31(4) (b) of the TPA.
92.Section 29(6) of the TPA provides as follows regarding cases where the Respondent may issue assessments beyond 5 years:-
92.The facts in this case show that the Respondent issued an assessment for 2019-2022 on 3rd December 2023. Considering that the last reporting date for these assessments was 30th June 2023 the additional assessments issued on 7th December 2023 were within the 5-year statutory limit period.
93.The burden of proof in tax matters is on the Appellant to prove that the assessment by the Respondent was not justified. This is captured in Section 30 of the TAT Act which provides as thus:
92.In Katebes Enterprises Limited v Commissioner of Domestic Taxes (Tax Appeal E332 of 2023) [2024] KETAT 1293 (KLR), this Tribunal emphasized that the taxpayer has to produce documentary evidence to support its objection while in Katambo v Attorney General & another (Petition E532 of 2022) [2023] KEHC 19949 (KLR) the High Court stated that:
92.Whereas the burden of proof that the assessments by the Respondent were erroneous lay with the Appellant, the Appellant in this Appeal did not table any evidence before the Tribunal to show that the Respondent’s assessments related to its tax returns that were submitted over 10 years ago. Thereby making its additional assessments fall within the five years provided under the law.
93.In the absence of such evidence, the Tribunal holds that the Respondent’s additional assessments were not time-barred.
iii. Whether the Respondent erred in its assessment of WHT on payables to Sinopec Jianghan Petroleum Administration.
92.The Respondent alleged that it charged WHT on the intragroup expense as was required of it under Section 35 of the ITA because the Appellant had failed to deduct WHT from payments made to non-resident persons for management and professional service at the rate of 20%. That it was the Appellant’s failure to provide evidence to confirm that it had deducted WHT at the non-resident rate of 20% that caused it to make this assessment.
93.The Appellant argued that this cost was in relation to facilitation fees paid to transporters by the parent company on its behalf which should not have attracted WHT.
94.The Tribunal notes that whereas the Appellant bore the burden of providing evidence to show that the financial assistance that it had received was indeed facilitation fees as alleged, no evidence explaining the terms of the said financial assistance and the fact that it was done at arm's length or that it was not a loan was provided.
95.The Appellant was thus required to provide evidence that it had indeeed deducted WHT at the non-resident rate of 20% from the transaction with Sinopec Jianghan Petroleum Administration as is provided in Section 35 of the ITA which provides as thus:
92.Its failure to prove, as was required of it under Section 30 of the TAT Act that this payment in question did not relate to professional fees and that WHT was not chargable meant that the Respondent’s assessment retained its presumption of correctness. The Respondent thus did not fall into error when it charged WHT on deemed interest payables to Sinopec Jianghan Petroleum Administration.
iv. Whether the Respondent erred in its assessment of WHT on deemed interest against the Appellant on unpaid purchase of rig
92.The issue under this head was whether the Appellant was granted a loan by CNOOC and whether it was a related party.
93.The Appellant stated that it was not a related party to CNOOC and it was never granted any loan by CNOOC. The Respondent on its part averred that the Appellant had received a loan from a related party CNOOC which had not been paid and whose terms were unclear.
94.The Appellant stated that the debt in relation to the parent company does not relate to any professional or management services provided but that it is an inter-company balance in the form of financial assistance. The Appellant further stated that the said inter-company balance was booked in its books of accounts in 2013.
95.Having confirmed that it had received financial assistance from CNOOC. The Appellant was thus under an obligation to dispel the Respondent’s assessment as is required of it under Section 30 of the TAT Act by showing that the said financial assistance was received at arm’s length and hence the reason why its assertion that CNOOC is not related to it is correct.
96.The Appellant could have discharged its burden of proof by sharing the financial assistance agreement it had with CNOOC or the Transfer Policy that governs its relation with third parties on an arm 's length basis. This was not provided and hence the assessment by the Respondent’s assessment of WHT on deemed interest against the appellant on unpaid purchase of rig and intercompany account balances with Sinopec Jianghan Petroleum Administration stood proved as was held by Commissioner of Domestic Taxes v Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR) (Commercial and Tax) (8 July 2022) (Judgment) where the Court stated thus;
117.The Tribunal finds and holds that having conceded that it had received financial assistance from CNOOC, the Appellant was behoved to table evidence that this assistance was not a loan and that the financial assistance was accorded to it at arm's length.
118.Mere assertions don’t amount to evidence. Its failure to displace the Respondent’s assessment means that the Respondent did not err in its assessment of WHT on deemed interest against it on the unpaid purchase of the rig.
Final Decision
119.The upshot to the foregoing analysis is that the Tribunal finds and holds that the Appeal lacks merit and consequently makes the following Orders; -a.The Appeal be and is hereby dismissed.b.The Respondent’s Objection decision dated 5th February 2024 be and is hereby upheld.c.Each party is to bear its own costs.
119.It is so ordered.
DATED AND DELIVERED AT NAIROBI THIS 17TH DAY OF DECEMBER, 2024ERIC NYONGESA WAFULA....................... CHAIRMANCYNTHIA B. MAYAKA ...........................MEMBERDR. RODNEY O. OLUOCH.........................MEMBERABRAHAM K. KIPROTICH.........................MEMBERGLORIA A. OGAGA ..............................MEMBER