Permanent Establishment for Witholding Tax Purposes.

Case Study :TBEA Company Limited VS KRA

TBEA was awarded network upgrade works by KPLC

TBEA subcontracted the works to four Chinese companies .Two of them did not have KRA PINS

KRA findings indicated that the companies with PINS were non-resident but had the Permanent establishment (PE), while the companies without PINS were non-resident without permanent establishment.

Based on the above findings, KRA issued an assessment of KES 211m with respect to Withholding Tax(WHT) by charging payments to companies with PE at 3% and companies without PE at 20%.

TBEA conceded and paid KES 60m WHT by treating all the four subcontracted companies as having PE in Kenya and calculating the WHT liability at 3%.

TBEA lodged an objection against the balance of KES 143m.

KRA issued objection decision on 09/07/2020 by confirming the KES 143m WHT liability

TBEA appealed to TAT

TBEA Argued that:

• That the two companies without PINS that had been treated as having no PE in Kenya were indeed PE as per the definition of the Income Tax Act

“permanent establishment” in relation to a person means a fixed place of business and includes a place of management, a branch, an office, a factory, a workshop, and a mine, an oil or gas well, a quarry or any other place of extraction of natural resources, a building site, or a construction or installation project which has existed for six months or more where that person wholly or partly carries on business:

TBEA also relied on Article 5 of OECD Model Tax Convention

1. For the purposes of this Convention, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

2. The term “permanent establishment” includes especially:

a) a place of management;

b) a branch;

c) an office;

d) a factory;

e) a workshop, and

f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.

3. A building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months.

PIN registration was therefore not relevant and it would be unfair for TBEA to be punished for mistake committed its sub-contractors for failing to register for PINS

• The contracts entered with the sub-contractors as demonstrated to KRA required all the four subcontractors to be physically present in Kenya

• Though the invoices of the two companies were done in Chinese language, translation had been availed to KRA.

• All the payments were being made in China since the companies were present in China and the project was being funded by the Chinese Exim Bank

KRA responded that:

• The two subcontractors had no KRA PINS

• The invoices of the two subcontractors were done in Chinese

• Recommended payment recipient were domiciled in China

• Some invoices featured a tax rate payable in China

• One subcontractor had been assigned survey works which did not require 6 months of continuous say stay in Kenya

• The other company had been awarded civil and construction works, of which did not require physical presence as it could have been sub-contracted.

KRA submitted that it had relied on the above observations

It its analysis and findings, TAT observed that:

• The contract entered between TBEA and the two subcontractors required them to be physically present Kenya for 185 days .This meets the threshold of 6 months for a PE to be presumed.

• As provided by TPA, translation of the documents done in Chinese had been availed to KRA.

• Invoice bearing Chinese tax rates were subcontractors purchase invoices for items procured in China

• KRA had intentionally and deliberately ignored TBEA contracts with the two subcontractors together with the prevailing circumstances.

• KRA had therefore relied on the presumptions instead of the law and the unambiguous contract between TBEA and the Subcontractors

• That indeed the subcontractors had triggered a PE

As such KRA was not justified levying WHT at 20% instead of the 3% applicable to Permanent Establishments

TBEA Won the case

The ruling was delivered on 18/06/2021