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April 13, 2021

Kenya’s Tax Appeal Tribunal provides guidance on taxation of professional and managements fees under Double Tax Treaty Agreement

Executive summary

The Kenyan Tax Appeals Tribunal (TAT) on 1 April 2021 ruled on tax dispute between McKinsey and Company Inc. Africa Limited (McKinsey/the Appellant) and the Kenya Revenue Authority (KRA/the Respondent) with respect to the withholding tax (WHT) on professional fees paid to a South African entity (SA entity) under the Kenya-South Africa Double Tax Treaty Agreement (DTTA).

McKinsey’s contention was that the taxing rights for professional fees should be guided by the Article on business profits. The KRA’s position had been that where the DTTA does not contain a specific article on professional and management fees, such income is taxable under the ”Other Incomes” Article which grants Kenya taxing rights.

The TAT ruled in favor of McKinsey. In essence, the TAT grounds the well accepted guidance provided by the commentary under Organisation for Economic Co-operation and Development (OECD) Model Tax Treaty as sufficing for interpreting DTTAs and effectively respects the pacta sunt servanda principle.

In summary, where a DTTA does not contain a separate article regarding management or professional fees, such fees should be characterized as business profits.

Detailed discussion


McKinsey is a branch of a South African company whose principal business activity in Kenya is the provision of consultancy services including strategy, operation, financial and human resource consulting. The KRA conducted an audit of McKinsey’s tax affairs for the period of 2014 to 2017 that resulted in a confirmed assessment of additional withholding tax on professional fees paid to its related party in South Africa (not its head-office).

The Appellant appealed the decision of the KRA to the TAT on the grounds that the Respondent had wrongly applied the provisions of the Kenya-SA DTTA to the Appellant’s business.

The TAT concluded that there was only one issue for determination, being, whether the Respondent erred in demanding WHT from the Appellant on professional fees paid to its related party in South Africa.

The Appellant’s position

  • Professional fees paid to its related party resident in South Africa are taxable under Article 7 ”Business Profits” of the DTTA. Said Article provides that The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein….

  • As the DTTA does not define what constitutes business profits, the Appellant relied on the definition of business under the domestic law where business is defined as any trade, profession or vocation, and every manufacture, adventure and concern in the nature of trade, but does not include employment.

  • Prior to 2000, the OECD Model Tax Convention (MTC) provided separately for the taxation of management or professional services under Article 14. However, Article 14 was deleted on 29 April 2000. The effect of this deletion is that professional services are now taxable under Article 7 of the OECD MTC.

  • Its interpretation of the Kenya-South Africa DTTA is supported by the decision of the High Court of India in Bangkok Glass Industry Co. Ltd v Assistant Commissioner of Income Tax [2013] 215 Taxman 116 (Mad) where the Court dealt with the issue of taxation of technical services under the India-Thailand DTTA and found that professional services and such services are taxable under Article 7 as business profits.

  • Professional fees having been provided for under Article 7 of the DTTA cannot be construed as income under Article 22(3) (Other Incomes). Therefore, such fees are not taxable under Section 35 of the Income Tax Act (ITA). Article 22(3) is a residuary clause and only incomes not taxed under other articles of the DTTA maybe taxed under the said article.

  • The Respondent’s view on interpretation of DTTAs that do not have a specific article on management/professional fees would render them redundant and not serve the purpose, i.e., avoidance of double taxation.

The Respondent’s position

  • Section 35 of the ITA imposes charges to tax professional and management fees paid to a nonresident person not having a permanent establishment in Kenya and Paragraph 3(a) of the Third Schedule to the ITA provides that the applicable WHT rate is 20%.

  • As the DTTA does not specifically contain an article covering the taxation of management or professional fees at the point of payment, such fees fall squarely under Article 22 which covers items of income not specifically provided for under the other articles.

  • The DTTA provides a basis of taxation which is that WHT has to be tested first unless the entity maintains a permanent establishment to warrant invoking Article 7 of the DTTA. It went on to contend that Article 7(7) gives precedence to all other articles within the DTTA which have provided for the item of income in question.

  • Article 22(3) of the DTTA mirrored Article 21(3) of the United Nations (UN) Model. According to the Respondent, UN Model commentary’s interpretation of Article 21(3) states in part that: …this paragraph constitutes an addition to Article 21 of the OECD Model Convention. It allows the State in which the income arises to tax such income if its law so provides… This provision gives Kenya the right to tax such income through a withholding tax. Therefore, South Africa may tax the professional income received from Kenya as business profit. Double taxation is eliminated by providing a credit for the WHT paid by the South African entity in Kenya.

TAT Decision

The TAT found that:

  • The Kenya-South Africa DTTA follows both the UN and OECD Models. As such, reliance can be placed upon the Commentaries of both Models in interpreting it.

  • The import of Article 7 and in particular Article 7(1) is to allocate taxing rights to the country of residence. It provides that the source country (in this case Kenya) may tax that profit if the entity has a permanent establishment in Kenya. The question then that must be answered is whether the fees paid to the South African entity fall within the ambit of business profits and if they are attributable to the permanent establishment in Kenya.

  • Article 7 of the DTTA is the appropriate article in the taxation of professional fees in the instant case as it deals with the taxation of profits of any enterprise. The South African entity is an enterprise and the income it is deriving from Kenya through the payments made to it by the Appellant constitute business profit.

  • The question of Article 22 comes in only where income has not been dealt with in any of the previous articles. In this case, the income which constitutes business profits has been dealt with under Article 7. Thus, the Respondent cannot claim that the applicable clause is Article 22.

Next steps

Even though it is expected that the KRA will appeal this decision, it is a landmark ruling that provides clarity on the interpretation of DTTAs in Kenya. It is specifically applicable to the DTTAs that do not have a specific article dedicated to the taxation of professional fees such the DTTAs between Kenya and South Africa, France, Korea, Qatar, and the United Arab Emirates.


For additional information with respect to this Alert, please contact the following:

Ernst & Young (Kenya), Nairobi

Ernst & Young Société d’Avocats, Pan African Tax – Transfer Pricing Desk, Paris

Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London

Ernst & Young LLP (United States), Pan African Tax Desk, New York


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