March 1, 2022
Kenya High Court invalidates VAT Regulations, 2017 and declares maritime agency services provided to nonresident shippers should qualify as exported services
The Kenya High Court (the High Court), in a case (ruling delivered on 31 January 2022) between the Commissioner of Domestic Taxes (the Commissioner or the Appellant) vs W. E. C. Lines (K) Limited (WEC (K) Ltd or the Respondent) declared Kenya’s Value Added Tax (VAT) Regulations, 2017 null and void and held that maritime agency services provided to nonresident shippers should qualify as exported services for VAT purposes.
This Alert summarizes the assertions of the Appellant and Respondent and the High Court’s decision.
The Respondent is a Kenyan limited liability company and the exclusive local and shipping agent of WEC Lines BV (WEC BV), a company incorporated in the Netherlands. WEC (K) Ltd represents WEC BV locally pursuant to an agency agreement. WEC BV is engaged in the maritime transportation of goods.
WEC (K) Limited treated the agency services it provided to WEC BV as exported taxable services and as such applied for a VAT refund of excess input tax (because of zero -rating of exported services) from the Kenya Revenue Authority (the KRA or the Appellant). However, the KRA rejected the VAT refund application on grounds that the services were not exported. The Company objected and the KRA reconfirmed its position that WEC (K) Ltd was not entitled to the VAT refunds. WEC (K) Ltd then submitted an appeal at the Tax Appeals Tribunal (TAT) whose ruling was delivered in favor of the Company. In light of the Tribunal’s decision, the KRA challenged its decision at the High Court.
The Appellant (KRA) submitted that the Respondent’s (WEC (K) Ltd) services which included, among others, the solicitation of business, customer service, booking, documentation, quotation of rates, collection, administration and the forwarding of claims were offered to third parties, customers and/or importers based in Kenya and that these did not qualify as exported services for VAT purposes. The KRA therefore asserted that WEC (K) Ltd was not entitled to a refund of excess input tax. The KRA also contended that only services provided to the vessels, and not the owners, qualified for zero-rating.
The Appellant relied on Regulation 13 of the VAT Regulations, 2017 in rejecting the VAT refund claims by the WEC (K) Ltd. The Appellant also asserted that the VAT Regulations, 2017 and the main VAT Act, 2013 complimented each other and that the services rendered by the appellant were used and consumed in Kenya.
Regarding applicability of the VAT Regulations, 2017, the Appellant admitted that the VAT Regulations, 2017 were never tabled before the National Assembly for approval. However, the Appellant contended that although they were not tabled in the National Assembly, they had not been found to lack procedure nor illegal and as such they were still operational and valid.
Summarily, the Respondent, asserted its case as follows:
Issues addressed by the High Court
The High Court had the following questions to answer in determining the case:
Determination by the High Court
The High Court held that:
VAT Regulations, 2017, according to the High Court, are now invalid and they should not be applicable in making or arriving at taxation decisions by the Commissioner or the taxpayers.
With the invalidation of the VAT Regulations, 2017 it is unclear whether the VAT Regulations under the repealed VAT Act (cap 486) would now be applicable pursuant to the transition clause under the VAT Act 2013 which required that the Regulations under the previous VAT regime continue to apply until new regulations were enacted.
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