Kenya Revenue Authority & another v Republic (Ex parte) Kenya Nut Company Limited [2020] KECA 764 (KLR)
The bottom line
#Kenya's Court of Appeal confirmed that Kenyan companies must deduct and remit withholding tax on payments to foreign agents, no matter what their contracts say.
What this practically means
#Executive summary
#Key legal issues
#Construction of 'upon payment of an amount' in section 35 of the Income Tax Act
The High Court erred in construing the phrase restrictively so as to excuse the taxpayer from deducting withholding tax where commissions were deducted at source by overseas agents; the taxpayer must devise workable contractual mechanisms to ensure the tax is deducted and remitted.
The court held that a Kenyan entity trading with non-residents without a permanent establishment in Kenya bears a mandatory obligation to ensure withholding tax is deducted from payments and remitted. The taxpayer is deemed to know sections 10, 35 and 96 of the Act. Entering contracts allowing foreign agents to deduct commissions at source without withholding-tax mechanisms was reckless and intended to deny the country revenue. The mix of commissions and expenses was immaterial; the taxpayer bore the burden of identifying which portions were expenses.
Whether the Commissioner's assessment was subject to certiorari and prohibition
The Commissioner acted within jurisdiction, observed natural justice, and did not contravene the law; the judicial review remedies were wrongly granted.
The audit outcome, assessment and demand letters disclosed no excess of jurisdiction or breach of law. The assessment was shared with the respondent, which commented through its letter of 29th June 2006, engaged tax experts Ernst & Young, and attended a meeting at Times Tower on 12th July 2006 where it was given an opportunity to state its position. Natural justice was therefore observed and certiorari and prohibition could not issue.
Legitimate expectation as a defence to withholding tax demand
Legitimate expectation cannot arise against clear provisions of the law and cannot shield a person from paying tax.
Following the Supreme Court in Communications Commission of Kenya v Royal Media Services, the court reiterated that legitimate expectation requires an express, clear and unambiguous promise by a public authority, a reasonable expectation, competence of the decision-maker to make the representation, and cannot exist against clear provisions of the law or the Constitution. The respondent's expectation that it would not be required to remit withholding tax could not override the express statutory obligation.
Applicable penalty and interest regime for failure to deduct or remit withholding tax
Rule 14A applies only from 1st July 2004; before that, section 72D (20% penalty) and section 94 (2% monthly interest, capped at 100% of principal) apply. The penalty for July 2004 to 2005 is 10% of the tax involved, capped at Kshs. 1,000,000.
Rule 14A, introduced by Legal Notice No. 54 effective 1st July 2004, is specific to penalties for failure to deduct or remit withholding tax under section 35(6) and prescribes 10% of the tax involved subject to a maximum of one million shillings. As the tax demanded related to 2000-2005, the pre-July 2004 period is governed by section 72D as amended by Act No. 8 of 1997, and section 94 provides late payment interest of 2% per month capped at 100% of the principal tax.
Whether judicial review now includes merit review
Recent jurisprudence under Article 47 and the Fair Administrative Action Act recognises an implicit shift toward merit review including proportionality, but the court still has no mandate to substitute its own decision for that of the administrative body.
Relying on Suchan Investment, Darasa Investments and Rentco East Africa, the court acknowledged that consideration of proportionality and unreasonableness under Article 47 of the Constitution read with the Fair Administrative Action Act has introduced aspects of merit review of administrative action. Even so, the court emphasized that the judicial review court may not substitute its own opinion for that of the authority, and turned to whether the Judge properly exercised his discretion.
Whether the court could consider the exemption of fruits and vegetables from taxation
No; an argument not presented to or determined by the court below cannot be taken note of on appeal.
The learned Judge had found that the point had been abandoned before him. On appeal, the appellants asked the court to express an opinion on it as a critical question, but the court declined, observing that it could not take note of an argument that was neither presented to nor determined by the court below. The court reserved its opinion on the point.
Legal principles established
#- The obligation to deduct and remit withholding tax on payments to non-resident persons without a permanent establishment in Kenya is mandatory and rests on the Kenyan entity, which must put in place mechanisms to ensure the tax is accounted for.
- Legitimate expectation cannot be relied upon to shield a person from paying tax; it operates only within the law.
- The Court of Appeal will only interfere with the exercise of judicial discretion in granting judicial review remedies if the Judge misdirected himself or was clearly wrong, occasioning injustice.
- Rule 14A of the Income Tax (Withholding Tax) Rules 2001, prescribing a penalty of 10% of the tax involved subject to a maximum of one million shillings, applies only from 1st July 2004; earlier periods are governed by section 72D (20% penalty) and section 94 (2% monthly late payment interest).
Court orders
#- 1.The appeal succeeds with costs to the appellants
- 2.The orders of certiorari and prohibition issued by the High Court are set aside in effect by allowing the appeal
- 3.The penalty for failure to deduct or remit withholding tax is adjusted to 10% of the amount of the tax involved, subject to a maximum penalty of Kshs. 1,000,000, for the period July, 2004 to 2005
- 4.The rate of interest on late payment remains that provided under section 94 of the Income Tax Act
- On appeal from
- High Court
- Judicial Review Misc. Civil Application No. 610 of 2008
- Jurisdiction invoked
- First appeal to the Court of Appeal against the judgment of the High Court in a judicial review application (Constitution and Court of Appeal jurisdiction; provision not expressly stated in the judgment)
Key timeline
#Practical implications
#Frequently asked questions
#Cite this brief
#Cite this brief
Caselaw, "Kenya Revenue Authority & another v Republic (Ex parte) Kenya Nut Company Limited [2020] KECA 764 (KLR)", Case Analysis (2020). Civil Appeal No. 58 of 2015. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/2020/764/eng@2020-04-24
Suggested citation format for research notes or client memos. Always verify the original judgment before relying on any point.