Imposition of VAT on exported services amounts to double imposition of VAT and is contrary to the neutral application of VAT in International Trade law.

Coca-Cola Central East and West Africa Limited v Commissioner of Domestic Taxes [2020] eKLR

Income Tax Appeal 19 of 2013

High Court at Nairobi

F. Tuiyott, J

November 23, 2020

Reported by Beryl Ikamari & George Kariuki

Tax Law – Value Added Tax (VAT) – impact (original or initial burden for the payment of  tax) and instance (the settlement of the tax burden on the ultimate tax payer)of VAT – tax evasion – tax minimization – the destination principle – whether was VAT levied at the point of consumption or at the point of use - Value Added Tax Act, (cap 476) (repealed), sections 2 and 32; OECD International Guidelines on Value Added Tax, regulation 20(1) (a); Value Added Tax Regulations, regulation 2.

Brief facts

The appellant, Coca-Cola Central East and West Africa (Coca Cola Africa), provided marketing and promotional services for all of Coca-Cola’s world famous brands. Coca-Cola Africa operated as a subsidiary of the parent company (which owned and controlled the Coca-Cola trademark) and was located in United States of America.

Coca-Cola and its subsidiaries manufactured and sold proprietary concentrates used to prepare Coca-Cola beverage products with one such subsidiary being Coca-Cola Export which manufactured concentrates in various locations around the world but not in Kenya. The concentrates were sold to authorized bottlers who purchased, imported and in turn used the concentrates in preparing and packaging beverage products that bore the Coca-Cola trademarks. Value Added Tax was in turn paid for the concentrates by the bottlers at the point of import.

The chief purpose of the marketing and promotional services was to maintain, increase and grow the image, value and importance of the brands. It enhanced and encouraged sales of Coca-Cola Export and its subsidiaries to the Bottlers.

Contention arose between Coca Cola Africa (appellant) and the Commissioner of Domestic Taxes (respondent) on the instance and impact of Value Added Tax on Coca- Cola products being advertised in Kenya but meant for foreign market consumption. On one hand, Coca-Cola Africa postulated that the benefit of the marketing and promotion services accrued outside Kenya and that therefore, it should be treated as ‘exported services’ as per provisions of the VAT Act (Cap 476) (repealed). On the other hand, the respondent put forward an argument that marketing and promotion services provided by Coca-Cola Africa were consumed locally as the target audience was Kenya and they therefore ought to be treated as services locally consumed in Kenya.

At the Tax Tribunal, it was held that the marketing and promotional services were heard, seen, enjoyed and perceived by persons and households resident in Kenya and therefore physically consumed in Kenya, thus leaving no place for an interpretation of section 2 of the VAT Act, cap 476 (repealed). Therefore, VAT ought to have been charged at point of consumption since the same was a destination-based tax levied on commercial activities on the consumer as opposed to a charge on the business.

Aggrieved by that finding, the appellants lodged an appeal at the Commercial and Tax Division of the High Court.

Issues

1. Whether the Kenyan Bottlers benefited directly from the promotional services carried out by Coca-Cola Africa on behalf of Coca-Cola Exporters;
2. Whether the business model adopted by Coca-Cola Export Corporation (Coca-Cola Export) resulted in the evasion or minimization of Value Added Tax (VAT) payable in Kenya;
3. What was the nexus between the marketing and promotional services provided by Coca-Cola Africa and the activities of the Kenyan Bottlers?

Held:

1. The target audience for Coca-Cola Africa’s promotional activities was the Kenyan public who were either existing or potential buyers of the Coca-Cola drinks. However, that did not out rightly make them the consumers of the promotional and marketing services.
2. A person became a user or consumer of Coca-Cola Africa’s services only when, at the instigation or encouragement of the services, he consumed the Coca-Cola products.
3. Persons who saw, enjoyed, heard, perceived or even enjoyed an advertisement but failed to act on it could not be said to have used or consumed the products.
4. A promotion or marketing activity did necessarily lead to a sale or consumption of the promoted or marketed product.  Consumption of the soft drink therefore ought not to have been confused with consumption of the promotional and marketing services.
5. “Consumption” was defined as the act of destroying a thing by using it or the use of a thing in a way that exhausted it.
6. The marketing and promotional agreement entered into between Coca-Cola Africa and Coca-Cola Exporters was to increase brand awareness resulting in increased consumption of Coca-Cola soft drinks which translated to increased sales and profits for Coca-Cola Exporters.
7. The marketing and promotional services were not provided so that members of the target audience could merely hear, see, enjoy, feel or perceive them. They were not provided for the sake of it but in the hope that it would trigger a purchase or a desire to purchase a Coca-Cola product.
8. For VAT purposes, the final consumer of the Coca-Cola drink was the consumer of the marketing and promotional services. In that regard, Coca-Cola Africa supplied the marketing and promotional services to Coca-Cola Export at a fee by the latter.
9. Coca-Cola Africa did not receive any compensation for the performance of the promotional services from local independent bottlers who were the consumers of the services.
10. The Bottlers, whilst not paying for the promotional services, were a major beneficiary of the marketing and promotional services as it could lead to an increase in sales of the Coca-Cola brands. That was in line with an objective listed in the agreement which was to seek an increase in brand awareness resulting in increased consumption of Coca-Cola soft drinks.
11. No evidence was put forward to debunk Coca-Cola Africa’s own admission that the mandate of marketing and promotion of the Coca-Cola brand in Kenya was very substantially, if not solely, its own. If Coca-Cola Africa did not provide marketing and promotional services, then the bottlers would have to undertake them. Payment for those marketing and promotional services would have attracted VAT in Kenya and that would have been passed to the final consumer.
12.  The Commissioner failed to prove that that there was a leak in tax from Kenya and further that the business arrangement entered into led to unintentional non-taxation given that no tax similar to VAT was imposed on the services in the State where Coca-Cola Export was domiciled.
13.  The business model adopted by Coca-Coca Africa and Coca-Cola Exporters did not therefore lead to an avoidance or minimization of VAT.

Orders:-

1. The Appeal was allowed.
2. The decision of the VAT Tribunal dated 26^th November 2013 was departed from and set aside. 
3. Costs of the application were awarded to the appellant.