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Google Kenya Limited v Commissioner of Domestic Taxes (Tribunal Appeal 476 of 2020) [2023] KETAT 118 (KLR) (17 March 2023) (Judgment)
Neutral citation:
[2023] KETAT 118 (KLR)
Republic of Kenya
Tribunal Appeal 476 of 2020
E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, Jephthah Njagi & A.K Kiprotich, Members
March 17, 2023
Between
Google Kenya Limited
Appellant
and
Commissioner of Domestic Taxes
Respondent
Judgment
Background
1.The Appellant is a limited liability company incorporated under the Kenyan Companies Act. Its principal activity is the provision of marketing services to Google Ireland, a company based in Ireland as well as providing research and development (R&D) services to Google LLC, a company based in the United States of America.
2.The Respondent is a principal officer appointed pursuant to Section 13 of the Kenya Revenue Authority Act, (Cap. 469 of the Laws of Kenya) ("KRA Act") and the Kenya Revenue Authority is empowered to enforce and administer provisions of tax laws as set out in Section 5 as read together with the First Schedule of the KRA Act, among them, the Value Added Taxes Act (No. 35 of 2013).
3.On 24th October 2017, the Appellant lodged a Value Added Tax (''VAT") refund claim relating to the periods October 2016 to September 2017 amounting to Kshs. 65,402,764.00.
4.On 28th May 2020 the Appellant received an iTax notification informing it that the refund claim had been rejected.
5.The Appellant through its tax agents, PricewaterhouseCoopers Limited, reached out to the Respondent seeking for clarification on the basis for the rejection of VAT refund claim relating to the periods October 2016 to September 2017.
6.The Respondent notified the Appellant that the VAT refund claims had been erroneously rejected as a result of the iTax system configuration.
7.The Respondent advised the Appellant to resubmit its application for the VAT refund claims on the iTax system for re-consideration.
8.Since the twelve-months statutory period set out in law within which to apply for VAT refunds had already lapsed, the Appellant opted to issue a notice of objection dated 25th June 2020 challenging the rejection of the VAT refund claim for the periods October 2016 to September 2017.
9.The Respondent issued its response to the Appellant's notice of objection via an email dated 2nd September 2020, reiterating its earlier position that the refund claim rejection had been as a result of an iTax system issue and the same did not amount to a refund decision that could be objected to.
10.Aggrieved by the decision of the Respondent, the Appellant filed a Notice of Appeal on 1st October 2020.
The Appeal
11.The Appeal is premised on the following grounds as stated in the Memorandum of Appeal dated 14th October 2020 and filed on the same date:-a.That the Respondent erred in law and fact by rejecting the Appellant's refund claims application without following due procedure as envisaged in law;b.That the Appellant's objection dated 25th June 2020 having been responded to on 2nd September 2020 is allowed in law by effluxion of time;c.That the Appellant's supplies to its non-resident affiliates amount to supply of exported services for use and consumption outside Kenya and are therefore subject to VAT at the zero rate;d.That the Appellant is entitled to receipt of cash refunds amounting to Kshs. 65,402,764.00 being refund of excess input tax arising from making of zero-rated supplies during the period October 2016 to September 2017; ande.That the Appellant is entitled to late payment interest at the rate of 1% per month due to Respondent's failure to process refunds within the statutory timelines.
Appellant’s Case
12.The Appellant’s case is premised on the Appellant’s Statement of Facts dated 14th October 2022 and filed on the same date together with the documents attached thereto and the Appellant’s written submissions dated 8th September, 2022 and filed on 9th September, 2022.
13.That on 24th October 2017, the Appellant lodged a Value Added Tax (''VAT") refund claim relating to the periods October 2016 to September 2017 amounting to Ksh.65,402,764.00. That the refund claims related to excess credits arising from making supplies taxable at the rate of 0% (zero rated supplies). As a result of offering these services to Google Ireland and Google LLC, both of whom are not resident in Kenya, the Appellant has consistently been in a VAT receivable position.
14.That on 28th May 2020 the Appellant received an iTax notification informing it that its refund claim had been rejected.
15.That the Respondent neither reached out to the Appellant to verify the VAT credits nor requested for any information pertaining to the refund sought by the Appellant. That the Appellant was, therefore, astonished when the Respondent proceeded to reject its VAT refund application without engaging the Appellant nor seeking to understand the basis of the refund application.
16.That having noted that the Respondent neither conducted a refund audit nor issued any reasons for the rejection of the refund application, the Appellant through its tax agents, PricewaterhouseCoopers Limited, reached out to the Respondent for clarity vide an email dated 4th June 2020. That in the said email, the Appellant sought to understand the basis for rejection of its VAT refund claim relating to the periods October 2016 to September 2017.
17.That following the email request, the Respondent notified the Appellant that the VAT refund claims had been erroneously rejected as a result of the iTax system configuration to reject all refund claims for tax periods affected by assessments issued by the Respondent as was the case with some of the periods covered the Appellant's refund application.
18.That the Respondent advised the Appellant to resubmit its application for the VAT refund claims on iTax for re-consideration by the Respondent. That this was inspite of the fact that the twelve-months statutory period set out in law within which to apply for VAT refunds had already lapsed.
19.That the Appellant being keen to safeguard its legal rights, pursuant to the provisions of Section 51 (2) of the Tax Procedures Act, 2015 proceeded to issue a notice of objection dated 25th June 2020 challenging the rejection of the VAT refund claim for the periods October 2016 to September 2017 amounting to Ksh.65,402,764.00 that had been validly lodged.
20.That the Respondent issued its response to the Appellant's notice of objection via an email dated 2nd September 2020, reiterating its earlier position that the refund claim rejection had been as a result of an iTax system issue and the same did not amount to a refund decision that could be objected to.
21.That through email correspondence, the Respondent further reiterated its earlier stance that the Appellant was at liberty to resubmit its VAT refund application for re-consideration by the Respondent.
22.That it is noteworthy that whilst the Respondent's refund team had indicated that the rejection of the Appellant's refund claim had been as a result of an iTax system error, the Respondent's audit team had issued an output VAT assessment covering amongst others the periods October 2016 to September 2017 (the same period covered by the Appellant's refund claim). That in the said VAT assessment, the Respondent's audit team asserted that the supplies made by the Appellant were not exported supplies and that the same were taxable at the standard rate of sixteen per cent (16%). That the Appellant objected to the said assessment in its entirety and is currently awaiting the decision of the Respondent.
23.That given that the Respondent's audit team had already reached a position to reject the treatment of the Appellant's supplies as being zero rated, which by default implied the Respondent had reached a conclusion that the Appellant was not eligible for VAT refunds, the Appellant preferred an appeal at the Tribunal against the decision received by it on 2nd September 2020.
24.That based on the five grounds of appeal, the Appellant presents its case as follows:-
a. The Respondent erred in law and fact by rejecting the Appellant's refund claims application without following due procedure.
25.The Appellant avers that the Respondent did not furnish it with reasons for the rejection of its VAT refund claims nor any audit findings to support the rejection of the VAT refund application. The Appellant submits that it only became aware of the rejection of the VAT refund claim via an iTax notification.
26.That Section 49 of the Tax Procedures Act provides that:
27.That from the foregoing, it is the Appellant's submission that the Respondent erred by failing to provide it with clear statement of reasons for the refusal, thus limiting the Appellant's ability to decide on its next course of action.
28.That further, by failing to provide it with a statement of reasons for the rejection, the Respondent violated the Appellant's Constitutional right to fair administrative action under Article 47 (1) and (2) of the Constitution of Kenya, 2010 and Sections 4 and 6 of the Fair Administrative Action Act, 2015.
29.That the principle of fair administrative action requires that if a right or fundamental freedom of a person has been or is likely to be adversely affected by administrative action, the person has the right to be given written reasons for the action.
30.That the High Court in the case of Sceneries Limited vs. National Land Commission [2017] eKLR, Misc. Constitutional Application No.1 of 2016 emphasized that the right to be heard involves provision of sufficient information, at least that which the administrative body relied upon in making the decision, the Court stated that:
31.The Appellant submitted that failing to provide detailed reasons for rejection of its VAT refund application amounts to an incurable defect in the Respondent's decision. To this end, the Appellant submitted that the Respondent's rejection of the refund application lacks legal merit and is against the provisions of Article 47 of the Constitution of Kenya.
32.That based on the above, it is the Appellant's request that this Tribunal finds the Respondent's refund decision to be invalid and annul it in its entirety.
b. The Appellant's objection dated 25th June 2020 having been responded to by the Respondent on 2nd September 2020 is allowed in law by effluxion of time.
33.The Appellant submitted that having submitted its notice of objection on 25th June 2020, the Respondent issued its response to the said notice on 2nd September 2020, which was beyond the 60 days statutory timeline.
34.That the provisions of Section 51 of the Tax Procedures Act provide that a person who wishes to dispute a tax decision shall first lodge an objection against that tax decision. The objection must be lodged within thirty (30) days of the taxpayer being notified of the tax decision.
35.The Appellant submitted that its notice of objection was validly lodged as required under the provisions of Section 51 of the TPA as follows:a.The notice of objection was lodged within thirty (30) days from the date of the assessment;b.The objection stated the grounds of objection and the actions required from the Respondent; andc.All the relevant documents relating to the objection were submitted.
36.That upon submission of a valid notice of objection by the Appellant, the Respondent was allowed a statutory time limit to issue an objection decision failure to which the objection is allowed. That Section 51(8) of the Tax Procedures Act provides as follows:
37.That the Respondent has sixty (60) days within which to make the objection decision as provided under the provisions of Section 51 (11) of the TPA which states that:
38.The Appellant avers that the word "shall" when used in statutory provisions is a command, it is not permissive, it is mandatory. That therefore, due to the Respondent's failure to issue an objection decision within sixty (60) days from 25th June 2020, the Appellant's objection stood allowed. However, on 2nd September 2020, the Respondent, contrary to the provisions of the Tax Procedures Act proceeded to issue an objection decision vide email to the Appellant.
39.The Appellant avers that it had a legitimate expectation that the objection was allowed when the Respondent failed to issue an objection decision within the sixty (60) days' timeline provided in law. That the legitimate expectation arises where a member of the public, as a result of a promise or other conduct of an administrative body expects that he will be treated in one way and the administrative body thereafter reneges and wishes to treat him in a different way.
40.That the conduct of the Respondent to issue a decision past the legally stipulated timeline contravenes basic canons of taxation including certainty, consistency and predictability. That in any sphere of public law, these ideals and values must be protected against whimsical and capricious violation by the public authorities. Failure to adhere to these values results in unfairness.
41.That based on the foregoing, the Appellant reiterates that the Respondent should be stopped from reneging on its decision to allow the Appellant's objection as this goes against the doctrine of legitimate expectation and demonstrates an abuse of power by the Respondent.
c. The Appellant's supplies to its non-resident affiliates amount to supply of exported services for use and consumption outside Kenya and are therefore subject to VAT at the zero rate
42.The Appellant submitted that the R&D and marketing services supplied to its affiliate companies; Google LLC and Google Ireland respectively, qualify as exported services subject to VAT at the rate of zero percent.
43.The Appellant submitted that the services rendered are used by Google Ireland and Google LLC (both being non-resident entities), outside Kenya to inform their marketing strategies, to inform content design and development for sub-Saharan Africa, for strategic analysis of potential customers and for the ultimate benefit of enhanced sales in sub-Saharan Africa.
44.That Part A of the Second Schedule to the VAT Act, 2013, provides for zero rating of "the exportation of ...taxable services". Further, Section 2 to the VAT Act, 2013 defines services exported out of Kenya to mean
45.Separately, in accordance with the provisions of Section 17 (5) to the VAT Act, 2013 a registered person who has excess input tax arising from the making of zero-rated supplies is entitled to a cash refund of the excess VAT by the Respondent.
46.The Appellant submitted that the determination of whether or not it is entitled to the VAT refunds sought is pegged to ascertaining that indeed the Appellant's supplies are zero-rated. The Appellant submitted that the above can only be sufficiently substantiated by determining the following issues:i.Who is a consumer for purposes of exported services and how is the consumer to be ascertained?ii.What is the test in establishing whether services are exported or not: Is it the place of performance of the services, the location of the payer or the location of the consumer?iii.Having established who, the consumer is and the test for ascertaining whether the services are exported or not, which jurisdiction reserves the taxing rights in relation to exported services?
i. Who is a consumer for purposes of exported services?
47.The Appellant submitted that in order to determine the place of use or consumption of its services and hence the jurisdiction with the taxing rights, there is a need to determine who is the consumer of the R&D and marketing services.
48.The Appellant submits that the Kenyan VAT legislation does not provide guidance on how to determine the place of 'use' or 'consumption' of exported services or the consumer of the exported services. In the absence of such guidance the Appellant avers that it is important that the Respondent and taxpayers rely on decided case laws as well as international best practice for guidance.
49.That in a recent ruling by the Tribunal in the case of LG Electronics Africa Logistics FZE Kenya Branch vs. The Commissioner of Domestic Taxes (Tax Appeal No. 359 of 2018), where the local LG company had provided marketing and advertising services to its Head Office in Dubai, the Tribunal ruled that:
50.That in another TAT ruling in the case of Coca Cola Central East and West Africa Ltd. vs. Commissioner of Domestic Taxes (Tax Appeal No. 8 of 2018) delivered on 31 March 2020, the Tribunal stated that:
51.That the Tribunal went ahead to rule that the benefits of the said services accrues to Coca Cola Export, a company domiciled and incorporated in the United States of America. That the Tribunal acknowledged that according to the service agreement, Coca Cola Export, was the recipient of the marketing and promotion services and that the Kenyan public is a third party in so far as the service agreement is concerned.
52.That the above cases are similar in nature to the Appellant's operations in that, the Appellant also offers R&D, marketing services to its non-resident affiliates, Google LLC and Google Ireland.
53.The Appellant submitted that the service agreements in respect of these supplies, are between itself and Google LLC and Google Ireland who are the ultimate consumers of the R&D and marketing services rendered.
54.That this argument is further buttressed by the High Court of Kenya ("the Court") ruling, in the case of Commissioner of Domestic Taxes vs. Total Touch Cargo Holland (Income Tax Appeal no. 17 of 2013). In this case, the Court held that contractual relations are to be ascertained by having due regard to existing service contracts.
55.That further reliance was placed on the Organization for Economic Co-operation and Development ("OECD") VAT/GST Guideline 3.3 which provides that the identity of the customer with · regards to supply of services is to be determined by reference to the business agreement and other general correspondence, invoices, payment instruments and receipts exchanged between the parties.
56.The Appellant submitted that the ultimate beneficiaries of the services performed by the Appellant are its two non-resident affiliates.
57.That having duly established in the foregoing provisions that the consumer is to be ascertained in reference to the business agreement, the Appellant submitted that the key consideration in establishing whether indeed services are exported is not by reference to the place of performance of the services but rather the jurisdiction of the consumer.
58.That this is in accordance with the provisions of Section 2 of the VAT Act which provides that the key test in determining exportation of services is the place of 'use or consumption' of the services.
59.That the Appellant takes cognizance of the provisions of Regulation 13 (2) of the VAT regulations, 2017 which provides that the documentation proof for an exportation shall be:
60.The Appellant submitted that the copies of invoices as well as the proof of payment for the services rendered by the Appellant clearly demonstrate that the services are supplied to Google LLC and Google Ireland whose location is outside Kenya.
61.That paragraph 3.53 of the OECD GST/VAT guidelines provides that:
62.That in the case of Coca Cola Central East and West Africa LTD vs Commissioner of Domestic Taxes (Tax Appeal No. 8 of 2018), the Tribunal ruled that:
63.That the same position was also held by the Courts in the case of Commissioner of Domestic Taxes versus Total Touch Cargo Holland (Income Tax Appeal no. 17 of 2013) and the Tribunal, in the case of P.H. Services Kenya Limited vs Commissioner of Domestic Taxes (Appeal No. 6 of 2012) where it was held that the material test of exportation of services is not the place of performance of the service rather where the use or consumption of the service takes place.
64.The Appellant submitted that the place of performance of the services is not important in determining whether services have been exported or not, of importance is the place of use or consumption of the services, which has already been determined to be the jurisdiction of the consumer of the services. As such, the Appellant submits that services can be exported regardless of whether they are performed in Kenya or not. Having established the consumer and the test for ascertaining whether the services are exported or not, who reserves the taxing rights in relation to exported services?
65.That Paragraph I of the Second Schedule to the VAT Act, 2013 provides that services exported out of Kenya shall be taxable at the rate of zero percent.
66.That in observing the principle of neutrality, the OECD has developed International VAT/GST guidelines that act as a guide to determine the country with taxing rights over internationally traded services. These guidelines adopt the 'destination principle and provide that, as a general rule, the country with taxing rights over internationally traded services should be the country of the customer's location. Paragraph 1 of the Second Schedule to the VAT Act is in consonance to this destination principle.
67.That this position was upheld by the Tribunal in the case LG Electronics Africa Logistics FZE Kenya Branch vs. The Commissioner of Domestic Taxes (Tax Appeal No. 359 of 2018), where the Tribunal ruled that:
68.That likewise, in the case of Coca Cola Central East and West Africa Ltd vs. Commissioner of Domestic Taxes (Tax Appeal No.8 of 2018) the Tribunal having determined that the consumer of the marketing and promotion services was Coca Cola Export, a company incorporated and domiciled in the United States of America, ruled that in accordance with the destination principle, the United States of America is the jurisdiction that had the taxing rights.
69.That the above position was further reiterated by the High Court in the case of Panalpina Airflo Limited vs. Commissioner of Domestic Taxes [2019] eKLR when the Court inter alia held that the taxing rights in relation to VAT on cross border supply of services are vested in the jurisdiction of the final consumer.
70.The Appellant submitted that the jurisdictions with the taxing rights in relation to its services are the United States of America and Ireland respectively,
71.The Appellant submitted that the services provided were used and consumed outside Kenya by its affiliate companies thus amounting to a supply of exported services subject to VAT at the rate of zero percent.
d. The Appellant is entitled to receipt of cash refunds amounting to KES 65,402,764 being refund of excess input tax arising from making of zero-rated supplies.
72.The Appellant submitted that Section 17 (5) to the VAT Act, 2013, entitles a registered person who has excess input tax arising from the making of zero-rated supplies to a refund of the excess VAT.
73.That having established above that the Appellant makes zero rated exported supplies and having validly lodged the refund claim applications in compliance with the enabling provisions, the Appellant is entitled to a refund of these excess input tax.
74.That accordingly, the Respondent has erred in law and fact by rejecting the refund application for the period October 2016 to September 2017 amounting to Ksh.65,402,764.00.
75.The Appellant submitted that the excess input tax amounting to Ksh.65,402,764.00. for the period October 2016 to September 2017 is due and payable as cash refunds.
e. The Appellant is entitled to late payment interest at the rate of 1% per month for failure by the Respondent to process its refunds within the two years statutory timeline.
76.The Appellant averred that in accordance with the provisions of Section 47 (5) of the Tax Procedures Act:
77.The Appellant submitted that in addition to payment of the refund of Kshs. 65,402,764.00 the Respondent is required in accordance with the law to pay it interest at the rate of 1% per month for each period beyond the stipulated statutory timeline of two years.
78.In its submissions, the Appellant, indicated that there are three (3) issues for determination by The Tribunal as follows:-a.Whether marketing support services rendered by the Appellant to Google Ireland qualify as exported services taxable at 0%;b.Whether research and development services rendered by the Appellant to Google LLC. qualify as exported services taxable at 0%; andc.Notwithstanding and without prejudice to the foregoing, if penalties and interest based on an erroneous assessment are merited in law.
a. Whether marketing support services rendered by the Appellant to Google Ireland qualify as exported services taxable at 0%.
79.That in rejecting the VAT refund claims, the Respondent averred that the marketing and customer support services rendered by Google Kenya "...are consumed by audience in Kenya who hear the advertisements, read the translations and watch the demonstrations conducted by Google". The Respondent further argued Google Ireland was a payer of the service and not a consumer.
80.The Appellant refuted the above assertions by the Respondent and submitted that the consumer of the marketing services is Google Ireland with the place of consumption of these services being Ireland. In order to substantiate its submissions, the Appellant raised the following issue.
81.The Appellant placed reliance on the Organization for Economic Co-operation and Development ("OECD") VAT/GST Guideline 3.3 which provides;
82.The Appellant also relied on the decision in LG Electronic Africa Logistics FZE Kenya Branch vs. The Commissioner of Domestic Taxes (Tax Appeal No. 359 of 2018), where the local LG company had provided marketing and advertising services to its Head Office in Dubai, the Tribunal ruled that:
83.That the above case is similar in nature to the Appellant's operations in that, the Appellant also offers marketing support services to its non-resident affiliate Google Ireland pursuant to a marketing agreement entered into between Google Ireland and the Appellant. The Appellant submits that there is no nexus between the marketing services rendered and any subsequent Google suite of products purchased by Kenyan consumers from Google Ireland.
84.The Appellant submitted that the Marketing and Services agreement in respect of the supply of marketing support services is between itself and Google Ireland Limited and Google Ireland is the ultimate consumer of the marketing support services rendered.
85.The Appellant further submitted that the ultimate beneficiary of the market support services performed by it is Google Ireland.
Where is the place of consumption?
86.The Appellant submitted that Guideline 3.2. of the OCED VAT/GST guidelines provides that for business-to-business supplies, the "jurisdiction of consumption" is the jurisdiction in which the consumer is located. This is the jurisdiction that has the taxing rights over the internationally traded services.
87.That the court in line with the abovementioned guideline in Coca-Cola Central East and West Africa Limited v Commissioner of Domestic Taxes [2020] eKLR stated that
How to determine the place of consumption
88.The Appellant submitted that as per Paragraph 3.53 of the OECD VAT/GST guidelines:
89.The Appellant submitted that the determination of the place of consumption of services and hence the jurisdiction with the taxing rights flows from determination of who the consumer is with regards to the marketing support services.
90.The Appellant relied on the case of Panalpina Airflo Limited v Commissioner of Domestic Taxes [2019] eKLR, where the Court, inter alia, held that the taxing rights in relation to VAT on cross border supply of services are vested in the jurisdiction of the final consumer. That in making its finding, the High Court reiterated the Tax Appeals Tribunal finding in the case of Coca Cola Central East and West Africa LTD vs Commissioner of Domestic Taxes [Tax Appeal No. 8 of 2018] where the Tribunal having determined that the consumer of the marketing and promotion services was Coca Cola Export, a company incorporated and domiciled in the United States of America, ruled that in accordance with the destination principle, the United States of America was the jurisdiction with the taxing rights.
91.The Appellant submitted that the location of the consumer as identified in the business agreement between the parties is considered as the place that the service was consumed.
92.That as demonstrated by the Appellant, the consumer of the services is Google Ireland, a company located in the Republic of Ireland and therefore this is the location of such consumption and not Kenya as alleged by the Respondent.
93.That similarly, the Tribunal in 3M Kenya Limited versus Kenya Revenue Authority (Appeal No. 30 of 2016) having found that 3M Gulf Ltd and 3M South Africa, both being located outside Kenya, were the consumers of marketing services of 3M Kenya Limited held that based on the OECD guidelines in respect to business services, the general rule is that the jurisdiction where the customer is located has the taxing rights over services. The court in the same case also found that the marketing services offered to 3M Gulf Ltd and 3M South Africa were export services and therefore zero rated for VAT.
94.The Appellant drew parallels between the 3M Kenya Limited case and its own operations. The Appellant submitted that its marketing services are similar to the nature of those provided by 3M Kenya Limited in the aforementioned case and therefore, its marketing services to Google Ireland are export services and the jurisdiction with the taxing rights in relation to its services is Ireland.
95.The Appellant submitted that the Respondent erred in law and fact by imposing VAT at the standard rate (16%) on exported services it rendered to Google Ireland, a non•resident entity for the period October 2015 to September 2016. As such the additional VAT assessments totaling to Kshs. 65,402,764.00 should be vacated forthwith for lack of a basis in law and the refund claims as lodged by the Appellant paid.
96.That the Tribunal rendered Judgment in TAT Appeal No. 120 of 2017 on 20th November 2020 which appeal was between the same parties and the issues that arose for determination in that appeal were also similar to those arising for determination in the present case. The facts of that earlier appeal were also similar to those in the present case, albeit the period for which refund was claimed by the Appellants was different.
97.That in its decision of 20th November 2020, the Tribunal on the one hand agreed with the Appellant that R&D services are indeed exported services hence subject to VAT tax at zero-rate while on the other hand held that marketing services rendered by the Appellant to Google Ireland are services consumed locally hence subject to VAT at the standard rate of 16%.
98.That the Tribunal’s decision was appealed by both parties with the Appellant being aggrieved by the decision to the extent that the Tribunal had held that marketing services to Google Ireland were not exported services, while the Respondent was aggrieved by the decision to the extent that the Tribunal had held that R&D services were exported services. The High Court in the appeal case was tasked to determine whether the marketing support services, and the R&D services rendered by Google Kenya to Google Ireland and Google LLC. respectively were export services.
99.That in its decision issued on 27th May 2022, the High Court found that, as regards the marketing support services, the TAT made an error in finding that the place for consumption was in Kenya, yet its analysis of facts. it had determined that Google Ireland was the consumer of the services and further made an error in finding that the place of consumption was in Kenya contrary to Guideline 3.2. of the OCED VAT/GST guidelines which provides that for business-to-business supplies, the "jurisdiction of consumption" is the jurisdiction in which the consumer is located.
100.That consequently, the High Court determined that having found that the consumer of the marketing support services rendered was Google Ireland, the place of consumption under the OECD Guidelines hereinabove highlighted by the Appellant ought to have been Ireland, which is the location of the consumer. That this position is buttressed by the decision of the High Court in the case of Coca-Cola Central East and West Africa Limited vs. Commissioner of Domestic Taxes [2020] eKLR.
101.The Appellant further submitted that as regards the R&D services rendered to Google LLC., the High Court agreed with the TAT which had found that the services were consumed by Google LLC., a company based outside Kenya and therefore, these services qualified as export services.
102.That given that the facts and the issues that were before the High Court for determination in the earlier case are similar to those in this case, and in appreciationof the doctrine of stare decisis, the Appellant urged the Tribunal to be guided by the said decision of the High Court issued on 27th May 2022 and hold that that the marketing support services and R&D services rendered by Google Kenya to Google Ireland and Google LLC. in the present case are export services taxable at zero rate.
b. Whether research and development services rendered to Google LLC qualify as exported services which are taxable at 0%
103.he Respondent avers that the Appellant's research and development services target persons within the Kenyan territory thereby making the Kenyan locals the final consumers of these R&D services as provided by the Appellant.
104.That submitted above, Paragraph 3.53 of the OECD VAT/ GST Guidelines provides that a customer of a service is to be inferred by reference to the business agreement. It provides as follows;
105.The Appellant submitted that the Research and Development services agreement was between it and Google LLC. and the research and development services rendered by it to Google LLC. were to improve Google LLC’s products.
106.That it then follows that the consumer for the purposes of the Research and Development services agreement could only be Google LLC.
107.The Appellant submitted that a consumer of the services is the person who is contracted to benefit from the services. In this case, since Google LLC. is contracted to benefit from the services, then it is the consumer of the R&D services.
108.That paragraph 1.12 of the OECD VAT/GST Guidelines provides that due to the widespread acceptance on the application of the destination principle to international trade, most of the rules currently in force provide for taxation of supplies of goods and services in the jurisdiction where consumption takes place.
109.The Appellant submitted that since the consumer, Google LLC., is located outside Kenya and the place of consumption of these services is outside Kenya, the taxing rights over its R&D services are in the consumers' tax jurisdiction.
110.The Appellant further submitted that just as Google Ireland and Google LLC. are Google Kenya's customers using and consuming the marketing and R&D exported services offshore, in the same vein or similarly all Kenyan- based customers who purchase Google suite of products are offshore consumers of services from Google Ireland and Google LLC.'s with Kenya having the taxing rights resulting from the purchase of Google's products. That to this end, Google Ireland and Google LLC. are registered and account for VAT in Kenya under the VAT Digital Marketplace Supply Regulations, 2020.
111.The Appellant submitted that the research and development services rendered to Google LLC. qualify as exported services which are taxable at 0%. The Respondent's tax assessment relating to R&D services is thus erroneous and lacks any legal basis.
c. Notwithstanding and without prejudice to the foregoing, penalties and interest based on an erroneous assessment are merit in law.
112.The Appellant submitted that all marketing and R&D services rendered are exported services taxable at 0% and therefore the issue of an assessment should not arise in the first place.
113.That the Respondent has sought to charge a tax shortfall penalty at the rate of 5% on the alleged principal VAT due from subjecting the Appellant's zero-rated sales to VAT at the prevailing applicable VAT rates. That the Respondent also imposed a late payment interest at the rate of 1% per month on the outstanding VAT it alleged to be due.
114.The Appellant submitted that the sales made to its non-resident affiliate entities have been exported from Kenya to the U.S.A and Ireland, being the location of consumption and hence taxable at 0%.
115.The Appellant submitted that no principal VAT is due and payable and that the additional VAT assessment raised by the Respondent is erroneous and devoid of any legal merit. Accordingly, the tax shortfall penalty and the attendant late payment interest imposed by the Respondent should be vacated.
Appellant’s Prayers
116.The Appellant makes the following prayers to the Tribunal:-a.This Appeal be allowed;b.The Respondent processes and pays refund claims amounting to Kshs. 65,402,764,00 being refund of excess input tax arising from making of zero-rated supplies;c.The Appellant is entitled to late payment interest at the rate of 1% per month for the delay occasioned by the Respondent in processing its refunds beyond the two-year statutory timeline.d.The costs of and incidental to this Appeal be awarded to the Appellant; ande.Any other orders that the Tribunal may deem fit.
Respondent’s Case
117.The Respondent’s case is premised on the hereunder filed documents:-a.The Respondent’s Statement of Facts dated and filed on 17th December 2020 together with the documents attached thereto.b.The Respondent’s written submissions dated 9th September 2022 and filed on 10th September 2022.
118.In the Statement of Facts, the Respondent stated that the Appellant declared sales to two clients only namely Google Ireland and Google USA. These sales were declared as exported/ zero rated.
119.That further, the Appellant claimed input VAT for purchases made locally. With time, the input VAT claimed accumulated.
120.That for the period October 2016 to September 2017, the Appellant had accumulated credits amounting to Kshs 65,402,764.00.
121.That the Appellant applied for a refund claim on 24th October 2017 requesting to be refunded Kshs 65,402,764.00 being accumulated input VAT for the period October 2016 to September 2017.
122.That on 28th May 2020, there were adjustments on the Appellant's ledger reversing the refund claim, and reinstating the input VAT credit for the period October 2016 to September 2017.
123.That the Appellant treated these adjustments on the ledger as a refund decision and went ahead to lodge a notice of objection.
124.That the ledger adjustments were auto generated by iTax and was not a refund decision. That these adjustments had the effect of reversing the refund claim and reinstating the VAT credits as initially positioned on the ledger.
125.That since the adjustments were not out of refund decision, the Respondent could handle the matter in accordance with Section 51 of the Tax Procedures Act.
126.That on 2nd September 2020, the Respondent advised the Appellant of the same and informed it that the adjusted credit was still available for utilization.
127.The Respondent submitted that the Appellant has another matter at the Tribunal pending determination, premised on the same facts, but for a different period.
128.That subsequently, additional assessments were issued for different periods and refund decisions made rejecting claims made for other period.
129.That the Respondent held several meetings with the Appellant on the issues in dispute. That parties agreed that the issues be consolidated, since they are similar so that uniform decisions can be issued for matters falling under Section 51 Tax Procedures Act. That parties are still in negotiations on this dispute.
130.That the Respondent averred that the Appellant's allegations underground 1 of the Appeal are erroneous since the adjustments were system based and in accordance with the law.
131.That the Appellants' allegations underground 1 of the Memorandum of Appeal are erroneous because the adjustment in the system did not amount to a refund decision to be responded to by parties in accordance with section 51 of the Tax Procedures Act.
132.That the Respondent averred that the Appellant's objection was therefore premature and invalid in view of the fact that there was no decision to be responded to in accordance with section 51 of the Tax Procedures Act.
133.That in response to ground 2 of the Memorandum of Appeal, the Respondent stated that parties having agreed to consolidation of the issue subject to this dispute together with other issues between the same parties, then such a ground is overtaken by events and the Appellant is estopped from raising such a ground.
134.That in response ground c, d and e of the Appellant's ground of Appeal, the Respondent avers that in view of the fact that there was no refund decision to be acted upon by the Respondent under Section 51 of the Tax Procedures Act, and in view of the fact that parties are in discussion, then this ground is premature at this stage.
135.That the allegations of the Appellant as laid out in its Memorandum of Appeal and Statement of Facts unless where in agreement by the Respondent are unfounded in law and not supported by evidence.
136.The Respondent submitted that the main issue for the Tribunal's consideration and determination is whether or not the Appellant's appeal has merit and whether it is premature at this stage.
137.The Respondent submitted that the ledger adjustments do not amount to a refund decision and the Appellant ought to reapply for refund while adhering to the process.
138.That it was the Appellant's contention that the Respondent erred by rejecting the Appellant's refund claims application without following due procedure as envisaged in law. In response to this allegation, the Respondent submitted that the adjustments on the ledger were auto generated on iTax and resulted in creation of Credit Adjustment Vouchers.
139.That based on this auto generated adjustment, the Appellant proceeded to submit its notice of objection on 25th June 2020 which it claims to be validly lodged and in conformity to Section 51 of the Tax Procedures Act
140.That the said Section provides as follows;
141.The Respondent submitted that the auto generated ledger adjustment is not a tax decision as cited by Section 51 of the TPA. That therefore, despite the Appellant adhering to the statutory timelines of thirty (30) days as claimed, their objection was not one directed at a tax decision but rather their objection was to an auto generated adjustment.
142.That the Respondent did not take the same into consideration since there was no tax decision issued and the Appellant has not proved the same.
143.The Respondent relied on Section 2 of the Tax Procedures Act which gives a definition of what amounts to a tax decision. It is stated that;
144.That further, Section 2 gives a definition of what amounts to a refund decision. It is provided that;
145.That Section 47(3) of the Tax Procedure Act thus provides;
146.That based on the foregoing, the adjustment in the system did not amount to a refund decision since it was not issued in writing by the Respondent and therefore there was no need of issuing a notice of objection in accordance with Section 51 of the Tax Procedures Act.
147.That it is for this very reason that the Respondent correctly explained to the Appellant on the steps to take in its email dated 2nd September 2020. The Respondent submitted that the said communication of 2nd September 2020 was clear on the taxpayer's recourse under the law and nothing prevented the Appellant from being guided by the said communication.
148.The Respondent further submitted that it must be noted that the said email was not the only email exchanged between parties. The parties had previously communicated with a view of resolving the dispute and continued to do so well after the said email of 2nd September 2020.
149.That the Appellant further argued that upon issuance of the objection, the Respondent failed to adhere to the statutory timelines envisaged in the Tax Procedures Act, Section 51(I I) which provides that;
150.That contrary to this contention, it is the Respondent’s submission that there was no valid objection that required an objection decision.
151.Further, the Respondent places reliance on Section 51(8) of the Tax Procedures Act which requires the Respondent to issue an objection decision only where a valid Objection has been issued by a Taxpayer. The said section provides;
152.That in this instance, the Respondent in exercising its mandate advised the Appellant of the way forward under the law. The Appellant ignored the guidance by the law.
153.The Respondent submitted that the objection was premature and invalid in view of the fact that there was no decision to be responded to. It irrefutably follows that the provisions of Section 51 of the Tax Procedures Act do not apply in the instant case and thus this appeal is premature.
154.That the Appellant further contended that it had a legitimate expectation that the objection would be allowed and therefore failure to issue an objection decision curtailed the same. In response to this, the Respondent submitted that legitimate expectation cannot arise against the law. Through the several meetings held with the Appellant, it was advised to reapply for a refund based on the procedure outlined in law, which they failed to do.
155.That in the Supreme Court of Kenya case of Communications Commission of Kenya & 5 others vs. Royal Media Services Limited & 5 others [2014] eKLR the Court expressed itself on the issue of legitimate expectation as follows at paragraphs 268 and 269:
156.That therefore, no legitimate expectation was created since the same is clearly against the provisions of the TPA.
157.The Respondent further submitted that while seeking a refund of overpaid tax, the Appellant had to adhere to the refund process as set out in Section 47 of the TPA as spelt out below:-
158.The Respondent submitted that the Appellant ought to reapply for a refund which shall be conducted pursuant to Section 47. That therefore;a.The Appellant shall apply using the prescribed form.b.An audit shall be conducted by the Respondent.c.The Respondent shall notify the Appellant of the decision in writing.d.The Respondent shall repay the overpayment within two years and as stipulated in Section 47(4) of the TPA.
159.The Respondent urged the Tribunal to dismiss the Appeal for being premature at this stage and to refer the matter back to the Respondent for the Appellant to reapply for the refund to ensure a proper refund decision is issued.
160.The Respondent relied on the case of Nairobi TAT No. 147 Of 2021 - Wananchi Group (K) Limited vs. Commissioner of Customs & Border Control, where the Tribunal referred the dispute back to the Respondent for reassessment.
Respondent’s Prayers
161.The Respondent prays that The Tribunal considers the case and:a.Dismisses the Appeal for being premature.b.Awards the Respondent the costs of the Appeal.c.Refer the matter back to the Respondent for the Appellant to reapply for the refund.
Issues For Determination
162.The Tribunal has carefully studied the pleadings and documentation filed by both parties and is of the respectful view that the issues for its determination are as follows:-a.Whether there is a valid appeal before the Tribunal.b.Whether the Appellant’s objection dated 25th having been responded to on 2nd September 2020 is allowed in law by effluxion of time.c.Whether the Appellant’s marketing support services to Google Ireland and Research and Development services to Google LLC are exported services and therefore qualify as exported services taxable at 0% rate.
Analysis And Findings
a. Whether there is a valid appeal before the Tribunal.
163.The parties are in agreement that on 24th October 2017, the Appellant lodged a Value Added Tax (''VAT") refund claim relating to the periods October 2016 to September 2017 amounting to Kshs. 65,402,764.00.
164.On 28th May 2020 the Appellant received an iTax notification informing it that its refund claim had been rejected.
165.The Appellant through its tax agents, PricewaterhouseCoopers Limited, reached out to the Respondent for clarification on basis for the rejection of VAT refund claim.
166.The Appellant submitted that it was informed by the Respondent that the VAT refund claim was erroneously rejected as a result of the iTax system.
167.The Appellant further stated that it was advised by the Respondent to resubmit its application for the VAT refund claims on iTax for re-consideration.
168.That since the twelve-months statutory period set out in law within which to apply for VAT refunds had already lapsed, the Appellant opted to issue a notice of objection dated 25th June 2020 challenging the rejection of the VAT refund claim.
169.The Respondent issued its response to the Appellant's notice of objection via an email dated 2nd September 2020, reiterating its earlier position that the refund claim rejection had been as a result of an iTax system issue and the same did not amount to a refund decision that could be objected to.
170.The Respondent submitted that the Appeal is premature as no refund decision was made and the Appellant should reapply for refund which shall be conducted pursuant to Section 47(1) of the TPA.
171.The Tribunal notes that the Appellant lodged the claim for VAT refund on 24th October 2017. After lodging the claim for refund, Section 47(3) of the Tax Procedures Act thus provides that;
172.The Tribunal further notes that the Appellant received a system generated notification that its application had been rejected two and a half years after lodging its claim for VAT refund. The Appellant submitted that upon checking with the Respondent, it was advised that the system generated information it received was a system error and it should therefore re-apply for the refund. The Appellant further submitted that since the statutory period for submitting refund claims had already expired, it could not take the option of reapplying as advised by the Respondent.
173.The Tribunal finds that the iTax communication from the Respondent conveyed a message from the Respondent. That iTax notification was not produced as evidence either by the Appellant or the Respondent. There is no dispute that there was a communication from the Respondent to the Appellant regarding the application for VAT Tax refund lodged on 24th October 2020. The Appellant treated the communication as a tax decision from the Respondent. The iTax generated communication formed the basis on which the Appellant raised it objection. Section 51(2) of the Tax Procedures Act states that;
174.In respect to what the Respondent ought to do after receiving the objection from a taxpayer, Section 51(4) of the TPA states that;
175.There is no evidence before the Tribunal that the Respondent determined that the objection of the Appellant was not “validly lodged”. Having failed to declare the objection as not being validly lodged and having not immediately informed the Appellant in writing that the objection had not been validly lodged, the Tribunal finds that the objection is valid.
176.Being aggrieved by the decision communicated in the email dated 2nd September 2020, the Appellant filed this Appeal after giving the notice of Appeal as required. As the Appellant followed the steps stipulated in the law in filing this Appeal, the Tribunal finds that there is a valid appeal before it for determination.
177.The Tribunal addressed itself on the validity of an objection in Appeal No 271 of 2020, SAMPESA Agency Limited vs. Commissioner of Domestic taxes at Paragraph 19 where it held that:-
b. Whether the Appellant’s objection dated 25th June 2020 having been responded to on 2nd September 2020 is allowed in law by effluxion of time.
178.The Appellant’s letter of objection is dated 25th June 2020. The Appellant has provided the evidence that it was received by the Respondent on 26th June 2020 when it was stamped “received” by the Respondent.
179.The Respondent communicated its response to the objection through an email dated 2nd September 2020.
180.The Appellant submits that since the Respondents’ response was communicated 68 days after the objection was lodged with the Respondent, the Objection was allowed by operation of the law which gives a statutory timeline of 60 days.
181.In respect to the timeliness for making the decision on the objection lodged by a taxpayer, The Tax Procedures Act in Section 51 (11) states that:-
182.The Tribunal finds that there was communication between the Appellant and the Respondent during the month of July 2020 where the Respondent sought to clarify various issues raised in the letter of objection. That email communications were on 10th and 13th July 2020.
183.Based on the fact that there was request for details from the Respondent to which the Appellant responded on 13th July 2020, the Tribunal finds that the Respondent’s response to the letter of objection by the Appellant was made within the statutory timelines.
c. Whether the Appellant’s marketing support services to Google Ireland and Research and Development services to Google LLC are exported services and therefore qualify as exported services taxable at 0% rate.
184.Before delving into this issue, the Tribunal wishes to make the following observations.a.The Appellant and the Respondent have been involved in lengthy disputes on the issue of whether the marketing support services to Google Ireland and Research and Development services to Google LLC are exported services and therefore qualify as exported services at 0% rate. The Tribunal determined TAT Appeal Number 120 of 2017 which dealt with four separate VAT refund claims for the period between February 2010 and February 2013. In the Judgement dated 20th November 2020, the Tribunal found that the marketing services to Google Ireland “though provided to a non-resident person were consumed in Kenya as the ultimate goal was to increase the sales in Kenya”. In relation to the Research and Development services to Google LLC, the Tribunal found “that the services in this instant were exported services subject to tax at the rate of 0%”.b.Both parties were not satisfied with the judgement of the Tribunal and appealed in Income Tax Appeals E004 of 2021 and E006 of 2021. Both Appeals were consolidated and the judgement rendered on 27th day of May 2022. In the Judgement, Justice E.C, Mwita at Paragraph 60 concluded as follows:-c.The Tribunal also heard and determined Appeal No TAT 246 of 2021 which was on the VAT refund claim relating to the period October 2015 to September 2016. In the judgement dated 14th April 2022, the Tribunal did not depart from its findings in Appeal No 120 of 2017. In paragraph 103 of that judgement, the Tribunal stated:
185.The Tribunal upholds the principle of stare decisis, which ensures judicial officers reach substantially the same legal conclusions that were reached in previous cases when considering similar legal issues, thus the principle ensures certainty, clarity, predictability and legitimacy within the law. In this regard the Tribunal is guided by the Supreme court case of Jasbir Singh Rai & 3 Others vs. Tarlochan Singh Rai & 4 others SC PET. NO. 4 of 2012 [2013] eKLR , Where the court observed that;
186.In view of the foregoing, the Tribunal is bound by the decision of Justice EC Mwita in Income Tax Appeals E004 of 2021 and E006 of 2021 in which the Court found that the marketing services rendered to Google Ireland were consumed by Google in the Republic of Ireland and not in Kenya. The Judge also agreed with the decisions made by the Tribunal that R&D services were consumed by Google Inc outside Kenya and therefore subject to VAT at the 0% rate.
187.The Tribunal in the circumstances finds that the Appellant is entitled to the refund claims for VAT for the periods October 2016 to September, 2017.
Final Decision
188.The upshot of the foregoing analysis is that the Appeal is merited and the Tribunal accordingly proceeds to make the following Orders: -a.The Appeal be and is hereby allowed.b.The Respondent’s communication to the Appellant dated 2nd September 2020 be and is hereby set aside.c.The Respondent to process the Appellant’s VAT refund claims for the period October 2016 to September 2017 in the sum of Ksh.65,402,764.00 within Ninety (90) days of the date of delivery of this Judgment.d.Each Party to bear its own costs.
189.It is so ordered.
DATED AND DELIVERED AT NAIROBI THIS 17TH DAY OF MARCH 2023. .................................…..ERIC N. WAFULA CHAIRMAN………………………CYNTHIA B. MAYAKA MEMBER……………………… GRACE MUKUHAMEMBER……………………… JEPHTHAH NJAGI KIPROTICHMEMBER……………………… ABRAHAM K. MEMBER
