Dentons

High Court determines VAT treatment of exported services in favour of taxpayers.

In three recent decisions, the High Court has determined that container depot services offered to non-resident shipping lines are services exported out of Kenya for Value Added Tax (VAT) purposes. Prior to the enactment of the Finance Act, 2021 on 1 July 2021, services exported out of Kenya were zero-rated but are now exempt for VAT purposes.

In HCCOMMITA E063 of 2020 Commissioner of Domestic Taxes v. Fortune Container Depot, HCCOMMITA E060 of 2020 Commissioner of Domestic Taxes v. Fortune Container Depot and HCCOMMITA E152 of 2020 Commissioner of Domestic Taxes v. Dodwell and Company (EA) Limited, the High Court held that the container depot services were exported services as defined under section 2 of the VAT Act, 2013 and therefore zero-rated for VAT purposes. The first two decisions were delivered by Majanja J and the last one by Mabeya J.

In making this determination, the High Court, in all three cases, held that the key consideration is whether the service is provided for use or consumption outside Kenya and not whether the service was performed in or outside Kenya. The High Court relied on the decision in Commissioner of Domestic Taxes v. Total Touch Cargo Holland [2018] eKLR where Odero J held:

"A clear reading of this provision is that for a service to be deemed an "exported service", it matters not whether that service was performed in Kenya or outside Kenya. The determining factor is the location where that service is to be finally used or consumed. Therefore, an exported service will be one which is provided for use or consumption outside Kenya."

Majanja J in HCCOMMITA E063 of 2020 Commissioner of Domestic Taxes v. Fortune Container Depot added that the person who was invoiced for the services and the person who made payment for the services were not relevant factors under the VAT Act, 2013.

The three decisions now determine the VAT treatment of container depot services. It is likely that the KRA will appeal these decisions and we will have to wait to see what the Court of Appeal has to say on this issue.

The High Court has also considered the VAT treatment of exported services in the following cases which all support the position that the key consideration is whether the service is provided for use or consumption outside Kenya and not whether the service was performed in or outside Kenya:

  • Panalpina Airflo Limited v. Commissioner of Domestic Taxes [2019] eKLR – Okwany J held that, where the ultimate consumer of the service is outside Kenya, the service is consumed outside Kenya.
  • Coca-Cola Central East and West Africa Limited v. Commissioner of Domestic Taxes [2020] eKLR – Tuiyott J relied on the OECD (2017), International VAT/GST Guidelines that provide that the jurisdiction where the customer is located has taxing rights over the service.

Conclusion

While the determination of whether a service is "exported out of Kenya" for VAT purposes is to be made on a case-by-case basis, the decisions of the High Court establish that the key consideration is whether the service was provided for use or consumption outside Kenya. Where the service was performed, who was invoiced for the service and who paid for the service are irrelevant considerations.

The above decisions relate to the flower industry, shipping industry, and marketing and promotion services. It will be interesting to see how the courts apply the principles in these cases to taxpayers in different industries as the issue of exported services will inevitably arise.

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