KTDA Dubai Multi Commodities Centre Faces Tax Claim from KRA

In a significant ruling, the Tax Appeal Tribunal (TAT) has upheld a tax claim of Sh122.67 million against KTDA Dubai Multi Commodities Centre, a tea trading firm based in the United Arab Emirates and a subsidiary of Chai Trading Company (CTCL). This decision comes as a result of a protracted dispute with the Kenya Revenue Authority (KRA), which asserts that the firm is liable for taxes due to its operations in Kenya.

Background of the Dispute

The conflict traces back to an audit conducted by KRA on KTDA Dubai Multi Commodities Centre and its parent company, CTCL, covering the period from 2015 to 2021. Following this audit, KRA issued preliminary findings on December 9, 2022, which prompted a response from KTDA on February 17, 2023. The tax authority subsequently issued a default notice assessment on March 15, 2023, demanding Sh120,093,511. However, KTDA rejected this assessment, leading to a formal dispute over a revised claim of Sh122,672,965 for the tax years 2018 to 2020.

Tribunal’s Findings

The TAT, chaired by Christine Muga, ruled that KRA’s demand for taxes was justified. The Tribunal found that KTDA Dubai Multi Commodities Centre was a tax resident in Kenya, primarily due to the management and control of its operations being exercised from within the country. The Tribunal emphasized that the firm’s Board of Directors meetings, which were crucial for strategic decision-making, were held in Kenya, further solidifying its tax residency status.

Arguments from KTDA

In its appeal filed on July 14, 2023, KTDA contended that KRA had erred in both law and fact by classifying it as a tax resident in Kenya for the years in question. The firm argued that it did not conduct business operations partially within and outside Kenya, and therefore should not be subject to the tax claims made by KRA. Additionally, KTDA challenged KRA’s assertion that it was required to impose withholding tax on management fees and other payments.

KRA’s Position

In response, KRA maintained that its audit revealed KTDA’s operations were indeed managed from Kenya. The tax authority pointed to the minutes from Board of Directors meetings, which indicated that key decisions regarding the firm’s operations were made while the directors were present in Kenya. KRA argued that the regional manager, who was an employee of KTDA Dubai Multi Commodities Centre, was effectively running the entity in Dubai under the full management and control of CTCL, which owns the subsidiary outright.

Tribunal’s Rationale

The Tribunal sided with KRA, stating that the evidence presented demonstrated that KTDA Dubai Multi Commodities Centre was managed and controlled from Kenya. The Tribunal noted that the Board meetings were essential for making strategic decisions, and since these meetings occurred in Kenya, the firm was bound by Kenyan tax laws. The Tribunal concluded that the management structure and operational oversight were firmly rooted in Kenya, thereby justifying KRA’s tax claim.

Implications of the Ruling

This ruling has significant implications for KTDA Dubai Multi Commodities Centre and potentially for other foreign entities operating in Kenya. It underscores the importance of understanding tax residency rules and the implications of operational management locations. Companies engaged in cross-border trade must be vigilant about their tax obligations, particularly when their management activities are conducted in jurisdictions where they may not have initially considered themselves tax residents.

The case serves as a reminder of the complexities involved in international business operations and the necessity for firms to maintain clear records of their management practices to avoid disputes with tax authorities. As the global economy continues to evolve, the intersection of local laws and international business practices will remain a critical area for companies to navigate carefully.