The High Court has delivered its judgment in Income Tax Appeal No E84 of 2020: Commissioner of Domestic Taxes v W. E. C. Lines (K) Limited where Dentons Hamilton Harrison & Mathews represented the taxpayer. The Court invalidated the Value Added Tax Regulations, 2017 (VAT Regulations, 2017), upholding the taxpayer’s position that agency services provided by a Kenyan-resident shipping agent to its non-resident principal shipping line were services exported out of Kenya for Value Added Tax (VAT) purposes. These were zero-rated during the period covered by the judgment (February 2015 to January 2018). 

The scope of the agency services included marketing, customer care and post landing services that were provided by the taxpayer to its principal, a non-resident shipping line. The Commissioner of Domestic Taxes had relied on the provisions of the VAT Regulations, 2017 in submitting that the services were not services exported out of Kenya.

In arriving at this decision, the High Court:

1. Found that, pursuant to section 11(1) of the Statutory Instruments Act, 2013, the Cabinet Secretary (CS) - National Treasury was required to table the VAT Regulations, 2017 before National Assembly within seven days of their publication.
2. Held that the VAT Regulations, 2017 ceased to have any effect on the 8th day after the CS - National Treasury failed to table them before the National Assembly.
3. Upheld the position 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. This is in accordance with the judgment in Commissioner of Domestic Taxes v Total Touch Cargo Holland HC ML ITA No. 17 of 2013 [2018] eKLR.
4. Concluded that the services provided by the taxpayer were exported services consumed outside Kenya since the non-resident shipping line was the beneficiary of the services.

What does this decision mean for you?

There has been a long-standing debate regarding the validity of the VAT Regulations, 2017 stemming from the fact they were never tabled before the National Assembly as required by law. Substantive issues have also been raised with respect to the conflicts between the provisions of the Value Added Tax Act, 2013 (VAT Act, 2013) and the VAT Regulations, 2017. The High Court has now settled these issues.

Following this judgment, any actions or inactions premised solely on the VAT Regulations, 2017 are invalid. Taxpayers should accordingly assess the impact of the invalidation of the VAT Regulations, 2017 on their VAT affairs from 11th April 2017. Going forward, it is also important for taxpayers to evaluate how this decision impacts their affairs including monthly VAT compliance as well as applications for tax refunds and reliefs.

The Kenya Revenue Authority intends to appeal this decision. The VAT Regulations, 2017 remain invalid unless the decision is overturned by the Court of Appeal.

For more information on this decision or any other tax matters, kindly get in touch with team listed under key contacts.