KRA loses Sh2bn claim on Kenya Ports Authority

The Kenya Revenue Authority (KRA) has lost a Sh2 billion dispute with the ports agency for taxes it claimed were due in relation to the procurement of cargo handling equipment between 2018 and 2022.

In a ruling delivered on January 26, the Tax Appeals Tribunal dismissed KRA’s claim of Sh1,993,582,700 in withholding tax plus penalty and interest, concerning two contracts for the supply of a tugboat and cranes by a foreign contractor to the Kenya Ports Authority (KPA).

The six-bench tribunal chaired by Justice Erick Nyongesa Wafula agreed with the KPA’s assertion that it was supplied with goods—a tug boat and cranes— and not services for which the port authority would have made payment for professional, management, or training fees, which would then have attracted a withholding tax.

Moreover, because the equipment was fully manufactured outside Kenya, they could not attract income tax as the income was not derived in Kenya.

Foreign suppliers pay a final withholding tax of 20 percent for training, management, or professional services. A resident pays a withholding tax of five percent.

Withholding tax is a type of income tax that is withheld by the payer of the service and remitted to the KRA within five days.

KRA argued that KPA contracted foreign suppliers to undertake two contracts to design, manufacture, supply, install, test, and commission the tugboat and cranes at the port of Mombasa. This, KRA said, was a turnkey project in which a contractor agrees to fully design, contract, and equip the facility or business before turning through the project when it is ready for operation.

Such a project, KRA noted, has some element of training and management, which should attract a withholding tax. But KPA said none of the equipment procured was tailor-made uniquely or specifically by the manufacturers, which would then have amounted to a service that would attract a withholding tax.

“It is also clear from the contracts that all design and manufacturing was to be done in the country of origin and delivered fully built,” KPA said.

In the Finance Act 2023, the government introduced a five percent withholding tax on sales promotion, marketing, and advertising services for residents.

There is also a new five percent withholding tax on digital content monetisation while foreigners pay 20 percent.

The new law also introduced withholding tax for rental income collected by agents appointed by the KRA commissioner in charge of domestic taxes.

The government does not necessarily rely on withholding tax to increase its collection of revenue, but to monitor and assess the value of transactions being undertaken, which would then inform a decision to impose other final income taxes.

However, in the Medium Term Revenue Strategy 2023, the National Treasury says it plans to introduce a final withholding tax of five percent on all farm produce delivered to co-operatives and other organised groups.

Failure to deduct or withhold and remit to the KRA attracts penalty and interest. The penalty for late payment of withholding tax is five percent of the tax due.

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