Tax regulations

High Court strikes down Value Added Tax Regulations, 2017 | Denton

The High Court delivered its judgment in Income Tax Appeal No. E84 of 2020: Commissioner of Inland Tax v WEC Lines (K) Limited where Dentons Hamilton Harrison & Mathews represented the taxpayer. The Court struck down the Value Added Tax Regulations, 2017 (VAT Regulations, 2017), upholding the taxpayer’s position that the agency services provided by a Kenya resident shipping agent to his main shipping company not resident were services exported out of Kenya for value added tax. (VAT). These were zero-rated during the period covered by the judgment (February 2015 to January 2018).

The scope of agency services included marketing, customer care and post-disembarkation services provided by the taxpayer to its principal, a non-resident shipping company. The Inland Tax Commissioner had relied on the provisions of the VAT Regulations 2017 to argue that the services were not services exported out of Kenya.

In reaching this decision, the High Court:

  1. Found that, pursuant to section 11(1) of the Statutory Instruments Act 2013, the Secretary to the Cabinet (CS) – National Treasury was required to table the VAT Regulations 2017 before the National Assembly within seven days following its publication.
  2. Ruled that the 2017 VAT Regulations ceased to have effect on the 8th day after the CS – National Treasury failed to table them before the National Assembly.
  3. Confirmed the position that for a service to be considered an “exported service”, it does not matter whether the service was performed in Kenya or outside Kenya. The determining factor is where this service is ultimately to be used or consumed. This is in accordance with the judgment of Inland Tax Commissioner 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 company was the recipient of the services.

What does this decision mean for you?

There has been a long-standing debate regarding the validity of the 2017 VAT Regulations stemming from the fact that it was never tabled in the National Assembly as required by law. Substantive issues have also been raised regarding 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 Questions.

As a result of this judgment, any action or inaction based solely on the VAT Regulations 2017 is invalid. Taxpayers should therefore assess the impact of the invalidation of the VAT Regulations 2017 on their VAT affairs from 11 April 2017. Going forward, it is also important for taxpayers to assess the impact of this ruling on their business, including monthly VAT compliance as well as claims for tax refunds and relief.

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.