This ruling lays to rest one of the most unconventional interpretation of double tax treaties adopted by KRA. This unconventional interpretation has resulted in significant uncertainty in respect of the interpretation of DTT’s that Kenya has with South Africa, France, United Arab Emirates, Qatar and Korea.
NAIROBI, Kenya — The Tax Appeals Tribunal (“TAT”) delivered a judgement on 01 April 2021 in the case of McKinsey v Kenya Revenue Authority (KRA)1 regarding the application of withholding tax on professional fees under the Kenya – South Africa double tax treaty (“DTT”).
The ruling clarified that where a double tax treaty does not contain a separate management or professional fees article, income by way of management or professional fees would ordinarily be characterised as business profits thus not subject to withholding tax in Kenya.
The TAT interpretation is in line with the guidance provided by the commentary under Organization for Economic Cooperation and Development (“OECD”) Model Tax Treaty.
Background
McKinsey and Company Inc. Africa Proprietary Ltd(“McKinsey”) had challenged the tax assessment raised by the KRA demanding withholding tax on professional fees.
It was argued that KRA misinterpreted the Kenya – South Africa DTT by concluding that professional fees were taxable under Article 22 of the Kenya-South Africa DTT which deals with ‘other income’ and failed to consider the provisions of Paragraph 77 of the OECD Commentary on Article 7 which provides for income by way of management or professional fees to be taxed under business profits in the absence of a specific article dealing with the taxation of management or professional fees in the DTT.
Determination and Ruling
In delivering its ruling, the TAT placed reliance on the OECD and United Nations (“UN”) commentaries when interpreting the Kenya – South Africa DTT. The TAT established that the fees paid to the South African entity falls within the ambit of business profits and was not attributable to a PE of the South African entity in Kenya.
Having determined that the services constitute a business, the TAT agreed that Article 7 (i.e. Business Profits) of the DTT is the appropriate Article to determine whether Kenya or South Africa has the taxing right of such income and in this case it was held that South Africa had the right to tax the professional fees.
Implications of the ruling
This ruling lays to rest one of the most unconventional interpretation of double tax treaties adopted by KRA. This unconventional interpretation has resulted in significant uncertainty in respect of the interpretation of DTT’s that Kenya has with South Africa, France, United Arab Emirates, Qatar and Korea.
This unconventional interpretation has put the validity and continuity of the said double tax treaties in jeopardy. The TAT ruling re-establishes the primacy of the application of standard international conventions to the interpretation of Kenya treaties.
Additionally, taxpayers who have erroneously deducted withholding tax on payments to non-residents in the above-mentioned jurisdictions may, where the circumstances allow, be entitled to withholding tax refunds
