Genesis and Background of the Case

This case originated from an appeal by Oceanfreight (EA) Limited, one among several shipping agents operating in Kenya, against a judgment of the Tax Appeals Tribunal delivered on 8 December 2016 in TAT Appeal No. 101 of 2015. The Appellant challenged the Kenya Revenue Authority’s (KRA) imposition of income tax and withholding tax on demurrage charges, VAT on post-landing documentation fees, taxation of transhipment cargo, and deemed dividends.

The appeals were consolidated with similar appeals filed by other shipping companies as they all raised overlapping issues. The central questions revolved around the tax treatment of income derived from demurrage on containers, the VAT classification of documentation fees, the taxation of income from transhipment cargo from EAC partner states, and the powers of KRA under Section 24 of the Income Tax Act (ITA) to deem dividends.

Background of the Case

1. Consolidated Appeal: Oceanfreight (EA) Ltd was one of several appellants, all shipping agents registered under Section 8 of the Merchant Shipping Act and resident in Kenya.
2. Scope of Dispute: The case involved four major tax issues: income tax on container demurrage, VAT on post-landing charges, withholding tax on EAC transhipment cargo, and the deeming of dividends by KRA.
3. Amount in Dispute: KRA’s assessments included a KES 142,308,538 withholding tax related to demurrage, and KES 43,755,592 as withholding tax on transhipment income.
4. Legislative Context: The dispute involved interpretation of Sections 3, 9, 10, 24, and 35 of the ITA, VAT Act No. 35 of 2013, and EACCMA, alongside reference to international tax law interpretations.

Appellant’s Submissions (Oceanfreight EA Ltd and Co-Appellants)

1. Demurrage as Freight: Argued that demurrage should be classified as part of international freight, not rental income, and hence not taxable under Kenya’s income tax regime.
2. No Tax Framework Before 2018: Pointed to the 2018 legislative amendments that expressly brought demurrage into tax charge as proof that no such provision previously existed.
3. Agent vs Payer: Asserted that shipping agents merely facilitated payment and were not liable to withhold tax on behalf of non-resident shipping lines.
4. VAT on Documentation Fees: Contended that fees like Delivery Order and Bill of Lading fees were ancillary to freight and should be VAT-exempt under importation.
5. Double Tax Treaty Protection: Cited the Kenya-France DTT to argue that certain income (e.g., from French lines) should be taxed only in France.
6. Transhipment Exemption: Cited Section 9(1) ITA to assert that transhipment cargo from EAC states should be excluded from Kenyan tax.
7. Deemed Dividends Defence: Claimed that VAT refund delays and financial volatility justified non-declaration of dividends and that KRA bore the burden of proving bad faith.

Respondent’s Submissions (KRA)

1. Demurrage is Income: Argued demurrage on containers is post-freight and should be treated as rent for use of equipment, falling under Section 3(2)(a)(iii) and Section 10(1)(d) of ITA.
2. Withholding Tax Applies: Shipping agents, even as intermediaries, had a statutory duty to withhold tax before remitting to non-resident principals per Section 35(1)(c) ITA and Rule 4(1) of the Withholding Tax Rules.
3. Amendments Were Clarificatory: Maintained that 2018 amendments reinforced existing tax provisions rather than introducing new obligations.
4. No DTT Protection for Demurrage: Stated that demurrage is not freight and thus not covered under Article 8 of the Kenya-France DTT.
5. VAT Applies to Post-Landing Charges: Document processing and container handling fees occur after importation and are not part of freight; hence VAT is applicable.
6. Transhipment Income is Taxable: Contended that use of EACCMA terms like “foreign place” reclassifies EAC partner states as non-foreign, making cargo originating from them taxable.
7. Valid Deeming of Dividends: KRA argued that the taxpayer had distributable reserves and failed to prove dividend payment would prejudice its business, shifting the burden to the taxpayer.

Court’s Decision

1. Demurrage is Taxable Income: The Court held that container demurrage is post-freight income and taxable under the pre-2018 ITA framework. Cited Section 3(1), 3(2)(a)(iii) and 10(1)(d).
2. Withholding Tax Liability Confirmed: Found agents liable to withhold tax from demurrage collected for non-resident shipping lines under Section 35(1)(c).
3. VAT on Documentation Fees Reversed: Court reversed the Tribunal, finding that document fees (e.g., Bill of Lading, Delivery Order fees) were closely tied to freight and thus not VATable.
4. Transhipment Cargo Not Taxable: Court disagreed with the Tribunal and held that cargo in transit from EAC states was exempt under the ordinary meaning of transhipment in Section 9(1).
5. Deemed Dividends Upheld: The Court ruled that Oceanfreight failed to prove dividend declaration would hurt business; upheld KRA’s decision under Section 24 ITA.
6. Costs: Each party to bear its own costs.

Final Outcome (Dated 7 February 2020 by Justice F. Tuiyott)

• Demurrage tax and WHT upheld
• Document processing VAT reversed in favour of Appellant
• Transhipment income tax reversed in favour of Appellant
• Deemed dividends upheld in favour of KRA
• Each party to bear its own costs