Tax AdvisoryMarch 20, 2023by fiecon

Two Lakes Packaging Services V. Commissioner for Domestic Taxes: TAT Appeal No. 420 of 2021

Tax law


  • The Appellant is a registered taxpayer whose principal business is grading and packaging of flowers for export. It is located in Naivasha Kenya.
  • The Respondent is a principal officer of Kenya Revenue Authority, Kenya Revenue Authority is an agency established under the Kenya Revenue Authority Act for the collection of Government revenue and related purposes.
  • On 9th March 2021 the Respondent issued the Appellant with additional assessment on withholding income tax of Kshs. 13,185,734.00. The Appellant objected to the assessment on 8th April 2021. Upon reviewing the objection, the Respondent issued its objection decision on 4th June 2021.
  • Aggrieved by the Respondent’s decision, the Appellant filed a Notice of Appeal on 2nd July 2021 and subsequently an appeal on 1st July 2021.

Issue for Determination

  • Whether the Respondent erred in its assessment and demand for withholding tax from the Appellant.

Analysis and Determination

  • The brief facts leading to this dispute were that the Appellant contracted Manpower Company Ltd to offer management and professional services on packing and grading of flowers for export. Under the agreement, Manpower Company limited would provide employees contracted to them to work for and on behalf of the Appellant and would later invoice the Appellant all employee related costs plus Kshs 1000 management fees per employee.
  • The Appellant, on the basis of the itemized invoices paid withholding tax leaving out employee related costs such as payroll, Insurance and NSSF on the grounds that these costs did not form part of management and professional fees which did not attract withholding tax. The Respondent consequently issued an assessment for additional withholding tax arguing that withholding tax was applicable on the gross invoice amount.
  • Section 35(3)(f) of the Income Tax Act which imposes withholding tax on management services states that:

“Subject to section 3A, a person shall, upon payment of an amount to a person resident or having a permanent establishment in Kenya in respect of;

(f) management or professional fee or training fee, the aggregate value of which is twenty thousand shillings or more in a month.”

  • Paragraph 5 of the Third Schedule of the Income Tax Act which sets out the withholding tax rates, states as follows:

“The resident withholding tax rates shall be: (f) (i) in respect of management or professional fee or training fee, other than contractual fee, the aggregate value of which is twenty-four thousand shillings in a month or more, five percent of the gross amount payable”.

  • Management or professional fees is defined in Section 2 of the Income Tax Act as;

“a payment made to a person, other than a payment made to an employee by an employer, as consideration for managerial, technical, agency, contractual, professional or consultancy services however calculated. “

  • Looking at the definition of management or professional fees as stated in the Act, it is logical to conclude that services related to employee costs can indeed fall under the definition of professional services. However, the reimbursement for costs themselves cannot be deemed to be payments or consideration for any services rendered. By their nature, payroll costs, NSSF, NHIF and such costs were not payments to the contractor and therefore could not have been subject of withholding tax.
  • The Tribunal was of the view that the Respondent could not rely on the word “gross” appearing in Paragraph 5 of the Third Schedule to bring to charge an item which was clearly not subject to withholding tax. The Tribunal did not read any tax avoidance scheme in the itemization of the invoices, to separate the taxable from the non-taxable.

Final Decision

  • In view of the foregoing, the Tribunal determined that the Respondent erred in its assessment of additional withholding tax to cover the non¬≠taxable items. Consequently, the Tribunal finds that the Appeal has merit and therefore succeeds.
  • The orders that commend themselves are as follows:
    • The Appeal be and is hereby allowed.
    • The objection decision dated 4th June 2021 be and is hereby set aside.
    • Each party to bear its costs.

Our Opinion

The main issue before the Tribunal was if the respondent was incorrect in its assessment and demand for withholding tax from the appellant.

Our view is that the decision will enable service providers to establish prices for their services that adequately cover their reimbursable expenses with tax certainty, where the tax liability for businesses or individuals is definite and not arbitrary.

Fie-Consult LLP is always available to assist on your tax matters.


Author: Eddie Opiyo