Judgment summary
The Tribunal considered an appeal against an objection decision dated 7 March 2025 confirming additional assessments totalling KES 1,115,718,688 covering Corporation Tax, Withholding Tax, PAYE and VAT (para 7). The Appellant argued that its income arose from construction contracts executed and performed in Somalia and was therefore outside the scope of Kenyan tax, while the Respondent maintained that the Appellant had failed to produce documentation to support its position during the audit and objection stages.
The Tribunal held that the Appellant had not discharged its burden of proof under Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act, and dismissed the appeal, upholding the objection decision.
Background
The Appellant is described as an international company operating in Kenya, engaged in construction, logistics, and project execution for international organisations (para 1). The Respondent is the principal officer appointed under Section 13 of the Kenya Revenue Authority Act, responsible for collecting and administering tax revenue (para 2).
The Respondent carried out an audit of the Appellant culminating in an amended assessment dated 4th December 2024 (para 3). The Appellant objected by letter dated 2nd December 2024 (para 4). The Respondent issued its objection decision dated 7th March 2025, confirming the assessment (para 5). The Appellant lodged its Notice of Appeal dated 19th March 2025 (para 6) and was later granted leave to file an amended Memorandum of Appeal dated 11th November 2025 (para 7).
The amended assessments totalled KES 1,115,718,688, comprising Corporation Tax, Withholding Tax, PAYE, and VAT (para 7).
Core dispute
The Appellant contended that its income was foreign-sourced, arising from contracts executed, managed and performed entirely in Somalia under United Nations-funded infrastructure projects, and that no income accrued in or was derived from Kenya within the meaning of Section 3(1) of the Income Tax Act (Cap 470) (para 7). It argued that its role was strictly treasury-related, receiving and disbursing United Nations funds via a Kenyan bank account required due to the volatile situation in Somalia (paras 9 to 10), and that its arm's-length remuneration for this treasury function should be 0.41 percent of funds handled, based on a Transfer Pricing Policy and Benchmarking Study (para 26(c)).
On Withholding Tax, the Appellant argued that Docol Somalia is a non-resident entity with no permanent establishment in Kenya and thus had no withholding obligation under Section 10 of the Income Tax Act (para 7). On PAYE, it argued that directors' cash withdrawals were used to pay workers and suppliers in Somalia and did not represent director remuneration (para 7). On VAT, it argued that supplies performed entirely outside Kenya were not taxable supplies under Section 7 and Paragraph 2 of Part A of the First Schedule to the VAT Act, 2013 (para 7).
The Respondent maintained that the Appellant is a company incorporated in Kenya whose management and control were exercised in Kenya, so its income was derived or accrued in Kenya under Section 3(1) of the Income Tax Act (para 42). The Respondent stated it had requested documentation, including audited accounts, bank statements and general ledgers, but none was provided, prompting it to resort to best judgment assessment based on banking analysis, turnover testing, comparison with four comparable businesses, and a Country Risk Premium (para 30 to 36). The Respondent also asserted that the Appellant failed to withhold tax on subcontractor payments, failed to file VAT returns despite local supplies and receipts, and could not explain PAYE variances (paras 37 to 46).
Court findings
The Tribunal noted that Section 59 of the Tax Procedures Act (Cap 469B) empowers the Commissioner to require production of documents relevant to tax liability, and that Section 56(1) of the same Act places the burden on the taxpayer to prove a tax decision incorrect (paras 58 to 59). Section 30 of the Tax Appeals Tribunal Act (Cap 469A) likewise places the burden on the appellant to prove an assessment excessive or that a tax decision should not have been made or should have been made differently (para 60).
The Tribunal found that the Appellant admitted it had not provided the requested records, and that its explanation that the documents were unavailable or non-existent in Kenya was not supported by evidence and appeared to be an afterthought, since it had multiple earlier opportunities, including the Section 59 notice of 15th August 2024, a letter of 23rd October 2024, emails of 17/09/24, 2/10/24 and 18/10/2024, and its objection of 2nd December 2024, to raise this explanation but did not do so (paras 62 to 64).
The Tribunal held that it could not consider explanations never provided to the Commissioner at the objection stage, citing Commissioner of Investigation & Enforcement v Wamunyinyi [2026] KEHC 379(KLR) (para 63). It also found that the Appellant's request to adduce additional documents, made only in submissions rather than by a formal application under Section 13(3) of the TAT Act, was procedurally improper and could not be admitted (paras 65 to 67).
Citing Mugo v Commissioner of Domestic Taxes (TAT E918 of 2024) KETAT 374 (KLR), the Tribunal held that failure to adduce positive documentary evidence meant the Respondent's assessment retained its presumptive correctness and had not been impeached (para 68). It concluded that the Appellant failed to discharge its burden of proof under Section 30 of the TAT Act (para 69).
Outcome
The Tribunal held that the appeal lacked merit. It dismissed the appeal, upheld the Respondent's Objection decision dated 7th March 2025, and ordered that each party bear its own costs (para 70).
Tp method highlighted
The Respondent, applying best judgment under the circumstances of missing documentation, compared the Appellant to four comparable businesses/taxpayers and found an average gross profit margin of 25 percent, against the Appellant's declared 2 percent (para 34).
Because the Appellant conducted most of its projects in Somalia, which the Respondent characterised as having a risky and unstable macroeconomic environment, the Respondent applied a Country Risk Premium (CRP). It relied on the June 2024 CRP compiled by New York University's Professor Aswath Damodaran, showing Somalia's CRP at 17.55 percent, the same as Argentina, Cuba, Liberia, Malawi, Ukraine, Sri Lanka and Zambia, compared with Kenya's CRP of 9.51 percent (paras 34 to 35).
The Respondent added the 17.55 percent CRP to the 25 percent average gross profit margin of a comparable Kenyan company, arriving at a gross profit margin of 42.55 percent (25% + 17.55%) for use in its assessment (para 36).
The Appellant, for its part, argued that its function was purely treasury-related and that its arm's-length remuneration should be 0.41 percent of the funds it handled, based on its own Transfer Pricing Policy, a signed Intercompany Agreement, and a Benchmarking Study (paras 11 and 26(c)).
Major issues / areas of contention
- Whether the Respondent's Objection decision dated 7th March 2025 was justified.
- Whether the Appellant's income was foreign-sourced and derived from contracts performed entirely in Somalia, and therefore outside the scope of Kenyan income tax under Section 3(1) of the Income Tax Act.
- Whether the Appellant complied with its document production obligations under Section 59 of the Tax Procedures Act.
- Whether the Appellant discharged its burden of proof under Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act.
- Whether Docol Somalia, as an alleged non-resident entity without a permanent establishment in Kenya, had a withholding tax obligation under Section 10 of the Income Tax Act.
- Whether directors' cash withdrawals should be treated as employment income for PAYE purposes.
- Whether supplies allegedly performed entirely outside Kenya fell within the scope of the VAT Act, 2013.
- Whether the Appellant could properly seek to adduce additional documentary evidence at the appellate stage without a formal application.