Kenya vs Avic International: CASE SUMMARY
Case Information
- Court: Tax Appeals Tribunal (Kenya)
- Case No: TAT No. E786 of 2023
- Applicant: AVIC International Beijing (EA) Limited
- Defendant: Commissioner of Domestic Taxes
- Judgment Date: 22 November 2024
- Download the FULL JUDGMENT
Judgment Summary
The Tax Appeals Tribunal in Kenya ruled on the case involving AVIC International Beijing (EA) Limited (Appellant) and the Commissioner of Domestic Taxes (Respondent) concerning disputed tax assessmentsA tax assessment is a formal determination made by a tax authority to calculate the amount of tax an individual or entity owes. It is a comprehensive evaluation based on financial records, declared income, expenses, deductions, and any applicable tax laws or regulations. Tax assessments may arise from routine self-assessments by taxpayers, or they may be conducted by revenue authorities... More covering Corporation TaxCorporate Tax refers to the tax imposed by governments on the income or capital of corporations. Corporations, considered separate legal entities, are taxed on their profits, meaning the income generated from their operational activities, investments, and other financial undertakings. This tax is generally a key revenue source for governments, helping to fund public services, infrastructure, and other essential functions. The... More, PAYE, and Withholding Tax (WHT) for the years 2016 to 2023. The Respondent issued an audit notice on 30 July 2021 and finalized its assessments on 29 June 2023, leading to additional tax liabilities of Kshs. 530,528,802, later reduced to Kshs. 514,154,336 after objections.
Key disputes included the appropriateness of the Transactional Net Margin Method (TNMM)The Transactional Net Margin Method (TNMM) is one of the five primary transfer pricing methods recognised under the OECD Transfer Pricing Guidelines. TNMM is applied to evaluate whether the conditions of a controlled transaction between associated enterprises are at arm’s length. Unlike traditional transaction methods, which directly compare prices or gross margins, TNMM compares the net profit margin relative to... More as the most appropriate methodThe Most Appropriate Method (MAM) is a key concept in transfer pricing that determines the best method to evaluate whether intra-group transactions adhere to the Arm’s Length Principle (ALP). The ALP ensures that transactions between related parties are priced as they would be between independent parties under comparable conditions. The selection of the MAM depends on several factors, including the... More (MAMThe Most Appropriate Method (MAM) is a key concept in transfer pricing that determines the best method to evaluate whether intra-group transactions adhere to the Arm’s Length Principle (ALP). The ALP ensures that transactions between related parties are priced as they would be between independent parties under comparable conditions. The selection of the MAM depends on several factors, including the... More) for transfer pricing adjustmentsTransfer Pricing Adjustments are modifications made to the pricing of transactions between related entities within a multinational enterprise (MNE) by tax authorities or the MNE itself. These adjustments are carried out to ensure compliance with the arm’s length principle, which stipulates that prices for intercompany transactions should reflect what independent parties would have agreed upon under similar circumstances. The arm’s... More, the accuracy of income assessments based on VAT discrepancies, and the double taxationDouble Taxation occurs when the same income or financial transaction is taxed twice, typically in different jurisdictions. It can arise in two primary contexts: economic double taxation, where the same income is taxed twice in the hands of different taxpayers, and juridical double taxation, where the same taxpayer is taxed on the same income in more than one country. Double... More claims related to PAYE and WHT on expatriates and seconded personnel. AVIC argued that the Resale Price Method (RPM) was more suitable given the nature of its transactions and that TNMMThe Transactional Net Margin Method (TNMM) is one of the five primary transfer pricing methods recognised under the OECD Transfer Pricing Guidelines. TNMM is applied to evaluate whether the conditions of a controlled transaction between associated enterprises are at arm’s length. Unlike traditional transaction methods, which directly compare prices or gross margins, TNMM compares the net profit margin relative to... More overcomplicated the analysis. Further, the Appellant contended that certain assessments extended beyond the statutory five-year limit.
The Tribunal upheld the use of TNMMThe Transactional Net Margin Method (TNMM) is one of the five primary transfer pricing methods recognised under the OECD Transfer Pricing Guidelines. TNMM is applied to evaluate whether the conditions of a controlled transaction between associated enterprises are at arm’s length. Unlike traditional transaction methods, which directly compare prices or gross margins, TNMM compares the net profit margin relative to... More as the most reliable method under the OECDThe Organisation for Economic Co-operation and Development (OECD) is an international organisation comprising 38 member countries, established to foster economic growth, trade, and development on a global scale. Founded in 1961, the OECD provides a forum for governments to collaborate, share policy experiences, and develop solutions to common economic challenges. The OECD's core mission is to promote policies that improve... More Guidelines, noting deficiencies in AVIC’s benchmarkingBenchmarking, within the context of transfer pricing, refers to the process of analysing and comparing financial and economic data from independent companies to establish a fair and arm’s length price for controlled transactions. It is typically conducted using databases that provide details about comparable companies and transactions. The objective is to determine whether the terms and conditions of intercompany transactions... More and FAR analysisFunctional analysis is the cornerstone of transfer pricing and international tax compliance, ensuring that intercompany transactions adhere to the arm’s length principle. It evaluates the roles, contributions, and risk profiles of entities within a multinational enterprise (MNE) to determine how profits and costs should be allocated. This process ensures that related-party transactions reflect the pricing that independent enterprises would establish... More. However, it recognized procedural errors in assessing income discrepancies and PAYE liabilities. The Tribunal dismissed claims of double taxationDouble Taxation occurs when the same income or financial transaction is taxed twice, typically in different jurisdictions. It can arise in two primary contexts: economic double taxation, where the same income is taxed twice in the hands of different taxpayers, and juridical double taxation, where the same taxpayer is taxed on the same income in more than one country. Double... More and ruled on the validity of deemed dividend taxes based on adjustments.
The judgment highlighted the importance of comprehensive compliance with transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... More documentation and functional analysisFunctional analysis is the cornerstone of transfer pricing and international tax compliance, ensuring that intercompany transactions adhere to the arm’s length principle. It evaluates the roles, contributions, and risk profiles of entities within a multinational enterprise (MNE) to determine how profits and costs should be allocated. This process ensures that related-party transactions reflect the pricing that independent enterprises would establish... More to mitigate disputes, emphasizing adherence to procedural guidelines.
