Judgment summary
This is an appeal by Havas Media Kenya Limited against the Commissioner of Legal Services and Board Coordination concerning an additional Corporation tax assessment for the years 2019, 2020 and 2022. The assessment arose from a variance identified by the Commissioner between the Appellant's turnover as declared in its VAT returns and its turnover as declared in its Corporation tax returns (IT2C).
The Appellant, a media advertising agency, explained the variance as arising from media reimbursement costs recovered from clients, reversals of prior years' accrued income, zero-rated exported sales, foreign exchange gains and differential VAT rates following a change in the VAT rate in 2020. The Commissioner partially allowed the Appellant's objection but confirmed the remainder of the additional assessment.
The Tribunal found that the Respondent had failed to consider the Appellant's explanations and supporting documents on zero-rated sales, forex gains and differential VAT rates at the objection stage, and referred that part of the dispute back to the Respondent. The Tribunal also found that the Appellant had discharged its burden of proof regarding the reversal of accrued income and the media reimbursement costs, holding that these amounts should not form part of the Appellant's taxable income for Corporation tax purposes. The Appeal was allowed and the Objection decision was set aside.
Background
The Appellant is a private company incorporated in Kenya specialising in advertising, media planning, brand strategy, public relations, media relations, digital marketing and digital strategy (para 1). The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 (para 2).
By letter dated 13th December 2023, the Respondent notified the Appellant of its intention to verify tax declarations following identified revenue discrepancies (para 3). Following correspondence, the Respondent issued a letter of preliminary findings and a tax demand notice for PAYE and Corporation tax dated 11th September 2024 (para 4).
The Appellant conceded the PAYE additional assessment and paid the principal PAYE demand of Kshs. 912,554, but lodged an Objection against the Corporation tax additional assessments by letter dated 11th October 2024 (paras 5, 14). The Respondent issued an Objection decision on 9th December 2024, partially allowing the Objection but confirming principal Corporation tax of Kshs. 43,293,433, totalling Kshs. 70,437,323 inclusive of penalties and interest (paras 6, 16). The Appellant, being dissatisfied, filed its Notice of Appeal on 8th January 2025 (para 7).
Core dispute
The issue for determination was whether the Respondent was justified in confirming the Corporation tax additional assessment (para 88).
The Appellant argued that the turnover variance between its VAT returns and IT2C returns was attributable to: media reimbursement costs and disbursements to media suppliers which did not constitute income chargeable to Corporation tax under Section 3(1)(a)(i) read with Section 15 of the Income Tax Act; reversals of prior years' accrued income representing timing differences rather than under-declaration; and omitted revenue items comprising zero-rated exported sales, foreign exchange gains and differential VAT rates following the Tax Laws (Amendment) Act, 2020.
The Respondent maintained that the media reimbursement ledgers represented estimated, not actual, campaign costs and therefore formed part of the Appellant's income, that the reversal of accrued income had already been adjusted for in the VAT returns, and that the Appellant had not discharged its burden of proof under Section 56(1) of the Tax Procedures Act to show the assessment was incorrect.
Court findings
The Tribunal found that the Respondent had acknowledged, in its Statement of Findings, that it did not incorporate zero-rated/exported sales, foreign exchange gains and differential VAT rates into its Objection decision, despite having received the supporting documents, and had instead deferred the matter for separate assessment. The Tribunal held this was not a valid reason to avoid addressing the Appellant's ground of Objection and that this contravened Section 51(8) of the Tax Procedures Act (paras 97 to 101).
On the reversal of accrued income, the Tribunal found that, based on Section 12(1)(a) of the VAT Act, the Appellant's correct tax point was the date services were performed (that is, the date income accrued), not the date of invoicing. The Tribunal found the Respondent's assertion that the reversal had already been adjusted for in the VAT returns to be factually inaccurate, and held that the Appellant had discharged its burden of proof on this ground (paras 109 to 115).
On media reimbursement costs, the Tribunal found that the Appellant had demonstrated, through contracts, client invoices and corresponding supplier invoices, that its income comprised only agency commissions and not the reimbursed media costs. The Tribunal held that the Respondent's characterisation of the reimbursement ledger entries as estimates forming part of income was factually inaccurate, and that deducting the reimbursement costs as expenses against revenue also contravened Section 15(1) of the Income Tax Act (paras 121 to 128).
Outcome
The Tribunal found the Appeal to be merited. It ordered that the Appeal be allowed and that the Objection decision dated 9th December 2024 be set aside.
The Respondent was directed to consider the Appellant's explanations of variances for 2019, 2020 and 2022 relating to zero-rated/export sales, exchange rate differences and differential VAT rates, together with the corresponding supporting documents already issued during the Objection stage, and to issue a revised Objection decision in accordance with Section 51(8) and 51(11) of the Tax Procedures Act within 60 days of delivery of the judgment.
Each party was ordered to bear its own costs (para 130).
Major issues / areas of contention
- Whether the Respondent was justified in confirming the Corporation tax additional assessment based on the variance between the Appellant's VAT and IT2C turnover declarations.
- Whether media reimbursement costs and disbursements recovered from clients constitute income chargeable to Corporation tax under Section 3(1)(a)(i) read with Section 15 of the Income Tax Act.
- Whether reversals of prior years' accrued income resulted in an under-declaration of Corporation tax, given differing VAT and income tax accrual and tax points.
- Whether the Respondent properly considered the Appellant's explanations and supporting documents on zero-rated sales, foreign exchange gains and differential VAT rates at the Objection stage under Section 51(8) of the Tax Procedures Act.
- Which party bore the burden of proof under Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act, and whether that burden was discharged.