CAT 1

QUESTION

Mr. Charles Owino has a permanent home in Kenya. He works for a company based in the
United Kingdom (UK) where he lives. He came to Kenya for a one-monthly holiday on 1
September 2015 but had not returned to the UK by 31 March 2016.

a) Based on the foregoing explain the term “residence” as per Cap 470 laws of Kenya and
aided with relevant case law(8 Marks)

b) Using case law explain withholding tax as per Cap 470 laws of Kenya (7 marks)
Residence of an individual is key to tax since it affects the scope of the charge to tax like: the
applicable rates, tax reliefs, exemptions and tax at source. Physical presence in Kenya in a
particular year of income connotes the residence for tax purposes.

The term residence can be deduced from the term resident under Section 2 CAP 470 to
enunciate the meaning of:

a) an individual that has a permanent home in Kenya and was present in Kenya for any
period in a particular year of income under consideration.

b) or could be an individual that has no permanent home in Kenya:

But was present in Kenya for a period amounting in the aggregate of 183 days or more in that
income year.

But was present in Kenya that year of income and in each of the two preceding years of income
for periods averaging more than 122 days in each year of income.

Also residency can be enlisted to imply a body of persons being:

a) A body being a company incorporated under a law of Kenya.

b) The management and control of the affairs of the body was exercised in Kenya in a
particular income year under consideration.
c) Declaration of the body by the Cabinet Secretary through Gazette notice to be resident in
Kenya for any year of income.

Mr Owino qualifies as a resident individual because he has a permanent home in Kenya under
Section 2 of the Income Tax Act. Mr Owino’s holiday was supposed to lapse of 31st September
2015 but he opted to stay in the country up to 31 March 2016. Accumulatively, these are an extra
of 152 days till on the date of 31st March 2016 and 182 days if the preceding holiday month is
added. In relation to the tax residency concept in Kenya, residents pay income tax on their
income from Kenya and on income for services rendered anywhere else in the world with the
reprieve in section 41 of Double Tax Relief. Therefore, if an individual has a permanent home in
Kenya, and sets foot in year of income, no matter how short the stay is, he/she shall be deemed a
resident for the whole year and shall pay income tax. Mr Owino is thus mandated to pay income
tax for the period he is in Kenya.

Further, Article 4 (2) of the UK/KENYA Double Taxation Agreement states if an individual
is a resident of both Contracting States, then his status shall be determined in accordance with
the following rules (a) he shall be deemed to be a resident of the Contracting State in which he
has a permanent home available to him. If he has a permanent home available to him in both
Contracting States, he shall be deemed to be a resident of the Contracting State with which his
personal and economic relations are closest.

Article 4(2)(C) states that if a person has “a habitual abode in both contracting states or neither
or them, he shall be deemed to be a resident of the contracting state of which he is a national”.

Section 3(1) CAP 470 states income tax shall be charged for each year of income upon all the
income of a person, whether resident or nonresident which was accrued in or was derived from
Kenya.

Enasoit Ranch Limited v Commissioner of Domestic Taxes [2020] eKLR

Facts

The case is a tax appeal of 2015 filed by the Ranch a LLC incorporated under the Laws of Kenya
and is situated in Dol Dol, Laikipia in the business of Ranching and provision of camping
activities such as accommodation, game drive and horse riding. This appeal is against the
decision of the local committee dated 5th June 2015.

Issues

The issue of determination was whether Mr Halvor Nicolai (deceased) who financed the Ranch
through his two companies both registered in the British Virgin Islands had a permanent
residence in Kenya. Also in that determination, the contentious withholding tax issue would be
resolved.
Applicants Case

i. The local committee erred in fact and law in failing to find that Mr Astrup was resident in
Kenya
ii. The local committee erred in law in declining to allow the appellant to adduce evidence to
prove that Mr. Astrup had a permanent home in Kenya.
iii. The Local Committee erred in law and breached the Appellant’s Constitutional right to a fair
hearing in declining to admit the Appellant’s evidence which demonstrated that Mr Astrup had a
permanent home in Kenya.
iv. The Local Committee erred in fact and law in failing to conclude that the cottage at Enasoit
was permanent structures that constituted a permanent home and not temporary tents.
v. The Local Committee erred in law and fact in disregarding Mr. Astrup’s resident permit which
demonstrated his close connection to Kenya.
vi. The said decision of the local committee is therefore wrong in law and fact.

Determination

The determination of the residence of Halvor in Kenya is defined under section 2 of Cap 470 as:
‘resident’ when applied in relation:
(a) to an individual means:
(i) that he has a permanent home in Kenya and was present in Kenya for any period in any
particular year of income under consideration: or
(ii) that he has no permanent home in Kenya but (A) was present in Kenya for a period or
periods amounting in the aggregate to 183 days or more in that year of income (B) was present in
Kenya in that year of income and in each of the two preceding years of income for periods
averaging more than 122 days in each year of income

Judgement

Justice Mary Kasango concurred with the submissions of the learned counsel for the Ranch that
the Local Committee erred to have considered The Double Taxation Relief (Kenya/Norway)
Arrangements Notice 1973. The determination of the residence or otherwise of Halvor
ought to have been as provided in Cap 470. Under that legislation the term residence is defined
and there was no need to go beyond that legislation.
Cesena Sulphur Co. vs. Nicholson (Surveyor of Taxes) (1875-1883) 1 TC 88

Facts

A company was incorporated in England to take over and work sulphur mines in a place
called Cesena in Italy. In Italy, the manufacture, sale and management of the company business
was run there. On the other, hand the managing director of the company was permanently
resident in Italy and registered there were three quarters of the shares were also resident.

The Board of Directors controlled sale, ordered direction and management of the company from
London and also the annual general meetings were also held in London where dividends were
also declared.
Issue

It was whether the company was a resident in England to subject the whole of its worldwide
income to tax or whether it was resident in Italy.

Judgement

It was decided that since every act of the company’s management was done in England, thus the
main place of management was London and that they were a resident in England with the
obligation that all worldwide income was subject to English taxation.

b) Using case law explain withholding tax as per Cap 470 laws of Kenya (7 marks)

 Sections 10 and 35 of the Income Tax Act and the Income Tax (Withholding Tax Rules) 2001
withholding tax it is a tax that is chargeable on, among others, interest, dividends, royalties,
management or professional fees, commissions, pension or retirement annuity, creating an
obligation on the tax payer, whether resident or non-resident, to deduct and remit the tax on
eligible income which accrued in or was derived from Kenya. The companies and partnerships
making the payment, are responsible for deducting and remitting the tax to the Commissioner of
Domestic Taxes.
Section 35 (1) of the Income Tax Act states a deduction of withholding tax is predicated on the
condition that the agent appointed to collect the tax for the appellants under section 96 of the Act
has in fact made a payment to a non-resident person. Thus it is clear the deduction of tax from
taxpayer’s income for withholding purposes is predicated on a real or actual taxable payment
being effected, made and received by the tax payer.

Lambe V. Commissioners of Inland Revenue (1934) 1 KB 178, it was decided that income

means that which comes in, and refers to what is actually received; that in order to attract tax
there must be income in the sense of something coming in, and therefore withholding tax is
leviable on the total income. It follows from this argument that, before a demand for payment
can be made, there must be an income and a deduction.

Kenya Commercial Bank vs. Kenya Revenue Authority High Court Income Tax Appeal
No. 14 of 2007 the court gave the view that it was upon the appellant alone who had the
responsibility to devise workable procedures to ensure compliance with the Tax Law. The
applicant is ought to have devised a system by which its contractual terms with its agents would
ensure that withholding taxes were accounted for. According to the judge, this may be a
prudent  course since the converse may very well open an avenue for tax evasion by
unscrupulous agents thus render the whole idea of deducting taxes on commissions payable to
non-residents a mirage. As attractive as this argument seems, it flies in the face of the decisions
guiding the interpretation of tax legislation.

Tanganyika Mine Workers Union V. The Registrar of Trade Unions (1961) EA 629, where
it was decided that where the provisions of an enactment are penal in nature, they must be
construed strictly and that in such circumstances, violence ought not be done to its language so
as to bring people within it. The judge concluded saying:

Whereas the obligation to pay taxes is a statutory obligation and the failure to collect the tax by
way of withholding and remitting taxes by the principals in respect of commissions in my
view ought not to be lightly excused, taking into account the language of section 35 of the Act,
the court must, not without a little anguish, find that the decision by the Respondent was in the
circumstances unjustified under the law …...In this case, payment was by way of deduction of
the Commission at source. Therefore the applicant was not in a position to effect deduction at the
time when the agents paid themselves the said commission. I am not prepared to interpret the
said phrase to mean anything else apart from what the phrase connotes in ordinary English
language.”

Republic v Kenya Revenue Authority & another ex parte Kenya Nut Company Limited
[2014] eKLR.

Issues

It was whether withholding tax was payable in respect of agency commissions retained by
several entities domiciled in foreign jurisdictions, which sourced customers for the applicant’s
goods.

Applicant’s Case

The applicant had maintained that it had no control over these commissions and could not
therefore withhold tax.

The applicant therefore claimed that the KRA’s decision was unreasonable since it (the
applicant) could not be required to recover taxes as an agent of the KRA even though it had no
control of the taxable income.

According to the applicant, the KRA’s insistence on charging withholding tax, “in spite of the
impossibility and overwhelming difficulty of recovering tax from foreign traders,” violated its
legitimate expectation that the KRA would be fair and reasonable, since the ITA contemplated
that withholding tax would only be recovered where a tax payer (constituted as an agent of the
KRA) actually made deductions from funds within its control.

Respondent’s Case

The KRA insisted that the applicant was responsible for this tax, and demanded the withholding
tax together with interest thereon.
Judgement

The Court agreed with the applicant, finding that since the commissions in question were paid by
way of deduction at source, the applicant was not in a position to effect deduction of the
withholding tax at the time when the foreign agents paid themselves the commissions. The court
also nullified the penalty imposed on the applicant, on the basis that the KRA had failed to
specify the statutory basis of the penalty. The Commissioner had imposed a penalty at the rate
of 20% yet the applicable regulations stipulated a rate of 10%. At the hearing, the Commissioner
had contended that this higher penalty was imposed under the ITA but had failed to cite a
specific provision of this law to justify it.

Conclusively, withholding taxes are deducted at source from the following sources of income:
interest from bank at 15%, interest on housing bonds at 10%, dividends at 5%, royalties at 5%,
insurance commission at 5%, and insurance brokerage at 10%. Further, other services
payments, including management or professional fees, consultancy and training fees
exceeding Ksh. 24,000 per month are charged at 5% as per the Finance Act 2011.
 REFERENCES

1. Cesena Sulphur Co. vs. Nicholson (Surveyor of Taxes) (1875-1883) 1 TC 88

2. Enasoit Ranch Limited v Commissioner of Domestic Taxes [2020] eKLR
3. Income Tax (Withholding Tax Rules) 2001
4. Income Tax Act CAP 470 Laws of Kenya
5. Kenya Commercial Bank vs. Kenya Revenue Authority High Court Income Tax Appeal
No. 14 of 2007
6. Lambe V. Commissioners of Inland Revenue (1934) 1 KB 178
7. Republic v Kenya Revenue Authority & another ex parte Kenya Nut Company Limited
[2014] eKLR.
8. Tanganyika Mine Workers Union V. The Registrar of Trade Unions (1961) EA 629,
9. UK/KENYA DOUBLE TAXATION AGREEMENT SIGNED 31 JULY 1973