Both countries apply the imputation method to eliminate double taxation. The Kenya Revenue Authority conducted a tax audit for the years 2014 to 2018 and issued in October 2019 an assessment of the additional withholding tax on fees paid by the taxpayer to an affiliate (a resident of South Africa). The taxpayer objected, arguing that no withholding tax was levied under Article 7 (corporate profits) of the Kenya-South Africa Income Tax Convention. Over the years, there have been tax disputes between various taxpayers whose transactions are covered by the DTA and the Kenya Revenue Authority (KRA) regarding the interpretation of the DTA. Most often, the disputes concerned the interpretation of articles 7 and 22 of the DTA, which provided for the taxation of corporate profits and other income. First, the key issue in resolving tax disputes was whether the fees charged by a South African company for the provision of professional services to a Kenyan company should form part of the commercial profit under article 7 of the Commission or whether the fees fell within the scope of article 22 of the Commission. A new double taxation agreement (DTA) between South Africa and Kenya has been adopted by the authorities, which will strengthen capital import rules and enter into force on 1 January 2016. On 26 November 2010, the kenyan and South African governments concluded a double taxation agreement (DTA) to ensure that resident residents and resident companies avoid double taxation and tax evasion with respect to income tax. The DTA then entered into force on 1 January 2016. According to a recent communication published by the South African Revenue Service, the Kenya-South Africa Income Tax Convention entered into force on 19 June 2015.

The treaty, signed on 26 November 2010, is the first of its kind between the two countries, although an earlier 1959 treaty was concluded between South Africa and the UK with regard to Kenya. On 1 April 2021, the Kenya Tax Appeals Tribunal (TAT) ruled on the tax dispute between McKinsey and Company Inc. Africa Limited (McKinsey/the complainant) and the Kenya Revenue Authority (KRA) concerning withholding tax (WHT) on fees paid to a South African company (SA company) under the Kenya-South Africa Double Taxation Agreement (DTTA). The respondent`s view on the interpretation of DTAs that do not contain a specific management/fee article would render them superfluous and would not serve the purpose of avoiding double taxation. The Tax Appeal Tribunal ruled that amounts paid by a Kenyan branch to an affiliate in South Africa are not subject to withholding tax under the provisions of the Kenya-South Africa Income Tax Convention. Although the KRA is expected to appeal this decision, it is a landmark decision that clarifies the interpretation of DTAs in Kenya. This is especially true for permanent contracts that do not have a specific article dedicated to the taxation of professional fees, such as permanent contracts between Kenya and South Africa, France, Korea, Qatar and the United Arab Emirates. Since the DTTA does not explicitly include an article that covers the taxation of management or fees at the time of payment, these fees fall directly under section 22, which covers income not expressly provided for in the other sections.

The Appellant appealed KRA`s decision to the TAT on the basis that the Respondent had wrongly applied the provisions of DTTA Kenya-SA to the Appellant`s activities. Since the tax authority has not proved that the South African company has a permanent establishment in Kenya, no withholding tax has been levied In summary, if a DTTA does not contain a separate article on management or professional fees, these fees should be called business profits. Christopher Kirathe | christopher.kirathe@ke.ey.com Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London Section 35 of the ITA charges a fee for the taxation of business and administrative expenses paid to a non-resident who does not have a permanent establishment in Kenya, and paragraph 3(a) of the Third Schedule to the ITA provides that the applicable WHT rate is 20%. Prior to 2000, the OECD Model Convention provided for the taxation of management or professional services separately in accordance with Article 14. However, article 14 was deleted on 29 April 2000. As a result of this removal, professional services are now taxable under Article 7 of the OECD MLC. There is one important distinction to keep in mind. If article 7 of the Commission were applied, South Africa would have tax duties on profits made in Kenya by a South African resident in South Africa who did not have a permanent establishment in Kenya.

On the other hand, if article 22 of the Commission were applied, Kenya would have tax duties on the winning profits made by the resident of South Africa, whether or not the resident of South Africa had a permanent establishment. The question of article 22 arises only if the income has not been dealt with in any of the preceding articles. In this case, the income representing the profits of the company has been treated in accordance with Article 7. Therefore, the defendant cannot claim that the applicable clause is Article 22. Profits from the sale of other assets by assets resident in a Contracting State may be taxed only by that State. The DTTA provides a tax base that consists of WHT first having to be tested, unless the company maintains a permanent establishment to justify the use of Article 7 of the DTTA. Article 7(7) prevails over all other articles of the DTTA which provide for the income element in question. The information contained herein is of a general nature and is not intended and should not be construed as legal, accounting or tax advice or opinions provided by Ernst & Young LLP to the reader.

The reader is also cautioned that this material may not apply or be appropriate to the reader`s specific situation or needs and may require consideration of non-tax and other tax factors if action is to be considered. The reader should contact their LLP.C or other tax professional before taking any action based on this information. Ernst & Young LLP assumes no obligation to inform the reader of any change in tax laws or any other factor that may affect the information contained herein. Section 7 of the DTTA is the appropriate section for the taxation of fees in this case, since it deals with the taxation of a corporation`s profits. The South African entity is a company and the income it receives from Kenya through payments made to it by the complainant constitutes a commercial profit. Article 22, paragraph 3, of the Convention on Access to the Union for Accidents at Work reflects Article 21, paragraph 3, of the United Nations (UN) Model. In the respondent`s view, the interpretation of Article 21(3) in a commentary to the UN Model states in part: . this paragraph supplements Article 21 of the OECD Model Convention. It allows the state in which the revenues are generated to tax that income if its law so provides. This provision gives Kenya the right to tax this income through a withholding tax. Therefore, South Africa can tax professional income received from Kenya as a business profit. Double taxation will be eliminated by granting a credit for the amount paid by the South African entity in Kenya.

Update on tax news Send this document by e-mail Print this document The contract contains the provision that a permanent establishment is considered to be incorporated if a company of a Contracting State provides services by employees or other employees for the same or a related project for a period of more than 183 days in a total period of 12 months. . . .