Tax Laws Need to be Validly Enacted And Enforced

Financial services consulting firm, Pricewaterhouse Coopers (PwC) says the recent high court ruling that rendered the Value Added Tax regulations, 2017 null and avoid affirmed that tax laws need to be validly enacted and enforced.

In a tax alert dated February 2022, PwC says “Tax law must be validly enacted and enforced. Failure to which creates an illegality. Where tax laws are prescriptive, there is no room for intendment or inference.”

In its Judgement issued on 31 January 2022, in a case pitting KRA, who were appealing an earlier ruling of the tax appeals tribunal, against W. E. C. Lines (K) Limited (WEC Kenya), the court declared the regulations “null and void” owing to procedural invalidity in their enactment.

The court found that the VAT Regulations, 2017 were never tabled before the National Assembly as required by the Statutory Instruments Act, 2013 in section 11, which states that “Every Cabinet Secretary responsible for a regulation-making authority shall within seven (7) sitting days after the publication of a statutory instrument, ensure that a copy of the statutory instrument is transmitted to the responsible Clerk for tabling before parliament.”

The appeal was against a case in which KRA was ordered by the Tax Appeals tribunal to pay WEC Kenya Ksh 6.4 million in VAT refunds.  The Kenyan limited liability company is the sole shipping agent of WEC Lines BV (WEC BV), a Dutch company engaged in the maritime transportation of goods. WEC Kenya represents WEC BV in operations related to its shipping business in Kenya.

WEC Kenya filed a VAT refund application for the period February 2015 to January 2018 attributable to zero-rated exported services supplied to WEC BV. KRA rejected the respondent’s application on 18 April 2018 citing the following on grounds that the services provided by WEC Kenya were consumed in Kenya, given that the company provides services to the clients of WEC BV located in Kenya.

KRA further argued that Regulation 13 of the VAT Regulations, 2017 which deals with exported goods and services, did not apply to the services supplied by WEC Kenya. KRA argued that the standard rate of tax, 16%, applied on the supplies made by WEC Kenya as opposed to the zero rates.

The Tribunal ruled that, as defined by the contract between WEC Kenya and WEC BV, the Dutch company was the sole consumer of the services provided by the respondent, on the basis that there were no agreements between WEC Kenya and the Kenyan importers.

While upholding the tribunal’s ruling, the high court indicated that there was no dispute that the respondent was an agent of WEC BV. As such, any contract made by WEC Kenya and third parties as contemplated by that agency relationship is, in fact, a contract between that third party and WEC BV. Therefore, there was no exclusive contract to speak of between the local importers of goods and WEC Kenya. As such, no services were offered from WEC Kenya to the importers.

PwC further says the judgment underpins the Privity of “contract is a sacrosanct legal doctrine that has not always been considered by the KRA when making decisions affecting taxpayers or when arguing its case before various tribunals.

In their interpretation of the ruling, PwC says “neither the KRA nor any third party has the jurisdiction to rewrite contracts between freely contracting parties. It follows, therefore, that parties are free to constitute the rights and obligations within the wording of their contracts.”