Tribunal upholds Chinese firm's Sh340m tax bill

Chinese civil engineering company Jiangxi Jing Tai Water Conservancy has been ordered to pay Sh340 million in taxes to the Kenya Revenue Authority (KRA).

The Times Towers Building housing Kenya Revenue Authority in Nairobi on Monday, Oct 1, 2018. [Jonah Onyango, Standard]

The Tax Appeal Tribunal said KRA's assessment of Sh340.91 million was justifiable.

The tribunal ruled that the firm did not file a valid objection to explain why KRA's assessment could have been issued in error.

The tribunal - led by Nyongesa Wafula, Cynthia Mayaka, Rodney Oluoch, Abraham Kiprotich, and Gloria Ogaga - said the engineering firm failed to provide evidence to dispute KRA's tax assessment.

"From the above analysis and case laws and considering that the appellant (Jiangxi Jing Tai Water Conservancy) has not provided any reason why it did not validate its objection, the tribunal finds that the respondent was justified to invalidate the appellant's objection," said Mr Wafula.

KRA said it investigated corporation tax from January 2018 to December 2022, value-added tax (VAT) from January 2018 to December 2022, and Pay as You Earn (PAYE) from January 2018 to December 2022.

The taxman argued that over the period, the company was in a loss position except for 2021, when it declared a taxable income of zero and also filed all its VAT returns, where it was in a constant credit position as a result of classifying sales under the exempt category.

KRA said it applied the banking analysis method based on the banking credits in accounts held at Sidian Bank, KCB Bank, and SCB Bank in establishing the taxable income and confirmed its suspicion that the company had been misclassifying sales as exempt instead of classifying the sales as general rated.

Further, KRA argued that it proceeded to make adjustments for non-trade deposits such as interbank transfers, capital injection, reversals, and unpaid cheques to come up with the net banking expected income and established trade income banked was Sh1.25 billion.

The taxman also established an undeclared income of Sh413.89 million between 2019 and 2022.

It also said its analysis of VAT declarations revealed that the Chinese firm had declared VAT-exempt sales amounting to Sh687.39 million for the years 2020, 2021, and 2022 earned from Lake Victoria South Water Services Board.

KRA disallowed subcontractors' expenses, operating expenses, and auto and truck expenses for lack of supporting documentation.

However, the company said the banking approach is not the ideal approach for KRA to use in determining the income accrued in a year for tax purposes.

The firm said KRA categorically stated that the amounts paid by Lake Victoria South Water Services Board to their firm were inclusive of VAT, but KRA failed to compute tax by working the amounts backwards to determine the taxable amount.

It said KRA subjected this amount, which was already inclusive of VAT, to VAT, equating to double taxation.

The company also said that KRA failed to take into consideration the loss carried forward from the prior year, 2018, when arriving at the additional corporate income tax assessment contrary to Section 15 of ITA.

The firm said interbank transfers are not revenue or trading income but normal movements of money from one bank to the other, where it is an account holder in both banks and therefore should not be subjected to income tax or VAT.

The firm said KRA failed to consider the director's capital injection, which was made as deposits into the company's bank.