KRA hunts pipeline contractor for Sh18 billion in back taxes

A firm based in Cyprus, the tiny Mediterranean island nation, has lost a suit it filed hoping to block a Sh18 billion tax demand by Kenya Revenue Authority.  

Zakhem International Construction, the firm that built the oil pipeline between Mombasa and Nairobi, has been directed to oblige with the decision of the tax appeals tribunal.

KRA successfully argued that the company, whose president is the Lebanese Consulate to Kenya Abdallah Zakhem, has been misrepresenting its revenues owing to its complex business structure.

Taxation for a locally incorporated company is treated differently from that of a foreign firm that has been contracted for a Kenyan job.

A shocking discovery that only came to light during the proceedings was that the firm is not Kenyan as it is easily confused with its sister Zakhem Construction (Kenya).

Legally, the two exist as independent entities capable of suing and being sued despite the shared ownership.

Zakhem Construction hosts the Lebanese Honorary Consulate in Nairobi, which is across the road from the General Service Unit Headquarters on Thika Road.

KRA’s demand is based on several projects Zakhem International Construction (ZIC) has been carrying out in Kenya, including the Sh51 billion one it was contracted for by KPC.  

It was the size of this contract that jolted the taxman’s Transfer Pricing Unit (TPU) to action, making huge discoveries on the alleged non-compliance.

Subsequently, KPC was directed to withhold the balance due to the contractor that was outstanding sometime late last year, marking the start of a legal battle that culminated in Lady Justice Margaret Waringa Muigai’s ruling.

The amount was, however, only Sh8 billion which is less than half the outstanding taxes demanded, with fresh concerns the balance might be lost as Kenya does not have any bilateral agreements on taxes with Cyprus – also considered a tax haven.

Further, an earlier tax claim against the firm for an estimated Sh300 million could not be paid after the firm bluntly said it was broke.

After granting the freeze orders to KPC, KRA also asked commercial banks to detain any monies in the contractor’s accounts pending the determination of the tax claim, the tax tribunal was told, but the firm did not have any balances in its accounts.

It would appear that the accounts were drained as yet another company, Ecobank Limited, had earlier won temporary freezing orders over a separate legal dispute.

Muigai ruled that the Commissioner for Domestic Taxes had the right to serve notice to KPC to withhold the payments due to ZIC.

Permanent residency

She directed the parties to go back to the tribunal, which is independent from KRA, where the earlier tax bill could be appealed by the Cyprus firm.

At the heart of the contested tax claim is whether Kenya has any right to slap an income tax charge on a foreign company that is only here to offer a service and leave.

ZIC had argued that it was irregular considering that this was a government project and that it would be paying taxes at home in Cyprus.

In essence, it argues it had only operated in Kenya through a branch which it established specifically for the pipeline contract.

KRA on the other hand convinced the court, citing international conventions which give guidance on which circumstances a foreign company can be taxed abroad.

The taxman’s lawyers said the conventions only shield firms from taxation in a foreign land if they operate there for less than twelve months.

Anything over that period, for construction companies specifically, is considered as permanent residency hence liable to taxation as a local company.

“Specifically, the profits of an enterprise of one state are taxable in the other state only if the enterprise maintains a permanent establishment in the latter state and only to the extent that the profits are attributable to the permanent establishment,” OECD guidelines indicate.

OECD is the international organisation that shapes rules guiding cross-border trade, including how to tax businesses across borders.

ZIC handed over the pipeline in August last year after building it for over four years, an extended period since the project was intended to be delivered in just 18 months.

Part of the delay was attributed to wrangles with one of its sub-contractors, to potentially increase the costs of delivering the project.

More controversy over the pipeline would follow the company even after the huge tax bill, including the ongoing investigations triggered by a diesel spillage in April.

Among the claims leading to the spillage is poor workmanship.