The Kenya Revenue Authority (KRA) has lost an Sh11 million tax claim against an environmental lobby group.
KRA had demanded the money from Better Globe Forestry Limited (BGF) as part of the money the lobby had received from outside the country.
However, the NGO which is fighting climate change through afforestation, moved to court arguing the said money was meant for tree planting and not for profit.
The taxman wrote to BGF on April 12, 2019, seeking to verify tax declarations as indicated in their tax returns for 2015-2018 income.
In the letter, the Commissioner for Domestic Taxes, said the turnover earned in the period did not match the filed returns.
KRA wanted BGF to furnish it with Sales and Purchase invoices and ledgers, income statements and payrolls, and any other supporting documents and records for verification.
KRA wrote back on October 18, 2019, saying they did not find any anomalies under the Corporation Tax and Pay As You Earn (PAYE).
However, the taxman said BGF received long-term loans from outside the country and therefore needed to pay withholding tax amounting to Sh11 million, inclusive of penalties and interest.
BGF protested saying the money KRA was referring to was not a loan but was given by donors to set up forests in the country.
The lobby said the investors retained ownership of the trees planted and the attendant risks.
The organization said the nature of the money was that they would invest in trees, and upon maturity, they would be sold and the money paid back to investors.
BGF said the interest claimed by KRA would have applied if the funds were in the form of a loan which was not the case.
Part of their evidence was that in 2015, retired President Uhuru Kenyatta awarded them the award of a distinguished taxpayer, and this, therefore, demonstrates they are committed to tax compliance and cooperation.
KRA had claimed a review of lease agreements had shown BGF was the one handing out different contracts in the country. Commissioner for Domestic Taxes said this meant the foreign investors they were citing were not involved in the day-to-day operations of the organization, which also meant the said trees belong to BGF not the donors.
KRA said the company was not able to demonstrate that remittances from overseas investors were the same funds it had in their accounts.
The taxman said going by BGF's explanation that the money was not in the form of a loan, then section 16 (3) of the Income Tax Act would apply.
It argued that the money was in their account and would be paid back to the donors at a later date.
After the reply, BGF moved to the Tax Appeals Tribunal objecting to KRA's push for it to pay the Sh11 million.
The tribunal, in a November 12, 2021 decision, observed that investors from Norway injected Sh2, 550 (by current exchange rate) per tree, and expected a return of Sh28, 700 per tree after maturity which was to take 15-20 years depending on location. In the end, KRA said, BGF bought trees from owners at Sh28, 400. Trees at Karura Forest on April 22, 2023. [Boniface Okendo, Standard]
The tribunal noted that the fact BGF was a signatory to the funds used to buy the seedlings and this does not entitle them to full and complete ownership of the trees.
The tribunal noted that KRA said BGF had agreed to pay the said amounts and had even requested a payment plan for the same but there was no evidence tabled to that effect.
In the end, the tribunal found that the money given to BGF by her parent company, Better Glove AS, did not constitute an interest-free loan and allowed their appeal, rejecting KRA's objection.
Aggrieved by this decision, KRA moved to the High Court to challenge it.
In his Judgment, Justice David Majanja said the court was supposed to determine whether the money sent to BGF from Better Globe AS was interest-free loans and whether they should be subjected to pay withholding tax.
Justice Majanja said KRA was correct in requiring BGF to prove the funds were not a loan but a customer remittance, and that the company did so on multiple occasions.
"I am unable to find fault in the tribunal's conclusion that the remittances made by the respondent to Better Globe AS were not loans attracting deemed interest but remittances from Better Globe AS's investors who got a Return on Investment from the said remittances," said Justice Majanja.
He added: "The tribunal's overall conclusion was thus sound and I do not find any reason to intervene."
