The Court of Appeal at Nairobi held in a recent judgement that contributory hardware and software support services supplied by Sybrin Kenya to its South African and Guernsey affiliates qualify as exported services under section 2 of the VAT Act. The Court of Appeal further held that this sits outside the scope of Kenyan VAT. The Court sided with the taxpayer, reversing a High Court judgment and restoring a TAT decision. The ruling cancels a VAT assessment of Kshs. 40,689,306.
Background
- Sybrin Kenya provides software services related to bank cheque clearing processes.
- Sybrin was subcontracted by two foreign affiliates to provide contributory hardware and software services.
- These contributory services were integrated into a wider proprietary software package which SSPL and SL supplied to tier 1 and tier 2 financial institutions in Kenya.
- KRA carried out a VAT verification and issued a VAT assessment.
- KRA’s position was that the services were used by Kenyan banks and did not qualify as exported services under section 2 of the VAT Act.
- Sybrin Kenya objected averring that its services were exported for the use and benefit entities domiciled outside Kenya.
Decision of the Tax Appeals Tribunal
Sybrin Kenya appealed the assessment to the Tax Appeals Tribunal, which ruled in the company’s favor.
The Tribunal found that the services were correctly characterized as exported services under section 2 of the VAT Act and therefore not subject to VAT.
Decision of the High Court
KRA appealed to the High Court where the central question was where the services were finally consumed: by entities outside Kenya, as the company argued or by the Kenyan financial institutions using the finished software, as KRA argued.
The High Court overturned the Tribunal’s decision holding that: although foreign entities had contracted Sybrin Kenya, the ultimate consumers of the hardware and software maintenance services were the financial institutions in Kenya.
The High Court found the services were not exported and upheld the original assessment setting aside the Tribunal’s decision.
Decision of the Court of Appeal
Sybrin Kenya appealed to the Court of Appeal arguing that the High Court had: wrongly identified the Kenyan banks as the final consumers, ignored the specific terms of its subcontracts with its foreign affiliates and had overlooked the principle of separate corporate personality given the absence of any contractual link between the appellant and the Kenyan banks.
Sybrin Kenya argued that: the company’s services were contributory in nature and distinct from the finished product the Kenyan banks received and under section 2 of the VAT Act, an exported service is defined by where it is consumed, not where it is performed.
Sybrin Kenya further argued that OECD guidelines stipulate that for business-to-business supplies, the relevant place of consumption is the location of the customer rather than the end user. Another argument brought forward by Sybrin Kenya is that a service qualifies as exported regardless of where it is performed, provided it is consumed abroad. Sybrin Kenya invoked the separate corporate personality doctrine from Salomon v Salomon & Co Ltd [1896] UKHL 1 [1897] AC 22 and argued: taxing the appellant’s services would amount to double taxation, since evidence showed at least one Kenyan bank, identified as Barclays Bank (now ABSA Bank), had already accounted for reverse VAT on the same services.
KRA maintained that: the services were consumed locally because they were directed at, and ultimately shaped a product for Kenyan financial institutions. KRA further argued that the location of the consumer for VAT purposes was Kenya.
The Court of Appeal, whose jurisdiction is confined to questions of law under section 56(2) of the TPA framed the central issue as whether the services qualified as exported services under section 2 of the VAT Act.
It examined the actual service agreements between Sybrin Kenya and its two foreign affiliates. Both agreements defined the “customer” as the affiliate’s own customers located in Kenya, required Sybrin Kenya to act on the affiliate’s instructions, and provided for Sybrin Kenya to invoice only the affiliate, with no direct contractual obligation to or payment from the Kenyan banks.
The Court of Appeal found on this basis that the foreign affiliates not the Kenyan banks, were the primary consumers and beneficiaries of Sybrin Kenya’s services, since the foreign affiliates commissioned those services to meet their own obligations to third-party financial institutions in Kenya.
The Court applied the OECD destination principle, under which the taxing rights over a cross-border business-to-business service belong to the jurisdiction where the contractual customer is located, as determined by the business agreement.
Since SSPL and SL are domiciled in South Africa and Guernsey respectively, the Court’s conclusion: Sybrin Kenya’s services were correctly treated as exported and fell outside the scope of Kenyan VAT.
The Court of Appeal allowed the appeal, overturning the High Court and restoring the Tribunal’s 2021 decision.
Conclusion and Recommendation
This decision gives Kenyan taxpayers a clearer basis for structuring and defending cross-border service arrangements involving subcontracted, contributory work. The Court’s reasoning turned on the wording of the actual service agreements.
Sybrin Kenya’s contracts named its foreign affiliates, not Kenyan banks as the customer, and limited its invoicing to those affiliates, the affiliates were treated as the consumers for VAT purposes, even where the finished product was eventually used in Kenya.
For businesses providing contributory or fractional services to a foreign group company which then integrates those services into a product supplied to local customers, this ruling suggests VAT exposure often turns less on the ultimate destination of the finished product and more on how the underlying service and delivery agreements define the customer and the invoicing relationship.
Businesses in similar contributory arrangements should review their intercompany agreements and confirm the contractual customer, the invoicing party, and the absence of direct obligations to local end users are all clearly documented.
The Court’s reliance on the OECD destination principle confirms: OECD international VAT and GST guidance carries persuasive weight in Kenyan courts when characterizing cross-border digital and professional services, and this is likely to remain a relevant reference point in future disputes of this kind.
The judgment leaves open how a court would treat a reverse VAT and double taxation argument on its own terms, since the appellant raised this point, but it was not the basis on which the Court of Appeal decided the case.
If you provide contributory or subcontracted services to a foreign affiliate whose finished product ends up with Kenyan customers, this is your cue review your agreements.
Reach out to Intelpoint Consulting for a review of your cross-border service agreements and checking of any tax risks that you may be exposed to.
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