Tax disputes over exportable services and their mitigation
Letters
Tax disputes over exportable services and their mitigation
Wednesday 22 December 2021
Summary
- Generally, Section 2 of the VAT Act defines exportable services as those supplied for use or consumption outside Kenya.
- Service, on the other hand, is defined as anything that is not good or money.
- Taxing rights are granted at the place of consumption to maintain neutrality within the VAT system as it applies to international trade.
The taxation of exportable services obeys a rule of unique scope. Although established by international standards and practices as established by the OECD, ironically, they continue to pit the Kenya Revenue Authority against companies that export international services.
While it is difficult to define whether a service is exportable or not, the OECD Guidelines on International Trade and Services have set out procedures to help navigate the murky waters of establishing jurisdiction. the consumption.
The first point of reference would be the VAT law and its provision on “exportable services”. Generally, Section 2 of the VAT Act defines exportable services as those supplied for use or consumption outside Kenya.
Service, on the other hand, is defined as anything that is not good or money. An example would be a local business performing one of the following services: market analysis / survey on behalf of a non-resident business, consulting, data processing, promotion, consumer or consumer advertising services. non-resident company.
The divergence has always been the place of consumption, that is to say locally or internationally. The former would benefit from the standard 16 percent VAT rate as it constitutes a “taxable delivery”.
But, at the same time, the latter would be considered as an “exportable service”, therefore exempt from VAT (previously, it was zero-rated).
In particular, one might ask, how do you establish the place of consumption? The place of consumption is usually determined on a case-by-case basis, but primarily guided by established VAT guidelines developed by the Organization for Economic Co-operation and Development (OECD).
The guidelines recognize that a business may purchase or procure a service from another jurisdiction for the purpose of operating. Crucially, in order to identify who should bear the VAT, it is necessary to indicate the taxable event and the final consumer.
For example, suppose the services are consumed or used in a different jurisdiction other than Kenya, such a service constitutes an “exportable service” as defined by the VAT Act, therefore subject to exemption from VAT.
In most cases, it is not clear where a service is used or consumed, thus constituting the bulk of tax disputes.
To elucidate the place of consumption, courts generally rely on VAT law and the OECD guidelines to find an answer to this intractable question.
In doing so, the court will refer to the service agreement (if any) between the local business and the non-resident entity to establish the taxable fact and the end consumer.
The service agreement will help the court to identify the parties, their rights and obligations. And it doesn’t matter whether the service is performed in Kenya or outside Kenya.
Taxing rights are granted at the place of consumption to maintain neutrality within the VAT system as it applies to international trade. For a taxable service to be “exportable”, the benefits must be acquired outside Kenya for VAT exemption.
Under VAT law, a “taxable delivery” can only be made in Kenya by one person registered to another person.