The Tax Appeals Tribunal has ordered M-Kopa Holdings to pay taxes in Kenya after the financial technology firm, failed to prove that it was managed and controlled from the United Kingdom (UK).
M-Kopa sought reprieve from the tribunal after the Kenya Revenue Authority (KRA) assessed its withholding taxes and Pay as You Earn (PAYE) at Sh885 million.
In a ruling, the tribunal set aside withholding tax assessments for 2017 to 2019 and on deemed interest but upheld KRA’s position on tax residency, PAYE, and withholding tax from November 2019 onwards.
“The Respondent’s assessment regarding WHT (withholding tax) on interest for the period commencing November 7, 2019 onwards be and is hereby upheld,” the tribunal said in its August 9, 2024 decision.
“…The Respondent’s assessment regarding WHT on interest for the period from November 6, 2019 backwards be and is hereby set aside.”
The tribunal ruled that M-Kopa Holdings had its place of effective management in Kenya, thus affirming its tax residency in the country.
The tribunal agreed with KRA that senior managers based in Kenya played a significant role in making critical management decisions.
“The Appellant did not also table evidence of the key decisions that were made by the board in the meetings that were held outside Kenya. The determination of PEM (place of effective management) is based on facts and circumstances,” the tribunal said.
“… the appellant’s failure to provide evidence to support its argument that the board had actually made core decisions affecting the operation of the company in the meetings held outside Kenya, meant that it had failed to discharge the burden of proving that it was not a resident in Kenya.”
M-Kopa Holdings, a UK-incorporated entity, had challenged KRA’s assessment of Sh885,874,398 million in taxes, penalties, and interest for 2018, 2019, and 2020.
M-Kopa argued that its place of management was outside Kenya, having been incorporated in 2017 under the United Kingdom Companies Act. The firm told the tribunal that its registered offices are in the UK and its board of directors included members residing in various countries, with only five out of 14 directors being Kenyan residents.
M-Kopa also contended that Jesse Moore, one of its senior executives, was wrongfully appointed by KRA as a tax representative in Kenya, as control of the company rests with its entire board and not with an individual.
The company further disputed the WHT assessments, arguing that the evaluation was based on deemed interest on redeemable preference shares, which it claimed should not have been taxed as the shares did not qualify as loans under the Income Tax Act.
While opposing the assessed PAYE taxes, M-Kopa Holdings argued that it was not a tax resident in Kenya for 2017, 2018, and 2020.
Therefore, it claimed that the remuneration of its employees, including senior executives and stock options granted to them, should not have been subject to taxation.
KRA defended its assessments, stating that M-Kopa’s place of effective management was in Kenya. The tax authority highlighted that key company decisions were made in Kenya, and senior management, including the CEO and CFO, resided in Kenya.
KRA maintained that the preference shares issued by M-Kopa were treated as debt, thus attracting WHT. It also argued that the PAYE assessments were valid, as M-Kopa employees, who were Kenyan residents, received share-based payments for services rendered.
Regarding withholding tax, the tribunal, led by its chairperson, Eric Wafula, sided with M-Kopa for the period between 2017 and 2019. The Tribunal observed that, prior to 2016, Section 35(6) of the Income Tax Act (ITA) allowed the Commissioner of the Kenya Revenue Authority to claim taxes from an entity that failed to deduct withholding tax as if the taxes were due from them.
However, the Finance Act of 2016 repealed this provision, meaning KRA could no longer demand taxes that had not been withheld. This legal gap persisted until the Finance Act of 2019 reinstated the provision under Section 39A of the Tax Procedures Act (TPA), effective November 07, 2019, allowing KRA to demand such taxes again.
Additionally, the tribunal set aside KRA’s assessment of WHT on deemed interest for redeemable preference shares, agreeing with M-Kopa that the shares did not qualify as loans under the tax laws. However, it upheld KRA’s PAYE assessments, ruling that the stock options granted to M-Kopa employees qualified as taxable income under the Income Tax Act.
