Background
In Appeal No. 46 of 2016 before the Tax Appeals Tribunal, the International School of Kenya (ISK), a company limited by guarantee established through a partnership between the U.S. and Canadian governments, challenged a PAYE tax assessment issued by the Commissioner of Domestic Taxes. Following a tax audit conducted between November and December 2015, the Commissioner issued assessments totaling over Kshs. 1.43 billion for PAYE, Kshs. 398,293 for Withholding Tax (WHT), and Kshs. 258.9 million for Corporation Tax. ISK objected to the PAYE and Corporation Tax assessments (but accepted the WHT liability), resulting in the Corporation Tax assessment being withdrawn. However, the PAYE assessment was confirmed, prompting ISK to file an appeal with the Tribunal. The appeal proceedings involved multiple filings and amendments by both parties between 2016 and 2020.
Parties Submissions
In its appeal, ISK argued that the Respondent (Kenya Revenue Authority) erred in imposing PAYE on emoluments and benefits of its foreign employees, citing its unique structure as a diplomatic entity jointly owned by the U.S. and Canadian embassies. ISK contended that the Kenyan Ministry of Foreign Affairs (MOFA) had granted it privileges and exemptions, including tax exemptions, since its establishment in 1976. The Appellant (International School of Kenya) pointed to diplomatic correspondences and agreements that emphasized its international character and the application of privileges under the Vienna Convention on Consular Relations, as well as domestic laws such as the Privileges and Immunities Act. ISK also argued that its long-standing tax-exempt status, established through agreements with the government, created a legitimate expectation that it would not be taxed. Additionally, ISK claimed that the Respondent’s assessment was based on estimations, making it excessive and incorrect. The Appellant sought to have the assessment set aside on these grounds.
The KRA/Respondent argued that the Appellant’s tax assessment of Kshs. 1,433,683,754.00 was accurate and in accordance with Kenyan law. The Respondent stated that the Appellant had failed to deduct PAYE from expatriate employees and benefits provided to locally hired staff, violating the Income Tax Act. The Diplomatic Notes cited by the Appellant did not extend diplomatic privileges or tax exemptions to its foreign employees, and the Appellant had not obtained an exemption certificate from the government. The Respondent further contended that the Appellant’s foreign employees were taxable under Kenyan law, as they were residents in Kenya and provided services within the country. Additionally, the Respondent rejected the Appellant’s claims regarding diplomatic exemptions, legitimate expectation, and the lifting of the corporate veil, arguing that the Appellant’s operations were commercial, not diplomatic, and that its failure to remit PAYE was discriminatory. The Respondent urged the Tribunal to dismiss the appeal and uphold the tax assessment.
Key Issues
The following issues were determined by the Tribunal:
1. Whether the Appellant (International School of Kenya) was exempt from paying PAYE on the salaries and emoluments of its expatriate staff.
The Tribunal found that the Appellant’s structure and diplomatic ties did not grant it diplomatic status or tax exemptions. The Appellant failed to demonstrate that its expatriate staff were exempt from PAYE under diplomatic privileges, the Vienna Convention, or the Income Tax Act. Consequently, the Tribunal concluded that the Appellant was not exempt from PAYE for its expatriate staff.
2. Whether the Appellant’s structure gave it a diplomatic character, thus conferring diplomatic privileges and immunities, including tax exemptions.
It was held by the Tribunal that the Appellant, despite having diplomatic representations on its Board, did not qualify as a diplomatic entity. Diplomatic correspondence between the Appellant and the Ministry of Foreign Affairs in 1976 did not grant the Appellant or its expatriate staff diplomatic privileges. Therefore, no tax exemptions were applicable based on diplomatic status.
3. Whether the Appellant’s expatriate staff were exempt from PAYE by virtue of the Vienna Convention on Consular Relations (1963) as domesticated under the Privileges and Immunities Act.
The Tribunal found that the Appellant was not entitled to tax exemptions under the Vienna Convention, as the expatriate staff did not meet the definition of “consular officers” and did not perform consular functions. Furthermore, even if they did, the specific tax exemption provisions did not apply to their employment.
4. Whether the Appellant’s expatriate staff were exempt from PAYE under Section 13 of the Income Tax Act and Paragraph 27 of the First Schedule, which applies to emoluments from foreign sources in connection with technical assistance or agreements with the government.
It was held that the conditions for exemption under Section 13 and Paragraph 27 were not met. The Appellant’s income primarily came from school fees, not foreign sources related to governmental agreements for technical assistance. Additionally, no agreement between the Missions and the Kenyan government for tax exemptions was provided. Thus, the Appellant’s argument for tax exemption under this provision also failed.
5. Whether the Appellant’s application for tax exemptions was properly made, particularly regarding its failure to seek exemption for PAYE on expatriate staff.
The Tribunal noted that the Appellant had applied for exemption from corporation tax in 1977 but did not seek exemption for PAYE on its expatriate staff. This procedural inconsistency raised doubts about the Appellant’s claim to diplomatic or tax exemptions for its staff.
6. Whether the Respondent (Kenya Revenue Authority) was within its rights to demand the payment of unpaid PAYE taxes.
It was held by the Tribunal that KRA was within its statutory authority to recover PAYE taxes and penalties, as the Appellant failed to deduct and remit these taxes as required by law. The Appellant had the option to either pay the taxes or engage with the Respondent to resolve the matter.
Final Determination
In its final determination, the Tribunal:
- Dismissed the appeal filed by the Appellant (International School of Kenya).
- Upheld PAYE assessment of Kshs. 1,433,683.75 by the Commissioner of domestic taxes dated 18th March 2016.
- Ordered that each party bear its own costs in relation to the case.
