A Chinese company failed to block a Sh2.4 billion tax demand after the Kenya Revenue Authority (KRA) accused it of under-disclosing income through profit shifting, exaggerating hospitality expenses and excluding Chinese expatriates from payroll.
The Court of Tax Appeals rejected a request by Weihai International Economic & Technical Cooperative Company Limited, a Chinese construction company, to declare the tax demand by KRA technically invalid.
The company, which KRA says has won a number of construction tenders in Kenya, wants the tax demand set aside on the grounds that it has not yet done so. Weihai said that the KRA objection is complete for the company’s opposition to the taxman before the tax demand comes 127 days later, outside of the statutory time limit of 60 days.
According to the firm, KRA’s objection notice, which was published in the statutory timeline, was insufficient, incomplete, unintelligible, and contained missing pages.
However, the court refused to grant the request, saying that the application would harm the KRA.
“It is the tribunal’s considered finding that the order sought in this application is of a substantive nature, it cannot be granted at this stage because doing so would be tantamount to determining and giving a final order without considering the merits of the appeal,” he said. five members of the tribunal in the judgment made on September 20, 2024.
“As a result of the above, the court finds that the respondent (KRA) will suffer prejudice if the order sought in the application is considered and granted because this action will determine the substantive appeal without according to the respondent’s right to a fair hearing. court as guaranteed under Section 50 of the Constitution Kenya,” said the court presided over by Robert Mutuma.
Tax assessment
KRA said that on April 18, 2023, it audited and conducted an assessment of Weihai’s financials for the period between 2017 and 2021 in terms of corporate income tax, value-added tax, withholding tax, and pay-as-you-earn. The tax demanded a total of Sh2,460,996,251 from the company, including penalties and interest.
Weihai objected to this tax assessment on May 29, 2023. KRA issued a notice of objection on July 27, which the Chinese company said was invalid because it was incomplete, missing pages and unintelligible.
In its preliminary findings, KRA said that the Weihai branch in Kenya, which has won and implemented several local construction tenders, did not declare its income, resulting in a reduction in income tax, including corporate income tax and withholding tax.
As the Weihai branch is a subsidiary of a foreign international company and may have business relationships with the parent company or other related parties, the transfer pricing policy document is required to ensure that all transactions with related parties are disclosed and announced.
In its preliminary findings, KRA also found what appears to be a profit-shifting scheme: “a review of the tax records withheld from the appellant revealed that Weihai received interest income from the amount deposited in a bank account managed by the appellant (Weihai Kenya) ,” said KRA.
The audit found there were unsupported surveyor fees of Sh57,658,704.83 in the books of Weihai Kenya in 2018.
“Further review of this charge revealed that this charge cannot be supported and is in fact a certificate of value,” KRA said.
KRA also noted that taxpayers have incurred “excessive accommodation costs, which are not wholly and exclusively for generating income.”
Weihai Kenya also made some additions to the plant and machinery on account. This will allow to claim wear and tear allowance for tax purposes, which KRA said has not been sufficiently reconciled. As a result, wearing allowance is not allowed, according to KRA.
Regarding VAT, KRA found discrepancies between value certificates and income declared in VAT returns, with some value certificates not being declared.
KRA’s investigation also found that some Chinese foreigners were not on the company’s payroll, even though the company had paid and renewed their work permits for them, meaning they did not pay PAYE. The company also pays for accommodation, airfare and a security bond for the expatriate, indicating that he is an employee.
In addition, some director fees amounting to Sh4,800,300 are not subject to PAYE tax.
Regarding withholding taxes, a review of the company’s operations revealed that some payments to contractors, subcontractors, consultants, and other professionals were not subject to withholding taxes as required by law.
Weihai has won several tenders in Kenya. It is one of the contractors of the Kenya Sustainable Towns Water Supply and Sanitation Program funded by the African Development Bank and has also built the Nakuru CBD road.
It is also the company that started the renovation of the Kipchoge Keino Stadium in Eldoret, Kenya.
