High Court Appeal rules that KPA owes KRA Ksh 20billion

Justice Francis Tuiyott of the Milimani Commercial Courts and Tax Division

Pursuant to an appeal ruling at a Nairobi High Court, the KRA is set to collect Ksh 20 billion from the Kenya Ports Authority(KPA). This money is expected to be raised from shipping companies who have since anticipated an increase in fees being charged by the KPA to importers.

The consolidated appeal suit had been filed by Ocean Freight East Africa (on behalf of seven shipping line companies) challenging a Judgment entered by the Tax Appeals Tribunal stating that demurrage could pass as income and hence was subject to provisions of taxation outlined in the Income Tax Act.

In the suit before the Tax Appeal Tribunal that pitted Ocean Freight East Africa and others against the Kenya Commissioner of Domestic Taxes, the Shipping line asserted that it was wrong for cargo originating outside Kenya to be subjected to taxation as pursuant to Section 9 of the Income Tax Act, the taxman was barred from applying income tax to gains or profits from the carriage of cargo which is embarked in Kenya solely as a result of transshipment. 

However, the Tax Appeal Tribunal had ruled that Kenya was a common ground of cargo originating from Uganda, Rwanda, Burundi and Tanzania (which were all EAC partner States). Therefore, by virtue of  Section 253 of the East African Community Customs Management Act (EACCMA), Section 9 of the Income Tax Act was inapplicable as provisions of the EACCMA took precedence over partner state laws with respect to where its provisions were applicable. 

The taxman had rebutted the arguments deposing that demurrage was subject to income tax as it had been accrued by various Cargo containers which overstayed beyond their free stay period at different KPA- owned container freight stations. The KRA held that demurrage was not part of freight charges levied to shipping lines as it was only accrued after the cargo entered the country after being cleared through customs

Nonetheless, in the High court ruling delivered by Hon Justice Francis Tuiyott, the court upheld the decision entered by the Tax Appeals Tribunal and stated that demurrage was a form of income to local agents managing the shipping lines and hence it was subject to income tax. The judge added that the agents bore an obligation to withold tax on the demurrage charge when remitting payments.

“On demurrage relating to delay of container post-port is not part of freight and the court upheld the decision of the tribunal that demurrage should be treated as income derived from Kenya and that the shipping agent were liable to withhold tax,” read part of the ruling of a consolidated tax appeal case.

Finally, Justice Tuiyott of the Milimani Commercial Courts Commercial and Tax Division held that freight comes to an end at the port of landing and thus any demurrage imposed on a container for late return after clearance is a post importation charge and by this foregoing demurrage was therefore a different charge and should not be confused with freight.

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