The definition of a technical service under Kenya tax is a bit complex. This is for a number of reasons. First, technical services overlap in many instances with payments for royalties. This would arise where someone supplies software installation services, user training services and similar services. You may read more about this possible interaction on an article at https://yazitaxafrica.com/tax-on-software-licence-fee-in-kenya/
Definition under the Income Tax Act
The Kenya Income Tax Act does not define ‘technical service’ or ‘a payment for a technical service’. The Kenya Income Tax Act (KITA) however provides for technical services under the definition of ‘management or professional fee’. This is as provided under Section 2 of the KITA that states;
‘management or professional fee means a payment made to a person, other than a payment made to an employee by his employer, as consideration for managerial, technical, agency, contractual, professional or consultancy services however calculated.’
The KITA defines some of the services included in the definition of management or professional fee. Like:
- Agency fees is defined as ‘payments made to a person for acting on behalf of any other person or group of persons, or on behalf of the Government and excludes any payments made by an agent on behalf of a principal when such payments are recoverable.’
- Contractual fees is means ‘payment for work done in respect of building, civil or engineering works.’
The KITA also lists professionals covered under the definition of ‘management or professional’. They include doctors, lawyers, and engineers. Basically, these would be people specialized in a certain area are certificated by the body dealing with that specialisation e.g. the Law Society of Kenya.
From the KITA we can only rule out what would not be a technical service. By way of definition however, the KITA is not fully helpful. It might thus help to consider the ordinary meaning of the services not specifically defined. Note that ‘ordinary’ meaning would be the preferred manner of interpreting tax legislation. Read our analysis of rules on interpretation of tax legislation posted earlier.
Ordinary meanings of services not defined
In the ordinary language, managerial services would be services linked to management or overseeing certain functions in an organisation in a management capacity. Consultancy services, on the other hand, would entail giving of expert advice by a professional (expert) in a field.
Now we turn to technical service. The Cambridge English Dictionary defines, the term ‘technical’ as relating to the knowledge and methods of a particular subject or job. This would essentially refer to having a special knowledge or a special skill set. This would mean that a certain kind of skill, that is not common, would be required to offer a technical service.
If you are providing services to be offered by someone with a ‘special knowledge’ or skill set this might be a technical services. This is excluding the already defined types of services.
That said, how would the Kenya Revenue Authority define a technical service for Kenya tax?
Practice by the Kenya Revenue Authority
From our experience, the Kenya Revenue Authority (‘KRA’) often classifies services involving use of technology and technological designs or innovations as technical services.
What about Kenyan courts?
Kenyan Case Law
The issue of services that qualify as technical services has been determined by the Kenyan Courts in a number of cases. Here are some of the cases.
The Barclays Bank cases
The High Court of Kenya decided two different cases between Barclays Bank of Kenya and the KRA. The issue was on withholding tax on payments made by Barclays Bank to card issuing companies like VISA International Services Association, MasterCard Inc. etc. It also dealt with withholding tax on interchange fee payments made to issuers of the cards.
In R vs. The Commissioner of Domestic Taxes ex-parte Barclays Bank of Kenya Ltd (2012) the High Court of Kenya dismissed an additional tax assessment by the KRA on Barclays Bank Ltd. The assessment was for withholding tax on payments made to Visa and other similar card companies. The case was dismissed on the basis that the KRA claimed that the payment constituted a payment of a royalty, an agency fee or a Management or Professional fee.
The Court found that the payment would not constitute a royalty or an agency fee. The Court also held that the KRA could not claim tax on the payment as a ‘management or professional fee’. The court found that the KRA need to clearly stipulate the category within which the payment fell in the wide definition of ‘management or professional fee’. This speaks to the Courts in Kenya using strict interpretation of tax legislation. The court interprets any ambiguity to benefit the taxpayer.
Second Barclays case
In a later case between the same parties (i.e. Barclays Bank of Kenya Ltd & KRA) in 2015, the Court dismissed the appeal by the KRA. This was because KRA did not clearly identify the category the payments made to card companies or issuers fell. I.e. within the broad category of ‘management or professional fees’ in the Income Tax Act. The Court held the view that the broad definition would only result in confusion to a taxpayer unless the KRA identified a particular category within which the disputed payment fell and the reason why the payment fell into that category.
A second case between Barclays Bank of Kenya Ltd and the KRA was in 2015 on a similar issue. However, the case came under judicial review. The Court was therefore mainly concerned with the assessment process followed by the KRA. Hence, the court did not go into the merits of the case. The case therefore does not issue a decisive judgment on the merit of the arguments by the KRA. We anticipate that the issue is likely to come up in future.
The High Court dealt with another case on withholding tax on payments made for use of a software system. We discuss the case below.
The Kenya Commercial Bank case
In Kenya Commercial Bank (‘KCB’) VS Kenya Revenue Authority [2008] the High Court held that payments made by KCB to use a software system and related services was subject to withholding tax. The court found that payment was for a royalty. The Court decision did not go into detail on the reason for the Court classifying the payment as a royalty. The Court contended that the issue of the nature of payment was not properly brought before the Court for determination. Once more, the issue of the nature of payment was therefore also not exhaustively dealt with in this case.
Additionally, the Court Appeal of Kenya dealt with the issue of withholding tax on technical services. We consider the case below.
The Stanbic Case
Unlike in the earlier cases, the definition of ‘technical services’ was dealt with, in some detail, in Stanbic Bank of Kenya Limited VS Kenya Revenue Authority [2008]. The issue for determination in this case involved payments made to Reuters for financial reports provided to Stanbic Bank.
The KRA assessed Stanbic Bank of Kenya for withholding tax. The assessment was on payments made to Reuters for financial reports provided to Stanbic on a daily basis. Two of the Judges at the Court of appeal upheld the assessment while one judge dissented. The Court upheld the assessment by the KRA.
A different judge stated:
‘in my view there is an element of skilled management and consultancy involved in the preparation and transmission of the requisite information by Reuters…which compelled the Appellant to go for it instead of obtaining the information from various other sources…the expertise involved must have promoted the Appellant to enter into the contract…’
The second Judge in agreeing with the same position noted;
‘…Reuters business alerts constitutes specialized information that is uniquely provided by Reuters…’
The Judge proceeded to note that;
‘…the products offered by Reuters were of a special nature otherwise why would the Appellant pay for them year in year out if the same would be easily available from the internet…’
The dissenting Judge at the Court of Appeal noted that ‘all Reuters did was provide financial information and not necessarily a technical service…’ . The dissenting Judge was of the view that the fact that technology is used in providing a service is not indicative that a service is technical in nature.
The above reasoning shows the complexities in defining what is a technical service, in Kenya tax law.
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Contacts: We trust that the above analysis has give you some insight on the issue. Please contact [email protected] if you have a query on any aspect of technical services under Kenya tax.
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