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KRA cannot demand VAT over Promotional and Marketing Services done for Foreign Companies as such are deemed as Export Services

Google Kenya Limited -Vs- Commissioner of Domestic Taxes: Civil Appeal No. ITA E004 of 2021 

This was a judgment of the High Court following the consolidation of two appeals Income Tax Appeal No. 004 of 2021 and Income Tax Appeal No. 006 of 2021 which arose from the decision of the Tax Appeals Tribunal (TAT) on 20th November, 2020. Google Kenya, a company incorporated in Kenya, had entered into an agreement with Google LLC, a company based in the United States of America, whereby Google Kenya was to provide research and development services (R&D services) to Google LLC. Google Kenya again entered into a marketing and service agreement with Google Ireland Limited, a company based in the Republic of Ireland, to provide marketing and support services to Google Ireland.

Google Kenya lodged VAT refund claims in relation to the services rendered to both Google Inc and Google Ireland, the claims were however rejected by the Commissioner of Domestic Taxes. Google Kenya being dissatisfied with the decision that the services it rendered to Google LLC and Google Ireland were consumed in Kenya and therefore not export services thus subject to VAT prompted the appeal.

The main issue of determination was whether marketing services rendered to a foreign company are export services.  The judge relied on the Organization for Economic Cooperation and Development (OECD) guidelines on cross-border supply for services which assert that in determining the use or consumption of a service, the identifier is the location of the customer identified as the person receiving the services, the destination principle.

The OECD Guidelines state that for business-to-business supplies, the jurisdiction in which the customer is located has the taxing rights over internationally traded services or intangibles. Guideline 3.3 outlines that the jurisdiction of the customer’s location can stand as the appropriate proxy of the jurisdiction of consumption as it achieves the objective of neutrality.  The jurisdiction in this case is where the customer has located its permanent business presence and therefore, the taxation jurisdiction is where the customer of the service is located.

“Merely because the advertisement is directed at the public does not in any way make the public the consumer of the said services,” the Judge said. The court in its determination concluded that the marketing services were commissioned by the foreign firms and therefore, Google Ireland and Google LLC were the beneficiaries and therefore the consumers of the services. The import of the judgment is that the Kenya Revenue Authority cannot demand Value Added Tax over promotional and marketing services done for foreign companies as such are deemed as export services.


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