Kenya vs Global Tea & Commodities (Kenya) Ltd, June 2024, Tax Appeals Tribunal, Case No. [2024] KETAT 1077 (KLR), APPEAL NO. 1221 OF 2022

Posted on | By Courts of Kenya
Category: Benchmark, Range and Median, Commodity Transactions, Intangibles - Goodwill Know-how Patents, Losses, Transfer Pricing Methods | Tag: , , , , , , , , , , , , , , ,
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Global Tea & Commodities (Kenya) Ltd, a subsidiary of Global Tea & Commodities Ltd UK, traded tea on its own account and acted as an agent buying and exporting tea for related entities. The Kenya tax authorities assessed Global Tea & Commodities with a tax liability of Kshs 1,410,128,134 for the years 2015-2018, based on transfer pricing adjustments related to transactions with Tapal Tea PVT Ltd, a Pakistani company.

Following an audit, the Tax authorities held the close relationship between Global Tea & Commodities and Tapal Tea PVT was evident through common directorship and significant trade volume without documented contractual agreements. They applied the TNMM based on a proper functional analysis. They also found, that an auction license constituted a valuable intangible asset.

An appeal was filed in which Global Tea & Commodities argued it was incorrectly classified as related to Tapal Tea PVT, disputed the use of the Transactional Net Margin Method (TNMM) by the tax authorities, asserting instead that the Cost-Plus Method (CPM) was most appropriate. Global Tea & Commodities further contested the classification of its tea-buying auction license as a valuable intangible asset, challenged the tax authorities’ benchmarking analysis, and objected to the tax authorities’ assertion that the company was structured to avoid taxes due to its consistent losses.

Decision

The Kenyan Tax Appeals Tribunal dismissed the appeal of Global Tea & Commodities and upheld the tax assessment:

Firstly, it found that Global Tea & Commodities and Tapal Tea PVT Ltd were indeed related enterprises. The Tribunal concluded that indirect participation in management was evidenced by common directorship (with overlapping roles in Typhoo Ltd and the parent company), as well as a substantial undocumented trading history spanning over 20 years, making Tapal Tea PVT effectively a related party.

Secondly, the Tribunal ruled the transactions between Global Tea & Commodities and Tapal Tea PVT were controlled transactions, subject to transfer pricing adjustments. The absence of arm’s length documentation and formal contractual agreements supported this conclusion.

Thirdly, the Tribunal found that the tax authorities was justified in applying the TNMM rather than the CPM. Global Tea & Commodities’ use of transactions with Tapal Tea PVT as comparables was flawed because of the established related-party status, which invalidated those transactions as independent comparables. The Tribunal also supported the tax authorities’ view that the tea auction license represented a valuable intangible asset, justifying the application of Earnings Before Interest and Taxes (EBIT) as the appropriate profit-level indicator.

 

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Related Guidelines

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Supplemental Guidance

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