The Itochu Corporation Kenya Branch claimed that it was merely a liaison office providing standard services to the head office, and that the correct method was TNMM with a cost-based mark-up.
The tax authorities found that the branch was integrated with Itochu Japan’s trading activities in Kenya, that staff were evaluated based on transaction volume targets and that the branch was responsible for carrying out economically significant functions and assuming certain risks. On that basis the tax authorities applied the profit split method, allocating 39 per cent of combined profits to the branch and 61 per cent to head office in Japan. This was based on customs data and Itochu’s segment disclosures, as the taxpayer had failed to supply complete records.
Judgment
The Tribunal held that the PSM was the most appropriate method, given the high level of integration of activities, the branch’s contributions, and its risk profile. It also found that the taxpayer’s incomplete documentation justified the tax authorities’ use of its best judgement when using the available data.
The Tribunal rejected the TNMM position and affirmed the 39:61 split, finding it to be consistent with the functional analysis and OECD guidance.
Regarding the source, it was found that 39 per cent of Itochu Japan’s income was properly treated as accrued in or derived from Kenya. The appeal was dismissed and the objection decision of 14 April 2022 was upheld.