A Kenyan PE of Siemens Aktiengesellschaft had operated under a transfer pricing policy applying a 3% Net Cost Plus margin, justifying it based on its limited-risk functional profile and minimal exposure to entrepreneurial risks. Siemens Germany, as the main contracting entity and the project’s entrepreneur, bore the risk and assumed losses following the insolvency of consortium partner Isolux.
The tax authorities disagreed with the 3% margin and applied a median Net Cost Plus margin of 6.94%, derived from a benchmarking study of comparable European engineering and project management companies, citing that the PE’s actual returns were negative and thus outside the arm’s length range.
An appeal was filed by Siemens with the Tax Appeals Tribunal.
Judgment
The Tribunal dismissed the appeal by Siemens AG’s Kenyan Permanent Establishment, upholding the tax authorities assessments on corporation tax, withholding tax (WHT), and PAYE.
The Tribunal found that the Siemens failed to substantiate why the 3% margin should apply, did not provide a detailed analysis to support deviation from the benchmark median, and bore the legal burden of proving that the assessments were incorrect—which it failed to discharge.
Regarding WHT, the Tribunal ruled that general administrative costs allocated from Siemens Germany constituted management or professional fees under Kenyan tax law and thus were subject to WHT, particularly in light of Sections 10 and 18(5) of the Income Tax Act and Article 12 of the Kenya-Germany DTA, which the Tribunal interpreted as not limiting Kenya’s taxing rights.
The Tribunal found that the tax authorities use of the median NCP was reasonable, that general HQ allocations and outsourced labor arrangements were taxable under Kenyan law, and that the Appellant did not meet its evidentiary burden. The Tribunal upheld the tax assessments and dismissed the appeal in full.