In settling a 17-year battle between the Kenya Revenue Authority (KRA) and oil marketer Total, the Court of Appeal has now condemned importers to bear responsibility in the event of any tax fraud committed by their clearing and forwarding agents.
Importers will no longer enjoy the luxury of leaving everything to clearing and forwarding firms but will have to closely oversee them to avoid paying heavily for the sins of their tax agents.
The Court of Appeal’s decision has, however, robbed the KRA of authority to demand interest and penalties on taxes whose principal has been paid once the dispute lands in the halls of justice.
Justices Philip Waki, Roselyn Nambuye and Asike Makhandia have in their decision saved Total from paying Sh133 million in interest and penalties for a tax claim that stood at Sh3.3 million 17 years ago.
Back in 2001, KRA wrote to Total demanding Sh23.4 million for 21 cases of burners that the oil marketer had imported. The burners had been imported in 1995.
A probe by the taxman had revealed that no duty had been paid for the cooking equipment.
Total held that its agent — Veritas Agencies Limited — had paid all taxes for the burners, and sent KRA documents in support of its stand. With KRA insisting that the documents were forgeries and unwilling to give Total 21 days to investigate further, the oil marketer sued.
The agreement between Total and Veritas provided for tax payment by the agent, which would then raise claims to the oil marketer for reimbursement.
It was then that KRA revealed that the receipts and import papers Total had were in respect of a consignment of farm cultivators, dairy and grain milling machines.
The documents also listed a different tax agent — Datini Mercantile Limited — as the clearing agent.
But Total insisted that the taxman’s case was against its clearing agent, Veritas, and that the claim was time-barred as it was raised six years after the burners were imported.
Under section 158 of the old Customs and Excise Tax Act (1978), the KRA loses its power to demand taxes if five years lapse with no claim. The only exception is if the taxes went unpaid on account of fraud.
In 2011, High Court judge David Majanja ruled that section 166 of the Customs and Excise Tax Act placed responsibility for payment on the importer which means agents cannot be used as scapegoats in the event payment is not made.
The judge then noted that section 165 of the same Act places responsibility on an agent, but held that section 166 directly pins importers.
“Though a clearing agent is licensed by the Commissioner under section 164, the agent remains the agent for the taxpayer and the taxpayer cannot evade his liability on the basis of fraudulent acts of the clearing agent. Section 166 of the Act underpins this liability,” Justice Majanja held.
By this time, Total had already paid the initially demanded principal of Sh3.3 million and interest of Sh20 million.
KRA, however, kept on with calculation of interest and penalties which had hit the Sh133 million mark when the Court of Appeal delivered a judgment on October 12, this year. The judges ruled that the Sh133 million penalty was more than 100 per cent of what KRA had claimed initially, and that it would be unfair to condemn the oil marketer to settling that amount yet the matter was before courts.
“KRA is barred from demanding of Total the sum of Sh133 million in penalties and further interest,” Justices Waki, Nambuye and Makhandia ruled.
The judges found it curious that Total Kenya did not enjoin its agent — Veritas — which would have been key in responding to the fraud allegations.
The court documents do not indicate whether any action was taken on Veritas, but the firm does not appear among clearing and forwarding agents allowed to do business in Kenya for 2018.