March 28, 2023 Kenya Tax Appeals Tribunal reiterates that private ruling is binding on Tax Authority
Executive summary In Kenya Nut Limited v Commissioner of Domestic Taxes, Appeal No. 547 of 2021, the TAT upheld the binding nature of a private ruling that the KRA issued to a taxpayer. The TAT held that without proof of material nondisclosure or misinformation, the KRA is bound by its own private ruling and may not arbitrarily revoke the ruling to the detriment of a taxpayer. The KRA issues private rulings under Section 65 of the TPA, which requires the KRA to communicate its interpretation of a tax law on a particular transaction when a taxpayer applies for a private ruling. The application should be made in writing, and the taxpayer is required to disclose all the material facts relevant to the transaction, the question to be interpreted by the KRA and the taxpayer's own interpretation of the question. While the ruling is binding on the KRA, it is not binding on the taxpayer. Detailed discussion Background Kenya Nut Limited (Appellant) wrote various letters, including one dated 30 October 2013, to the Commissioner for Domestic Taxes (Respondent) requesting guidance on whether Value Added Tax (VAT) applied for a variety of its products. The Respondent response, dated 6 December 2013, categorized some of the products as standard rated at 16% and others as exempt from VAT. In 2019, the Appellant applied for refund of VAT. After a delay in processing the refunds, the Respondent informed the Appellant that the private rulings issued in 2013 had been revoked and the products that had been classified as exempt from VAT were subject to VAT at 16%. As a result, the Respondent reduced the VAT refund claim by retroactively offsetting it with the VAT that would have been charged had the exempt sales been declared as standard rated sales. The Appellant filed the appeal at the TAT. Appellant's case The Appellant asserted that a private ruling is binding on the KRA where the taxpayer has made a complete and accurate disclosure under Section 58 of the VAT Act (now repealed) and Section 65 of the Tax Procedures Act, 2015. The Appellant had relied for years on the private ruling and treated its products as exempt sales for VAT purposes as a result. Therefore, the Appellant asserted the Respondent was estopped from rescinding its ruling pursuant to Section 120 of the Evidence Act. The Appellant also asserted that the retrospective revocation of the private ruling was unlawful, unreasonable and contrary to the right to fair administrative action under Article 47 of the Constitution of Kenya and Section 4(1) of the Fair Administrative Actions Act. Respondent's case The Respondent contended the private ruling was erroneous because it was based on the repealed VAT Act. The Respondent therefore challenged the legality and validity of the private ruling on the ground that it was contrary to the VAT Act of 2013 and consequently the Constitution of Kenya. It asserted that the basis for charging VAT and allowing VAT refunds was statutory rather than decided by a letter issued by the KRA. The Respondent also submitted that the error in the private ruling was due to the Appellant's providing misleading information when applying for the private ruling. Consequently, no legitimate expectation could result from an illegality and the taxes were due from the Appellant. Tax Appeals Tribunal determination The TAT framed the following issues for determination:
On the issue of estoppel, the TAT noted that while the Respondent argued that the Appellant's application for the private ruling provided misleading information, the Respondent had not presented any evidence to prove the assertion. The TAT emphasized that it is presumed that the Respondent would have satisfied itself to all material facts and law before issuing a private ruling, and thus it was estopped from denouncing its own ruling. Secondly, the TAT averred that based on its analysis of the correspondence between the parties, the Appellant had materially disclosed the relevant information. A legitimate expectation therefore arose because the Respondent's decision created an expectation in the Appellant that the Respondent had the power to fulfil. The TAT further affirmed that the revocation ought to apply prospectively rather than retroactively. The Tribunal noted the provision under Section 68(4) of the TPA, which states that upon the withdrawal of a private ruling, the terms of the ruling would continue applying to a transaction commenced during the pendency of the ruling. As such, the TAT ruled for the Appellant. Implications This ruling sets a precedent establishing that the enabling act provides an avenue for taxpayers to seek for private rulings under the TPA in circumstances where tax laws appear to be uncertain and unclear. The taxpayer should disclose all material facts relating to a transaction for which they are seeking a private ruling, as stipulated under Section 65 of the TPA. Once issued by the KRA, a private ruling should be binding on all transactions (covered within the ruling) initiated during the period when the ruling is valid. If revoked, the revocation should apply to subsequent transactions. ____________________________ For additional information with respect to this Alert, please contact the following: Ernst & Young (Kenya), Nairobi
Ernst & Young Société d'Avocats, Pan African Tax — Transfer Pricing Desk, Paris
Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London
Ernst & Young LLP (United States), Pan African Tax Desk, New York
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