Shipping companies are foreseeing an increase in fees they
charge importers after the High Court sitting in Nairobi ruled in favour
of Kenya Revenue Authority (KRA) and the latter will now collect $200
million in back taxes from shipping companies.
The
tax, in the form of demurrage, was accrued by cargo containers which
have overstayed beyond their free stay period at different KPA-owned
container freight stations.
Justice
Francis Tuiyott held that demurrage is an income tax and that the
shipping lines' local agents have an obligation to withhold tax on the
demurrage charge when remitting payments.
Ocean
Freight East Africa Ltd (appellant) on behalf of other shipping lines
had taken the Kenyan Commissioner of Domestic Taxes (respondent) to
court over the issue of income tax.
The
shipping lines under Ocean freight EA Ltd wanted the court to make a
finding that demurrage charges are not subject to tax in Kenya.
Demurrage is the charge levied by shipping lines on importers for
holding the container beyond the free period.
The
appellant urged that it was wrong for cargo originating from outside
Kenya to be charged tax since KRA did not have jurisdiction to tax such
income under Section 9 of the Income Tax Act but the tribunal noted that
it was a common ground that the tax in question is from cargo
originating from Uganda, Rwanda, Burundi and Tanzania which are all EAC
partner states.
The tribunal took the view that partner states
have integrated into once Custom territory and that by virtue of
section 253 of the East African Community Customs Management Act, 200,
the Community statute takes precedence over partner state law with
respect to which its provision relate.
In
that event, the court held that the appellant should withhold tax on
amounts received on carriage of transshipment for cargo originating or
destined for partner states.
“On
demurrage relating to delay of container post-port is not part of
freight and the court upheld the decision of the tribunal that demurrage
should be treated as income derived from Kenya and that the shipping
agent were liable to withhold tax,” reads part of the ruling of
consolidated tax appeal case filed by seven shipping lines operating in
Kenya protesting taxation of income on demurrage charges.
Justice
Tuiyott held that freight comes to an end at the port of landing and
any demurrage imposed on a container for late return after clearance is a
post importation charge. Demurrage is, therefore, different from
freight.
However, Judge Tuiyott ruled
in favour of the shipping lines with regard to Value Added Tax (VAT) on
processing fees. He held that fees associated with loading, unloading
and handling charges do not escape taxation because they have been
included in the cost of freight, hence are taxed under the EAC Customs
Management Act, 2014.
The KRA has
held that demurrage is not part of freight levied by shipping lines as
it can only be accrued after goods have been cleared through customs and
have entered the country.
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