The Kenya Revenue Authority (KRA) has suffered a setback after the Court of Appeal ruled that software support services supplied by a Kenyan company to its foreign affiliates, qualify as exported services and are not subject to local Value Added Tax (VAT).
The decision overturns a 2024 High Court judgment and cancels a Sh40.6 million VAT assessment against Sybrin Kenya Ltd.
In a judgment that clarifies how cross-border digital services should be taxed, the court held that the company's foreign affiliates, rather than Kenyan banks using the finished software, were the primary consumers of the services.
The three-judge bench allowed Sybrin Kenya's appeal and restored a 2021 decision by the Tax Appeals Tribunal, which had found that the company's services fell within the definition of exported services under the VAT Act.
“The tribunal found that the appellant's services were correctly characterised as exported services as defined under Section 2 of the VAT Act,” said the court.
The dispute arose after KRA audited Sybrin Kenya for the period between January 2016 and December 2019 before issuing a VAT assessment of Sh40.6 million.
The tax authority argued that although the company invoiced its South African and Guernsey affiliates, the services were ultimately consumed by Kenyan financial institutions and therefore attracted VAT.
Sybrin challenged the assessment, saying it had been subcontracted by Sybrin Systems (Proprietary) Limited of South Africa and Sybrin Limited of Guernsey to provide contributory software and hardware services that were later integrated into proprietary banking software supplied by those companies.
The Court of Appeal agreed, saying the contracts demonstrated that the foreign companies commissioned and consumed Sybrin Kenya's specialised services before delivering their own products to Kenyan banks.
"It is these foreign entities that utilise and consume the appellant's specific taxable supplies. These foreign affiliates commission the appellant's fractional services to fulfil their own proprietary obligations to third-party financial institutions in Kenya,” the judges said.
The court added: “They are, in this Court’s view, the primary consumers or beneficiaries of the services provided by the appellant. The location of the consumer is also clearly provided for in the agreements, as SSPL is domiciled in South Africa, and SL in Guernsey.
Rejecting the High Court's reasoning, the appellate judges found that the affiliates, not the Kenyan banks, were "the primary consumers or beneficiaries of the services provided by the appellant."
The judges also relied on the agreements between the parties, noting they expressly identified Sybrin Kenya as a contractor carrying out assignments on instructions from the foreign companies while invoicing only those affiliates.
One agreement stated: "Sybrin Kenya is contracted by Sybrin Systems to carry out specific activities as directed."
It further provided that Sybrin Kenya could provide systems to customers "without any direct contractual obligation with Sybrin customers" and that "all work done be invoiced and collected from Sybrin Systems only."
The court said the VAT Act focuses on where services are consumed rather than where they are performed.
Quoting the Organisation for Economic Co-operation and Development (OECD) International VAT guidelines, the judges noted: "For business-to-business supplies, the jurisdiction in which the consumer is located has the taxing rights over internationally traded services and intangibles."
The bench said that principle was consistent with Kenyan law because the foreign affiliates were located outside Kenya and were the contractual customers under the agreements.
Applying that approach, the judges concluded that the services qualified as exported services and therefore fell outside local VAT.
