Technology work carried out in Kenya can still qualify as an exported service for VAT purposes even when the resulting product is eventually used by businesses within the country, the Court of Appeal has ruled.

🇰🇪 Breaking It Down

The decision followed a dispute over a Ksh40.6 million VAT assessment involving a Kenyan technology company that provided specialised software and hardware maintenance services to foreign affiliates.

The Kenyan firm had been subcontracted by companies based outside the country to provide contributory software and hardware services, which were later integrated into wider proprietary systems supplied by the foreign companies to financial institutions in Kenya.

The tax authority argued that the services should attract local VAT because the resulting software and hardware services were ultimately used by Kenyan banks and other financial institutions.

📌 What You Need to Know

The dispute therefore centred on whether services performed by a Kenyan company could still be considered exports when the final product was used locally.

The Court of Appeal ruled that the physical location where the service is performed is not the determining factor under the Value Added Tax Act. Instead, the court said the crucial consideration is where the service is consumed.

Additionally, the judges found that the foreign companies that contracted the Kenyan firm were the primary consumers and beneficiaries of the specific services provided to them, which they then used to fulfil their own obligations to financial institutions in Kenya.

The court also noted that there was no direct contractual relationship between the Kenyan technology company and the financial institutions using the final products. The Kenyan firm was contracted and paid by the foreign affiliates under separate agreements.

Applying the destination principle, the judges held that the services were consumed by the foreign affiliates and therefore qualified as exported services. The Court of Appeal consequently overturned the High Court decision that had upheld the VAT assessment.

The ruling means that a service performed in Kenya does not automatically become a locally taxable supply simply because a final product incorporating that service is later used by a Kenyan customer.

📰 Source: Kenyans.co.ke