Non-Resident Employee Pay Not Taxable in Kenya

Last updated 04 February, 2024.

Introduction

The issue of taxation of non-resident employees has been a long-standing debate in Kenya. Recently, the case of Kenya Revenue Authority v. Diakonie Emergency Aid shed light on this issue. The case involved a dispute between the Kenya Revenue Authority (KRA) and Diakonie Emergency Aid over whether the Pay As You Earn (PAYE) tax on non-resident employees of a foreign company working in South Sudan and Somalia was taxable in Kenya.

The Tax Appeals Tribunal held that the disputed Pay As You Earn (PAYE) for non-resident employees of a foreign company working in South Sudan and Somalia is not taxable in Kenya.

Link to the whole case: Click here.

Introduction

The tax implications of operating across borders can be complex and confusing. This was highlighted in a recent tax appeal case in Kenya involving the German agency, Diakonie Bread of the World (DBG) and its Kenyan subsidiary, Diakonie Emergency Aid (DEA) Nairobi. The case, Tax Appeals No. 46 of 2015, centered around whether DEA Nairobi was liable to pay taxes on behalf of non-resident employees working for DBG's subsidiaries in South Sudan and Somalia. 

This article delves into the concept of permanent establishment and the taxation of non-resident employees in Kenya, drawing lessons from this landmark tax appeal case.

Background

DEA Nairobi was registered in Kenya and received funding from DBG Germany to fund operations in South Sudan and Somalia. Employees of the entities in South Sudan and Somalia were subject to the tax regime in their respective jurisdictions. However, the Kenyan tax authority argued that DEA Nairobi was responsible for deducting and remitting Pay-As-You-Earn (PAVE) taxes on behalf of the non-resident employees. The authority relied on the fact that all funding was sent through DEA Nairobi, which suggested that DEA Nairobi was fully in control of all the affairs of the programs in South Sudan and Somalia.

The Appeal 

DEA Nairobi appealed the decision and argued that it was not a permanent establishment of the Somalia and South Sudan entities in Kenya, and therefore, it was not liable to pay taxes on behalf of non-resident employees of these entities. The agency relied on the fact that DEA-PHC was registered in South Sudan as a Non-Governmental Organization, and the institution based in Somalia was registered in Somali. DEA Nairobi also argued that it did not coordinate and control the activities of the two organizations from Kenya, and therefore, this did not create a permanent establishment for the entities in South Sudan and Somalia.

Tribunal Findings

The tax appeals tribunal found that the issue of seat of registration of the three institutions was instrumental in determining whether DEA Nairobi would be liable to pay tax to the Government of Kenya on behalf of the non-resident employees. The tribunal established that the entities in South Sudan and Somalia had employed the employees who were subject to the Tax regime within their jurisdiction. This jurisdiction touching on nationals of the two countries cannot be donated to another country.

The tribunal also found that DEA Nairobi did not coordinate and control the activities of the two organizations from Kenya. Therefore, this did not create a permanent establishment for the entities in South Sudan and Somalia. The employees whose salaries were said not to have been subjected to PAVE deductions were Sudanese nationals resident in South Sudan.

Conclusion

The tax appeal case highlights the importance of understanding the concept of permanent establishment and taxation of non-resident employees in Kenya. The case also emphasizes the need for clear documentation and understanding of the legal and tax implications of operating across borders. As the global economy continues to grow, businesses need to be aware of the tax implications of their operations and the need to comply with local tax laws and regulations.