A key law that guides the management of Customs in East Africa is facing a crucial test in a landmark dispute between Kenya’s taxman and edible oils manufacturer Bidco, a dispute whose outcome could define the future handling of tax issues in the region.

The dispute, which has dragged on for four years, pits the Kenya Revenue Authority (KRA) against Bidco over a Ksh1.3 billion ($15.2 million) tax demand by the taxman. At the centre of the dispute is the interpretation of the East African Community Customs Management Act, a law that guides imports and exports in the region.

The case at the High Court in Nairobi is expected to come up for hearing in coming weeks, with legal experts arguing the outcome of the case could define the future application of the legislation in the region.

It is understood that the contest will define the discretion tax authorities in the EAC countries of Kenya, Uganda, Tanzania, Rwanda and Burundi can apply in executing the provisions of the Act.

The case goes back to 2009 when KRA demanded import duty, interests and penalties totalling Ksh1.3 billion ($15.2 million) after assessing the tax liability of the manufacturer.

The dispute revolves around the assessment and collection of Customs duty under the legislation worth Ksh780 million ($9.1 million) on assorted vegetable oils imported by Bidco from Singapore for use in its manufacturing processes in 2008.

KRA has nearly doubled this to Ksh1.3 billion ($15.2 million) over the years after charging interest and penalties, leaving the Thika-based Bidco Oil — which manufacturers Elianto Oil, Gold Band margarine, Gental detergent, and Yellow Star bar soap — facing a huge tax bill.

“Whichever the outcome, this is a test case. It is at the centre of doing business in the region. It will go a long way in defining the discretion tax authorities have in assessing tax liability,” said a top Nairobi lawyer who did not wish to be named. “It could also open a floodgate of other legal disputes across the region,” said the lawyer.

Court documents show that, in 2008, KRA selected Bidco for a routine post-clearance audit to review the company’s operations and check if it was following the correct procedures under Customs laws. The Customs audit, according to KRA, was done based on risk profiling of taxpayers in the edible oils industry and Bidco was selected for an in-depth assessment following an observation that the Customs values declared by the company were significantly lower than those of its rivals.

The audit, the taxman says, revealed cases of tariff misclassification and undervaluation of four of the key ingredients purchased from Josovina Commodities PTE Ltd in Singapore. KRA’s argument is that as a result, Bidco ended up paying less value added tax (VAT), import duty and import declaration fee (IDF), which is usually 2.75 per cent of the value of imported goods.

Both taxes had been paid based on the invoices deposited with the Customs department by Bidco. KRA alleges that after examining Bidco’s books during the audit, it found two sets of invoices regarding the consignment in question, in documents presented by the company as supporting evidence of self-assessment of tax payable.

The supplementary invoices were in the form of credit notes and debit notes. KRA reckons a debit note is a supplementary invoice increasing the amounts payable by the company in the instances where the supplier (Josovina) had supplied more crude edible oils than the company had ordered.

On the other hand, a credit note is a supplementary invoice reducing the amounts payable by the company in instances where Josovina had supplied less of the ordered consignment.

“The Commissioner, not being able to determine the correct cost per unit for the goods and in a bid to safeguard government revenue, chose the higher of the two values, which happened to be the value of the supplementary invoices (debit/credit) and coincidentally this was always 10 per cent above the cost per unit declared by Bidco,” says KRA in its submissions to the High Court in Nairobi.

But Bidco, in its response to the KRA charges and in an affidavit sworn by its managing director Vimal Shah, says the taxman erred in its statutory regime and parameters while assessing value of duty, contravening the EAC Customs Management Act, which requires that goods will attract duty based on their value. The Act says Customs value of imported goods shall be the transaction value, which is the actual price paid or payable for the consignment when sold for export.

Bidco says KRA contradicted the taxation regime being pursued by the EAC countries of Kenya, Uganda, Tanzania, Rwanda and Burundi.

At some point, the Commissioner General of KRA set up a Team of Technical Experts (TTE) to look into the dispute. On April 27 this year, KRA issued agency notices seeking to attach Bidco’s bank accounts — at Standard Chartered, Citi Bank, Barclays Bank, Equity Bank and Kenya Commercial Bank — and property for failure to pay the tax arrears.

Also slapped with the notices were leading distributors and marketers of Bidco’s products such as Nakumatt Holdings, Tusker Mattresses, Uchumi and Ukwala Supermarkets. But the manufacturer successfully moved to court to challenge the taxman.

High Court Judge David Majanja on June 19 allowed the case to be heard without depositing full security for disputed tax dues, as KRA had sought.

Justice Majanja however ruled that the company deposit a Ksh200 million ($2.3 million) guarantee instead and froze the agency notices that KRA issued against Bidco’s bankers and suppliers in April in relation to the demand for the duty.

For Bidco, the case touching on its Kenya operations could not have come at a worse time as it is facing trouble in Uganda over plans to expand its palm growing acreage.

Environmentalists are threatening court action after the government and Bidco Uganda Ltd announced the company is to get more land to expand its palm growing acreage on Lake Victoria’s Ssese Islands. The environmentalists warn that further encroachment on the islands’ unique ecosystem and biodiversity will cause environmental degradation.

Three weeks ago, the Uganda government said that it planned, together with Bidco, to start growing palm oil trees and to establish a processing plant on Buvuma Island in Lake Victoria at a cost of $147 million.

The oil palm projects in Uganda, which started in 2002, are government initiated projects in a joint venture with Wilmar Group of Malaysia, Josovina Commodities of Singapore and Bidco.

The contention in regard to the provisions of the EAC Customs Management Act come at a time when the EAC countries are grappling with challenges in implementing key protocols, crucial to fully transforming itself into a Customs Union.

For instance, non-tariff barriers, which so far pose the biggest implementation challenge for the Customs Union, are manifested in form of many police road blocks, weighbridges, inspection requirements and cumbersome documentation procedures at Custom points, defeating the idea of a free trade area as envisaged under this pillar.

This is not the first time a law touching on integration is becoming a subject of a court case. In January, a Uganda-based think tank, the East African Centre for Trade Policy and Law took EAC Secretary General Richard Sezibera to court over the controversial manner in which the bloc’s Treaty was amended in 2006, taking away the powers of the East African Court of Justice and giving them to national courts.

Citing what it describes as violation of the principles of the EAC Treaty, the think tank was contesting the action of EAC’s highest organ — the Summit — whose vote, five years ago, controversially gave jurisdiction to courts of partner states to interpret the EAC Treaty and settle other legal disputes around the Protocols of the Arusha-based bloc. Its lawyers argued that the provisions as amended had grave implications for the pace of the EAC integration process.