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.