Does location where service is to be finally used determine whether it has been exported?


The High Court of Kenya, in a judgment delivered on December 21 2018, has held that the test for determining whether a service has been “exported out of Kenya” is the location where that service is to be finally used or consumed. It was pronouncing itself on an eagerly awaited case of Commissioner of Domestic Taxes v Total Touch Cargo Holland, Income Tax Appeal No. 17 of 2013.


Item I of Part A in the Fifth Schedule to the Value Added Tax, chapter 476, Laws of Kenya (“VATA1990”) treated “exportation of goods and taxable services” as zero-rated supplies, which attract VAT at 0%.

VAT is a consumption tax and it is a generally agreed in law and practice that it should be imposed in the country where consumption takes place. With regard to “service exported out of Kenya”, sec 2 stated that the place of use or consumption is “outside Kenya whether the service is performed in Kenya or outside Kenya, or both inside and outside Kenya.”

In practice, it is generally not always easy to determine the place where services are consumed as happened with regard to exported services in the Total Touch Cargo Holland Case.

What is the Case About?

Total Touch Cargo Holland (Respondent) is a limited liability Company incorporated and based in the Kingdom of the Netherlands. It offers transport and handling services for businesses that export flowers and other horticultural products from Kenya to Europe.

The Respondent is also a member of The Stamina Group, comprising a number of companies doing business in the fresh cargo and food sectors. The Stamina Group incorporated a subsidiary company in Kenya, Total Touch Cargo Kenya Limited (TTC-K), for the purpose of engaging in the business of blocking airspace in the aircraft and providing cooling services to the parent company based in the Netherlands.

TTC-K contracted “cooling, scanning and palletizing” services to a Kenyan company, Kenya Airfreight Handling Limited (KAHL). When KAHL began to invoice TTC-K for its services, they were advised to bill the Respondent and not TTC-K. The reason, according to the Respondent, was that TTC-K was merely their agent and not the purchasers of the services. Furthermore TTC-K also had no links or agreement with the buyers in Europe.

Before implementing the instructions from the Respondent, KAHL sought guidance from the Commissioner of Domestic Taxes (Commissioner) about the VAT implications of the services. The Commissioner responded that the services were deemed to be local supplies and, therefore, amenable to VAT at 16%. This response contradicted an earlier one, given in December 2011, in which the Commissioner had advised KAHL that the services were exported out of Kenya and, thereby, chargeable to VAT at 0%.

The Respondent challenged the decision of the Commissioner at the VAT Appeals Tribunal. The tribunal found the services were exported out of Kenya. Dissatisfied with the Tribunal’s findings, the Commissioner appealed to the High Court.

Issue for determination

The main issue for determination by the court was whether the services were “exported out of Kenya.”

The Commissioner’s case

The Commissioner’s case was that the services KAHL offered to the Respondent were those “provided within Kenya” and thus taxable at 16%. 

The Appellant further submitted that “in determining the “user” or “consumer” of a service, the party who pays for said service is irrelevant. That what matters is where that service is provided, who provides the service and the place of use of that service and the place of consumption.” In this regard, the consumers of the services provided by KAHL were the flower farmers in Kenya whose produce was certified as fit for exportation.

The Appellant noted that the Respondent had changed its business structure so that KAHL would invoice the Respondent instead of TTC-K for the services. In their view, the restructuring was informed by a plan to evade and avoid payment of tax.

The Respondent’s Case

The Respondent’s case was that the services were “exported out of Kenya” because the company was incorporated in Holland and its consumers were based in Europe. They asserted that the services ensured horticultural produce arrived in Europe in a state suitable for consumption.

Citing the Organization for Economic Co-operation and Development’s VAT Guidelines on International Trade and Service in Intangibles (OECD VAT Guidelines), the Respondent argued that under the “destination principle”, goods, services and intangibles are zero rated when leaving one jurisdiction and are taxed upon importation to another jurisdiction.

The Respondent further argued that Commissioner had confirmed by letter that the services provided by TTC-K to the Respondent were offered in order to ensure that the produce reached the market in Europe in a state fit for consumption and had all along relied on this confirmation. They therefore had a legitimate expectation that this arrangement will not be changed.


The Court upheld the decision of the VAT Tribunal, that the services were “exported out of Kenya”. In arriving at the conclusion, the court held that the criterion for determining whether a service is to be deemed an ‘exported service’ is the location where that service is to be finally used or consumed. Where this is the position, the court asserted that “it matters not whether that service was performed in Kenya or outside Kenya”.

Furthermore, the court held that although the services were performed in Kenya, their user and consumer was the Respondent and the Respondent’s European customers who were based outside Kenya. The court refused that the words ‘use’ or ‘consume’ are synonyms with the word ‘performed’.

The court rejected the Commissioner’s contention that the consumers were Kenyan flower farmers as they were not parties to the contract for supply of services.

In their submissions, the Commissioner had argued that Reg 20(1)(d) of the VAT Regulations 1994, a subsidiary legislation, qualified the interpretation and application of section 2 of VATA, a parent statute.  Reg 20(1)(d) states services shall be deemed to have been supplied in Kenya, “where the supplier has established his business or has a fixed physical establishment in Kenya and the services are physically used or consumed in Kenya regardless of the location of the payer.”

The Court ruled that subsidiary legislation cannot override the provisions of primary legislation.The Court held that the OECD VAT Guidelines are applicable in interpreting Kenyan tax laws because they are internationally accepted principles informing the design and operation of VAT.

This position is similar to that in Unilever Kenya Limited v The Commissioner of Income Tax, Income Tax Appeal No. 753 of 2003, where the High Court approved the use in interpretation of Kenyan tax law of the OECD’s transfer pricing guidelines stating that, “it would be foolhardy for any Court to disregard internationally accepted principles of business as long as these do not conflict with our own laws”.


The case revolved around the interpretation of several provisions of VATA 1990. This statute was repealed and replaced with the Value Added Tax Act, No.35 of 2013. In light of this, the utility of the decision is very much limited to the facts of this particular case and may not serve as a precedent for transactions carried out after the present law came into force on 2nd September 2013.

One of the Respondent’s grievances was that that Commissioner had confirmed through a letter that their services were exported, but later changed their position and said they were not exported services. Essentially, the Respondent had legitimate expectation that the Commissioner’s earlier advice would continue to apply. This is a position some taxpayers could face when dealing with the tax administrator and it would have helped for the judge to explain and state the legal position on this.

There was a submission from the Commissioner that Total Touch Cargo Holland’s restructuring of operations was part of their business strategy informed by considerations of tax evasion and tax avoidance. This is undoubtedly a serious claim.

As this is likely to be a recurring theme, the Court missed an opportunity to create a precedent on the issue, denying taxpayers, tax administrators and practitioners’ jurisprudence that may assist decision-making.

This decision is very much limited to the facts of this particular case and it does not address the broad spectrum of issues that arise when dealing with the complicated subject of place of supply of services.  As such, it will not constitute the final precedent on the subject.

We understand the Commissioner filed a notice of appeal and sought a stay of execution of the decision at the Court of Appeal. It remains law before the higher court overturns it.

Writer is an advocate of the High Court

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