KRA Loses Landmark VAT Battle Over JKIA Export Services

The Court of Appeal has dealt the Kenya Revenue Authority (KRA) a landmark defeat, ruling that logistics and handling services at JKIA that support flower exports to Europe qualify as export services and are eligible for zero-rated Value Added Tax (VAT).

In a July 10 ruling, the appellate court dismissed an appeal by the Commissioner of Domestic Taxes.

Following the ruling, the court upheld earlier decisions by the Tax Appeals Tribunal and the High Court in favor of Airflo Limited, a Kenyan logistics company involved in the export of cut flowers and horticultural produce.

Further, the court ordered the Commissioner of Domestic Taxes to process Airflo’s VAT refund claims within 90 days and awarded the company the costs of the proceedings.

“The Appellant shall process the Respondent’s VAT refund claims as previously ordered by the Tribunal and affirmed by the High Court within ninety (90) days from the date of this judgment,” the court ruling read.

Dispute Over VAT Refund Claims

According to the court, the case arose from VAT refund claims lodged by Airflo Limited after the company applied zero-rated VAT to logistics services it provided to Airflo BV, its parent company based in the Netherlands.

Airflo Limited argued that, under a service agreement, it offers a range of export-handling services, including cold-room storage, palettization, vacuum cooling, X-ray screening, and customs documentation for flowers destined for overseas markets.

The company emphasized that the services qualified as exports because they were provided to a foreign entity and ultimately benefited customers outside Kenya.

However, KRA rejected VAT refund claims worth more than KSh46 million covering various tax periods in 2019 and 2020.

Further, the tax authority maintained that the services were consumed in Kenya because they were physically performed at JKIA prior to the flowers’ export.

KRA consequently noted that the services should have attracted the standard 16 percent VAT rate rather than zero-rating.

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KRA’s Arguments Before the Court of Appeal

After losing at both the Tax Appeals Tribunal and the High Court, KRA appealed the matter to the Court of Appeal.

The Commissioner of Domestic Taxes clarified that the determining factor in VAT treatment should be the place where the services were performed.

According to KRA, services such as warehousing, palletization, vacuum cooling and security screening were completed within Kenya and therefore consumed locally.

The tax authority also stated that the services fell under horticultural services, which are exempt from VAT, and therefore could not qualify for input VAT refunds.

However, the Court of Appeal dismissed KRA’s attempt to classify the services as horticultural services.

KRA further maintained that allowing such services to qualify as exports would undermine the provisions of the VAT Act governing the place of supply.

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Court Affirms Destination Principle

In a unanimous judgment delivered by Justices S. Gatembu Kairu, H.I. Ong’udi and Rachel Ngetich, the Court of Appeal rejected KRA’s interpretation of the law.

The judges held that the VAT Act establishes a distinction between where a service is supplied and where it is ultimately used or consumed.

According to the court, while Section 8 of the VAT Act determines whether a supply falls within Kenya’s taxing jurisdiction, Section 2 and the Second Schedule determine whether it qualifies for zero-rating.

Additionally, the court explained that the relevant test is where the economic benefit of a service is ultimately enjoyed, commonly referred to as the “destination principle”.

Judges present found that the flowers handled by Airflo had already been purchased by customers in the Netherlands before the logistics services were provided.

As a result, the ultimate beneficiaries of the services were the foreign buyers and Airflo BV rather than Kenyan farmers or the local export process, according to the court of appeal judges.

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