Coca-Cola East and West Africa has won a battle against the Kenya Revenue Authority (KRA) for the refund of Sh670 million after a tribunal ruled that the services offered by the company were zero-rated.

A six-member Tax Appeals Tribunal held that the marketing and promotional services offered by the company to its foreign affiliate, even though operating locally, are not within KRA's legal taxing right.

The firm is an affiliate of the global Coca-Cola Company with primary business of providing marketing and promotion services to its sister affiliate The Coca-Cola Export Corporation (TCCEC) in the Kenyan market.

“From the foregoing and having established that indeed the services offered by the Appellant are subject to VAT at zero-rate, the Tribunal is convinced that the Respondent’s objection decision was not justified,” the Tribunal said.

The Tribunal allowed the appeal by setting aside an objection decision and assessment of Sh502 million made by KRA against the company and at the same time allowed a prayer for a Sh669,881,942 VAT refund.

The firm told the Tribunal that it has a service agreement with TCCEC to provide marketing and promotion services in Kenya and several Central and East African countries for the benefit of Coca-Cola and its foreign affiliates. For these services, the appellant charges a fee.

The taxman had however maintained that the services qualified for VAT because they were provided and consumed in Kenya and paid for by non-resident persons.

It said an audit established that the firm declared 99.8 percent of its sales as zero-rated yet it contracts third parties to erect billboards, organise media launches, advertise in local radio stations, TV channels and print media, all of which are meant to influence local consumers.

“It is apparent that marketing and promotion services provided by the Appellant are exported services and therefore zero-rated,” said the Tribunal.

The purpose of marketing and promotion services was to maintain and grow the image, name and importance of Coca-Cola brands which benefit of foreign affiliates by enhancing and encouraging sale of concentrate, heard the Tribunal.

Further, the firm said it appealed for a refund of the excess VAT input in 2017, citing Regulation 13 of VAT Regulations 2017, arising from export services for the period between April 18, 2017, and August 29, 2018.

KRA then carried out an audit to verify the VAT refund claim and issued its preliminary findings in March 2022 and issued an assessment of Sh502 million.

The company rejected the preliminary findings on the basis that the brand marketing and promotion services provided were export services that were zero-rated.

The company then challenged the decision erred in holding that the marketing and promotion services were consumed locally yet their benefits accrued to foreign affiliates contrary to Section 8(1) of the VAT Act.

Further, that the KRA made a mistake by ignoring international best practices, yet precedents were established by the Tribunal and the High Court in similar disputes where both judicial bodies relied on their guidance having taken note of the gaps in local legislation on the taxation of exported services.

It was the company’s contention that at the period in dispute, Section 2 of the VAT Act had zero-rated export services and did not define what constituted a service exported out of Kenya.

On its part, KRA said it rejected the claim for VAT refund because the brand marketing and promotion services provided to TCCEC were locally consumed and thus did not qualify as exported services, therefore were subject to VAT.

The taxman maintained that the services qualified for VAT because they were provided and consumed in Kenya and paid for by non-resident persons.

According to KRA, the audit established that the firm declared 99.8 percent of its sales as zero-rated yet it contracts third parties to erect billboards, organise media launches, advertise in local radio stations, TV channels and print media, all of which are meant to influence local consumers.

“Therefore, as obtained from the foregoing, it is apparent that marketing and promotion services provided by the Appellant are exported services and therefore zero-rated,” said the Tribunal.