Avic International Beijing (EA) Limited v Commissioner of Domestic Taxes

Case Overview

In Avic International Beijing (EA) Limited v Commissioner of Domestic Taxes (Tribunal Appeal E786 of 2023) [2024] KETAT 1601 (KLR), the Kenyan Tax Appeal Tribunal upheld the Kenya Revenue Authority’s choice of the Transactional Net Margin Method (TNMM) over the taxpayer’s Resale Price Method (RPM) for related-party imports of completely knocked down (CKD) vehicle kits used in local assembly and subsequent sales to independent customers.

The decision also addresses common “bundled audit” issues: statutory time limits for assessments, PAYE on expatriates vs seconded personnel, and withholding tax (WHT) consequences of a transfer pricing adjustment (including deemed dividends).

Key Facts (as found by the Tribunal)

• AVIC International Beijing (EA) Limited (Kenya) was established in 2015 and imports trucks/machinery/spares; it is an approved CKD importer and motor vehicle assembler.
• KRA issued a Notice of Intention to Audit dated 30 July 2021, covering 2016–2021 (corporation tax, VAT, PAYE, WHT).
• KRA issued additional assessments on 29 June 2023 totalling KSh 530,528,802 (incl. penalties/interest).
  On objection (25 September 2023), KRA confirmed KSh 514,154,336 (incl. penalties/interest).
• Transfer pricing: KRA applied TNMM and made a TP adjustment of KSh 424,914,851, with corporation tax assessed on that adjustment of KSh 173,388,200.

What Was in Dispute

1. Most appropriate method (MAM): whether RPM or TNMM was appropriate for pricing CKD kit purchases from a related Chinese entity, given the Kenyan entity’s assembly/fabrication and market-facing functions.
2. Procedural validity: whether the appeal should be struck out for non-service of the notice of appeal.
3. Limitation period: whether parts of PAYE/WHT assessments were unlawful because they went beyond the five-year window in the Tax Procedures Act (absent proof of fraud/gross or wilful neglect).
4. PAYE scope: whether PAYE can be imposed where there is no employer–employee relationship (particularly for secondees).
5. WHT consequences: including whether a TP primary adjustment can generate a deemed dividend subject to WHT, and from when KRA could lawfully collect/recover that WHT from the company.

Holding (Outcome)

The Tribunal allowed the appeal in part and, in substance:

• Rejected KRA’s preliminary objection on non-service: the appeal was validly before the Tribunal because the statutory requirements for instituting an appeal were met and KRA had in fact responded (no prejudice).
• Transfer pricing: held that RPM was unreliable on these facts (local value addition and flawed RPM comparability), and upheld KRA’s TNMM and the TP adjustment of KSh 424,914,851 (with corporation tax assessed on it).
• Time-bar: held KRA’s PAYE and WHT assessments for tax periods before July 2018 were illegal (no pleaded/proven fraud/wilful neglect to extend time).
• PAYE: confirmed PAYE obligations attach to an employer paying emoluments to an employee; accordingly, PAYE could not be imposed on the Kenyan company for categories of seconded personnel where the employer–employee relationship was not established. It also found KRA’s “salary uplift” approach (benchmarking salaries to increase PAYE) was not legally supported on the evidence presented.
• Turnover variance issue (corporation tax): in addressing KRA’s VAT-vs-income turnover variance adjustment, the Tribunal accepted (at least in part) that KRA could not re-tax amounts previously accepted in an earlier objection decision, reducing that component of the corporation tax adjustment.
• Deemed dividends/WHT: accepted that WHT can apply to a deemed dividend distribution arising from a TP adjustment, but limited recovery: KRA had no legal basis to collect and recover (from the payer as withholding agent) WHT on deemed dividends for periods before 7 November 2019, and WHT was only demandable (on this recovery theory) for periods commencing 7 November 2019 (still subject to the Tribunal’s separate time-bar finding for periods before July 2018).

Why TNMM Beat RPM (Tribunal’s Transfer Pricing Reasoning)

The Tribunal’s method-selection analysis tracks OECD comparability principles:

• Functional comparability at gross margin level failed. RPM is most reliable where the reseller does not substantially add value; here, the Kenyan entity assembled CKD kits into vehicles and had additional functions (including design/fabrication and market-facing activity). The Tribunal cited OECD guidance that RPM becomes harder to apply where goods are further processed or incorporated into a more complex product.
• RPM benchmarking did not reflect the real FAR profile. The Tribunal noted that the taxpayer’s RPM comparable-selection criteria did not capture assembly/design/fabrication, even though the taxpayer used itself as the tested party—undermining reliability of a gross margin comparison.
• TNMM was more robust given available data. The Tribunal accepted TNMM with the Kenyan entity as the tested party, including because financial information for the foreign related party was not made available in a form that allowed reliable testing.
• Burden of proof mattered. The Tribunal emphasized that the taxpayer must show the assessment is excessive/incorrect (Tax Procedures Act burden of proof); AVIC did not successfully rebut KRA’s TNMM analysis with a persuasive counter-analysis.

Takeaways for Practitioners

• RPM is vulnerable where the “reseller” substantially transforms products through assembly/fabrication; expect TNMM to be preferred.
• Benchmarking must match the actual functions, assets, and risks; omitting key functions can sink the method.
• If arguing a foreign tested party, be ready to provide a full, usable financial set for that party.
• In Kenya, check the five-year assessment window early; demand clear pleadings/evidence if KRA seeks to go beyond it.
• For secondary adjustments (deemed dividends/WHT), analyse both (i) time limits and (ii) whether the statute actually allows collection/recovery from the withholding agent for the period in question.

Related Content

For approaches to comparables where local public data is thin, see Regional vs Local Comparables. For the underlying standard referenced throughout the decision, see Arm's Length Principle.

Frequently Asked Questions

1) Why did the Tribunal reject AVIC’s RPM analysis?
Because AVIC Kenya materially added value by assembling CKD kits into finished vehicles, and the taxpayer’s RPM comparables did not reflect those assembly/design/fabrication functions—making gross-margin comparability unreliable.

2) What method did the Tribunal accept and why?
TNMM (one-sided) with the Kenyan entity as the tested party, because net margin indicators were more robust on these facts and the taxpayer did not convincingly rebut KRA’s TNMM benchmarking.

3) Did the case address burden of proof?
Yes. The Tribunal reiterated that the taxpayer bears the burden to prove an assessment is excessive/incorrect; failure to adduce persuasive counter-evidence can be fatal in method-selection disputes.

4) What did the Tribunal say about PAYE on seconded staff?
It stressed that PAYE under the Income Tax Act depends on an employer–employee relationship. Where secondees were not employees of the Kenyan company, PAYE could not be imposed on the Kenyan company on that basis.