The snare of buying invoices to reduce tax liability

Case Study: China Communications Construction Company Limited v Commissioner of Intelligence Strategic Operations, Investigations' and Enforcement (Appeal E267 of 2023) [2024] KETAT 1202 (KLR) (9 August 2024) (Judgment)

?

The issue in dispute in this Appeal arose when KRA carried out an audit of CCCCL’s affairs and issued it with an assessment dated 3rd February 2023 for VAT and income tax amounting to Kshs 1,168,119,341.00.

CCCCL objected to this assessment vide its letter dated 2nd May 2023 and KRA issued its objection decision varying the assessment to Kshs 1,047,557,661.00.

Dissatisfied with KRA’s objection decision CCCCL lodged its Notice of Appeal on 25th May 2023 on the following grounds:

• That KRA erred and misdirected itself in finding that there was no supply and services and rejected the delivery notes supplied by CCCCL as proof of purchases on the basis that the delivery notes were incomplete and could not be relied on because the mode of delivery, persons receiving the goods and place of delivery were not indicated in the said delivery notes provided by CCCCL. This was inspite of the fact that CCCCL had produced valid delivery notes which proved the supply and delivery of taxable goods and services.
• That KRA further erred and misdirected itself by concluding that the entities for which CCCCL claimed purchases had no physical addresses from which they traded or stored the huge materials purchased by CCCCL, contrary to the evidence supplied to it by CCCCL. In doing so, KRA effectively placed an onerous and non-existent legal obligation upon CCCCL to not only provide proof of purchases, but also to provide proof of the physical addresses, importation or local purchase of the goods supplied to CCCCL which are not contemplated either under Section 15 of the Income Tax Act or Section 17 of the VAT Act, or any other law of Kenya.
• That Commissioner fell into error in concluding that the documents provided by CCCCL as proof of its claim for purchases were prepared for purposes of compliance with the requirement under Section 17 of the VAT Act and the same were not authentic.

CCCCL argued that:

• ?it purchases a lot of materials in its line of business which allows it to claim input VAT from those transactions.
• it had been reliably informed that its suppliers had declared output VAT and annual Corporation tax returns which could be verified by KRA who is in Control of the iTax system.
• in standard accounting practice, expenses would be deemed to be allowable if they are supported by documents such as invoices, delivery notes and proof of payments. That since CCCCL had provided these documents it follows that it had discharged its evidential burden under Section 17(3) of the VAT Act and Section 15(1) of the Income Tax Act. As such KRA had no legal basis for disallowing the purchases which met the legal threshold.
• once CCCCL had received the goods supplied then it was not required to investigate and ascertain the physical addresses of the suppliers, or storage for their goods or where the suppliers imported or purchased goods locally for purposes of supplying CCCCL.

KRA Responded That:

• the documents provided were not relied on because CCCCL had failed to show that there was a supply of goods and services. That it did not also provide delivery notes indicating the mode of delivery, persons receiving the goods and place of receipt of goods delivered.
• the said entities had no physical address from where they could either trade or store the huge materials allegedly purchased by CCCCL.
• it reviewed the documents that were provided by CCCCL and found that they were not authentic for the following reasons: -

i. The entities mentioned had no physical addresses from where they traded or stored the huge materials allegedly purchased by CCCCL.

ii. There were no delivery notes to prove purchases that there was a supply of goods and services indicating the mode of delivery, persons receiving the goods and place of receipt of goods delivered.

iii. From KRA’s records, the suppliers who were mentioned never manufactured, imported or purchased locally any goods for purposes of supplying to the Company.

KRA's witness analyzed CCCCL transactions with 6 major suppliers from whom CCCCL claimed input . The 6 companies (traders A) would in turn claim input and transfer money to other multiple suppliers (traders B). In some cases traders B would deal with another layer of companies(traders C)

KRA witnesses stated that traders A, B &C ?were shell paper companies, with no “meat” or substance, which were used by China Communications Construction Company Limited to transfer funds to unknown individuals and therefore there was no sale to CCCCL. That the fictitious invoices generated in the whole scheme were used to legitimize the transfers and to reduce tax liability on the significant income received by CCCCL.

KRA witness also stated that ?:

1)????? traders C would convert the funds from KES to USD and transfer the same to China however, there was ?no evidence of any purchase.

2)????? Traders A,B and C? did not have physical offices

3)????? Some business in A, B and C were formed through fraudulent documents

4)????? Directors of the traders A,B and C refused to appear before KRA after summons.

5)????? ?From the investigations conducted, it was established that the alleged suppliers do not manufacture, import or supply goods or services.

In its ruling on 09/08/2024, the TAT observed that:

• CCCCL failed to address the issues of fraud and tax avoidance schemes raised by KRA’s witness. The moment the said witness completed its testimony asserting that CCCCL had been involved in an elaborate tax avoidance scheme the burden of proof shifted to CCCCL to provide evidence by way of affidavit, witness statement or otherwise to rebut this assertions. This was not done in this case.
• CCCCL's transactions did not support a reasonable commercial transaction. It was instead an elaborate scheme to avoid payment of tax in Kenya. CCCCL's failure to discharge the burden of proof that had shifted back to it to show that it was not involved in a tax avoidance scheme was not discharged.
• It is also not possible or common in a typical arms-length transaction that all the traders and entities who were doing business with CCCCL could have adopted the same modus operandi of lacking documents, converting its Kshs to USD, and transferring its monies to China. That all these 3rd party companies were unaware of these transactions and also lacked the documents to support their transactions with CCCCL or the imports that they may have received from China to support the incoming USD transfers.

Based on the foregoing the Tribunal found that CCCCL was involved in an elaborate scheme to avoid tax .

??????????????????????????????????????????????