The-Accountant-Jul-Aug-2017

Public Policy
This brings about an exception to the
general rule. Guideline 3.5 provides that
the jurisdiction in which the supply is
physically performed has the taxing rights
over business to consumer supplies of
services and intangibles that:
i. Are physically performed at a readily
identifiable place, and
ii. Are ordinarily consumed at the same
time as and at the same place where they
are physically performed, and
iii. Ordinarily require the physical
presence of the person performing the
supply and the person consuming the
service or intangible at the same time and
place where the supply of such a service or
intangible is physically performed.
Examples or services that would fall under
this would include restaurant, hairdressing
services, theatre performances etc.
Guideline 3.7 allows for the use of
any other proxy beside the proxies set
out in guideline 3.1, 3.2 and 3.5; Such
proxies of determining which jurisdiction
has the taxing authority / rights over a
supply of a service or intangible. Such
proxies may include location of movable
or immovable tangible property, actual
location of the customer, or place effective
use and enjoyment. These are referred to
as Specific rules.
Paragraph 3.156 of the OECD
guidelines provides any specific rule, based
on Guideline 3.7, should be supported by
clear criteria and its application should
remain limited.
In applying Guideline 3.7, a two-step
approach is recommended to determine
whether a specific rule is justified.
i. Test if the general rule leads to
an appropriate result, in which case a
specific rule shall not apply. Where an
inappropriate result arises the use of a
specific rule might be justified.
ii. Use of the specific rule should lead to
a better result considered in the light of
neutrality, efficiency of compliance and
administration, certainty and simplicity,
effectiveness and fairness.
However, use of the specific rule may lead
to double taxation or non-taxation.
Guideline 3.8 provides that services
directly connected with immovable
property, the taxing rights may be
allocated to the jurisdiction where the
immovable property is located. Such
services may include transfer, sale lease
or the right to use, occupy or exploit
immovable property, construction services,
alternations, maintenance of the property
and other services closely connected to
the property e.g. architectural services.
Services connected with movable
property include those physically carried
out on the specific movable property e.g.
repairs, alterations, maintenance, rental.
Therefore, taxation may take place at the
location of the movable property.
However, the OECD Guidelines, in
paragraph 3.180, do not give guidelines
on the treatment of services that are
incidental to the export or import of
goods e.g. packaging, loading, transport,
insurance, storage, customs agency,
security inspection services etc. which are
considered out of scope. On this basis,
how then does an exporter in Kenya treat
services that are incidental to the export
of goods?
Given that the VAT regulations
exclude from zero rating all taxable
services consumed on exportation of
goods unless the services are in relation to
transportation of goods which terminate
outside Kenya, are other services that are
incidental to the export of goods zero
rated? Such services are in effect exported
as part of the goods being exported and
therefore consumed outside Kenya. VAT
is by design a tax on consumption and
should be paid by the final consumer.
As a counter-narrative, one may take a
case study of Australia.
(http://law.ato.gov.au/atolaw/view.
htm?docid=GST/GSTR20072/NAT/
ATO/00001) and (http://law.ato.gov.
au/atolaw/view.htm?docid=GST/
GSTR20037/NAT/ATO/00001)
A supply of work physically performed
on goods situated in Australia, when the
work is done is subject to VAT, regardless
of whether the goods are exported
immediately thereafter. The place of
consumption is, in effect, determined by
the location of the goods. The inference
is that the supply is so closely aligned
with goods that it is appropriate to treat
the location of the goods or real property
as the place where consumption occurs.
Fundamental to establishing whether
there is a direct connection between a
supply and particular goods is determining
what the supply is for. For example:
• a supply of repairs to goods is directly
connected with those goods
• a supply of advice or information to
a non-resident about the potential for
investment in the real property market
in Melbourne is not directly connected
with real property. While the supply
is connected with real property, the
generality of the advice or information
means that the supply does not have a
direct connection with real property. The
supply is not one so closely connected
with real property in Melbourne that
the place of consumption is regarded as
Melbourne.
In determining whether there is
a direct connection between a supply
and particular goods, the location of
the recipient of a supply is not relevant.
Rather, the issue is one of determining
whether the relationship between the
supply and the goods is sufficiently close
to be directly connected including:
• the supply changes or affects the goodsin
a physical way;
• the supply changes or affects the goods
in a physical way; or
• there is a physical interaction with the
goods but without changing the goods; or
• the supply establishes the quantity, size,
other physical attributes or the value of
the goods; or
• the supply affects (or its purpose is to
32 JULY - AUGUST 2017