Kenya Tax Appeal Tribunal rules on the use of Transaction Value Method for customs valuation

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EY Global

11 Nov 2021
Subject Tax Alert
Jurisdictions Kenya

Executive summary

The Kenya Tax Appeal Tribunal (Tribunal or TAT) held, in a judgment delivered on 29 October 2021, that the primary method of customs valuation is the Transaction Value Method (TVM). Alternative methods are to be applied upon failure of the TVM and the alternative methods should be applied sequentially.

In Tax Appeal No. 340 of 2020, the Appellant versus the Commissioner of Customs and Border Control (the Respondent), the Tribunal agreed with the Appellant’s assertion that the TVM, which is the primary method of valuation, must be applied first and that the alternative methods of customs valuation can only be applied if the primary method has failed.

The Tribunal further noted that the Appellant’s application for review was creditable by virtue of the facts and evidence provided by the Appellant in support of the appeal.

Detailed discussion

Overview of the case

The matter relates to a demand by the Respondent of Kshs.30,056,181 relating to imports of toothpaste over the period of 2015 to 2019. The Respondent alleged that the Appellant underpaid custom taxes on imported 75ml tubes of toothpaste based on declared TVM at Great Britain Pound (GBP) 0.52 per 75ml piece of toothpaste as opposed to the uplifted customs value recommended by the Respondent of GBP 0.94 per 75ml piece of toothpaste. The Respondent had conducted a desk Post Clearance Audit (PCA) on the importation of the Appellant’s products. The Appellant and its suppliers are related, and the Respondent determined the taxes payable by applying test values considering the relationship between the importer and exporter. The Respondent resorted to applying the Deductive Value Method (DVM) in determining the transaction value of the product.

Appellant’s contention

The Appellant asserted that there was no management letter issued by the Respondent, which would have afforded the Appellant an opportunity to countercheck the findings on the audit before the issuance of the demand letter/assessment.

In addition, the Respondent’s confirmation of its Decision without following due process contravenes the provisions of the PCA manual and East African Community Customs Management Act (EACCMA), 2004 and, violated Article 47 of the Kenyan Constitution (the Constitution).

The fact that the Respondent did not give reasons for arriving at its preferred valuation method and for not considering the TVM dictated to be used by the law contravenes the guidance by the World Trade Organization and EACCMA, 2004.

The Appellant also contended that it applied the Transaction Net Margin Method to determine the transfer price in accordance with the transfer pricing method rules. The Appellant’s Transfer Pricing Report detailed the methodology applied in determining the transfer price. In the report, import transactions categorized under sales, marketing and distribution were at arm’s length.

Respondent’s contention

The Respondent submitted that it was empowered to investigate the circumstances surrounding the sale in cases where there exists a relationship between the seller and the buyer.

The Respondent also submitted that it applied the circumstances of sale test to the imported adjusted consignment which test revealed that the relationship between the Appellant and its suppliers influenced the price paid for this product thereby failing to satisfy the conditions for an arm’s-length transaction.

The Respondent submitted that it was bound by law to apply the DVM contained in Paragraph 6 which took into account in-country profit margins and variance post-importation expense.

Tribunal’s Decision

In arriving at its decision, the Tribunal recognized that the PCA manual is a publication of the EAC Secretariat which is the executive organ of the Community and the provision of Section 122(6) of the EACCMA since the PCA exercise has a direct nexus to and resulted in the assessment by the Respondent.

The Tribunal noted that the Appellant made available to the Respondent, GSK’s TP documentation and valuation methodology and the schedules of prices supporting the same. However, there is no evidence that this information was considered by the Respondent in arriving at its decision.

In addition, the Respondent did not demonstrate to the Appellant or the Tribunal whether it observed “the circumstances of sale test” provided for in Paragraph 2 of the Interpretive Notes to the Fourth Schedule by examining relevant aspects of the transaction, including the way in which the price in question was arrived at to determine whether the relationship had influenced the price.

The Respondent also did not provide or advise on the formula or computation on how it determined the transaction value applied using the DVM and whether its application of the method was pursuant to the guidelines of Paragraph 6 of the Fourth Schedule.

The Tribunal recognized that Section 122(4) of the EACCMA allows a customs officer the right to satisfy themselves as to the truth or accuracy of any statement, document, or declaration. This position is also supported by Text 1:1 of the commentary by the WCO Technical Committee on Customs Valuation (TCCV). However, the TCCV also advises (in Decision 6.1) that in so doing customs administration should not prejudice legitimate commercial interest of the importer.

The Tribunal thus found that the Respondent’s decision was arbitrary and not objective. The Respondent has not demonstrated that the relationship between the Appellant and its suppliers influenced the prices declared to justify its application of an alternative method to the TVM.


This judgment demonstrates that the Fourth Schedule of EACCMA and procedures in conducting a PCA as stipulated in the East Africa Community Post Clearance Audit manual should be followed before assessments are raised. This is a welcome outcome as it fairly looks at the commercial side of taxpayers and their related parties.

For additional information with respect to this Alert, please contact the following:

Ernst & Young (Kenya), Nairobi
  • Francis Kamau 
  • Christopher Kirathe 
  • Hadijah Nannyomo 
  • Maureen Agutu
  • Stephen Ndegwa 
  • David King’ori 
  • Emmanuel Makheti
Ernst & Young Société d’Avocats, Pan African Tax – Transfer Pricing Desk, Paris
  • Bruno Messerschmitt
  • Alexis Popov 
Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London
  • Kwasi Owiredu 
  • Byron Thomas 
Ernst & Young LLP (United States), Pan African Tax Desk, New York
  • Brigitte Keirby-Smith 
  • Dele Olagun-Samuel 

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.