High Court clarifies what constitutes royalty and payment for copyrighted material
The High Court has ruled that payments in respect of use of copyright qualify as royalty while payments for copyrighted material don’t qualify.
The High Court clarified what constitutes royalty in respect of software payments. It was determined that payments for use of copyright qualify as royalty while payments for copyrighted material don’t qualify.
The judgment was delivered December 10, 2021, in the case of Seven Seas Technology Limited against the Commissioner of Domestic Taxes (Income Tax Appeal 8 of 2017)  KEHC 358 KLR.
The Appellant in this case was in the business of buying software from non-residents and would then sell to end-users based in Kenya. The Appellant was assessed by Kenya Revenue Authority (KRA) for withholding tax on the premise that the payments it made while acquiring the software for resale qualified as royalties under the Income Tax Act (ITA) and as such subject to withholding tax in Kenya.
Aggrieved by the Tax Appeals Tribunal decision which upheld the foregoing position, the Appellant lodged its appeal at the High Court.
In its appeal, the Appellant argued that in purchasing the software for resale, it acquired a copyrighted material, and it did not in any way acquire the rights to the intellectual property in it, that is, the Copyright in the software. As such it was a vendor of copyrighted material and not the user of copyright and does not, therefore, receive the right to exploit the copyright.
Further, that payments for the acquisition of copyrighted material do not fall within the definition of royalty under the ITA and as such withholding tax should not be applicable.
The Respondent on the other hand argued that the non-resident from whom the Appellant had procured the software received a consideration.
The consideration paid was for the use of or right to use the copyright of a literary work according to which it qualified as royalty under the ITA and as such attracting withholding tax.
Further, that the Appellant exploited intellectual property in the software when it resold the software to its customers and therefore the proceeds from the resale qualified as royalty in its wisdom.
The Court, in its determination took the view, that in purchasing the software for resale, the Appellant acquired a copyrighted article and not the copyright in it. Further, placing reliance on the OECD Model Tax Convention, the Court drew a distinction between payments made to acquire partial rights in the copyright which qualify as royalties under the ITA from payments made to acquire and distribute software copies (without the right to reproduce the software) which in its view should be dealt with as business profits.
What the ruling means for taxpayers
This decision goes a long way in providing certainty on the taxation of software payments in Kenya. More so, given the increased developments in technology, the dichotomy as to what taxes apply on the acquisition of a copyrighted article vis-à-vis the right to use copyright in an article is extremely crucial.
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