Kenyan tax exemption notice ‘unconstitutional’

The high court in Kenya recently delivered a judgment declaring that Legal Notice No 15 of 2021, issued in February 2021 by the cabinet secretary for national treasury & planning that exempted Japanese companies, consultants and employees from tax, was unconstitutional

The notice mentioned 16 agreements entered into between Kenya and Japan from 2007 to 2020

According to the notice, Japanese companies, consultants and workers involved in the projects executed under such agreements would not have to pay income tax on money earned in Kenya, as outlined in the agreements

The exemptions, which were adopted by national assembly on May 19 2021, were issued pursuant to section 13(2) of the Income Tax Act, which empowers the minister to issue a gazette notice providing that income or a class of income which accrued in or was derived from Kenya shall be exempt from tax to a specified extent

According to the court, under article 210 of the constitution, every waiver must be specifically authorised by legislation, reported to the auditor-general, and accompanied by a reason for the waiver There should also be a public record of the waiver and amount waived The court also pointed out:

● Section 13(2) of the Income Tax Act grants the power to exempt income or a class of income and not people or a class of people; and

● The legal notice was not subjected to public participation, which is a right that cannot be waived

Because the legal notice did not specify the amounts waived but simply stated that the exemptions were issued to the extent specified in those financing agreements , it did not comply with the requirements of under the constitution and Income Tax Act

Unless an appeal against the decision is filed and allowed by the court of appeal, the immediate effect of the judgment is that the cabinet secretary for national treasury & planning cannot grant a tax exemption to any entity or individual by simply issuing a legal notice, but must be based on legislation

Meanwhile following amendments introduced by Kenya s Finance Act, 2022, with effect from July 1 2022, the exportation of taxable services is a standard rated supply attracting VAT at a rate of 16%, except where the exported services are in respect of business process outsourcing

In a bid to counter the change in law, a number of petitioners filed a constitutional petition at the high court in September 2022, seeking to challenge the legality of the amendment However, through its judgment delivered on January 31 2023, the court dismissed all the petitions pertaining to the Finance Act 2022 The practitioners are appealing this decision at the court of appeal and are seeking to overturn the outcome in the high court

On February 7 2023, Kenya s cabinet secretary for national treasury & planning issued the Tax Procedures

(Common Reporting Standards) Regulations, 2023 The regulations, which are effective from January 1 2023, prescribe guidelines for the reporting by both financial and nonfinancial entities as required under the Tax Procedures Act

Another important decision relates to the 30%

KENYA INTRODUCED

A 30% TAX ON LUMP-SUM PENSION

WITHDRAWALS

EXCEEDING 600,000 KENYAN SHILLINGS tax on lump-sum pension withdrawals being suspended by high court

Following the filing of a petition by the Association of Retirement Benefits Scheme and the Association of Pension Trustees and Administrators, the Kenya high court has suspended the 30% tax on lump-sum pension withdrawals by persons aged 65 years or older pending a hearing and determination of the petition Kenya introduced the 30% tax on lump-sum pension withdrawals exceeding 600,000 Kenyan shillings with effect from January 1 2021, but both associations cited that there was a lack of public participation before the introduction of the tax

Celia Becker is an Africa regulatory and business intelligence executive at ENSafrica