October 27, 2022
Kenya High Court holds that a decision for abandonment of taxes is upon initiation and determination by the Commissioner
The Kenya High Court on 16 September 2022 declared that a decision for abandonment of taxes by the Cabinet Secretary (CS), National Treasury, was upon evaluation and recommendation by the Commissioner. This was pursuant to an application for judicial review filed by a local alcohol distiller (the Applicant) against the Kenya Revenue Authority (KRA or the Respondent).
The Applicant had made an application to the CS, National Treasury, for abandonment of taxes. In its response letter dated 20 January 2022, the National Treasury allowed the application and approved abandonment of 80% of the outstanding principal taxes and waived 100% of penalties and interest. However, on 2 March 2022, the Respondent advised the Applicant that the earlier approval of abandonment had been rescinded. The Applicant, being dissatisfied with the reversal of the decision, sought orders that the reversal decision by the Respondent, dated 2 March 2022, was irrational, illegal, unreasonable and untenable.
In its ruling dated 16 September 2022, the High Court ruled that in accordance with the Tax Procedures Act, 2015 (TPA), any decision for abandonment of taxes and waiver of penalties and interest had to be upon initiation and determination by the Commissioner. The CS, National Treasury could not act in its own motion without consulting with the Commissioner.
The Applicant is a limited liability company that operates a local alcohol distillery. The Applicant did self-assessment returns for January 2020 to August 2021 for taxes amounting to KES529,278,680 but failed to remit the same.
Instead, the Applicant through a letter dated 15 September 2021 applied to the CS, National Treasury, for abandonment of KES517,118,680 which the Applicant had collected as excise tax in the course of its business, an amount which was now being demanded by the Respondent. In its response letter dated 20 January 2022, the National Treasury allowed the application and approved abandonment of 80% of the outstanding principal excise tax and waived 100% of penalties and interest, in accordance with sections 37 and 89 of the TPA.
The Respondent through an email dated 2 February 2022 addressed to the Applicant, acknowledged the outcome of the abandonment and demanded the balance of 20% which amounted to KES80 million that was to be settled in installments. However, on 2 March 2022, the Respondent advised the Applicant that after due consultation with the Attorney General's office, the earlier approval of abandonment had been rescinded and the entire sum of KES517,118,680 was due and payable within seven days failure of which would result in enforcement measures. The Applicant, being dissatisfied with the reversal of the decision and citing lack of communication from the National Treasury, applied for a judicial review seeking orders of certiorari, prohibition and mandamus against the reversal decision by the Respondent dated 2 March 2022.
According to the Applicant, the recission decision by the Respondent to demand the payment of full taxes was illegal as there had been no application to review or set aside the decision by the National Treasury for abandoning 80% of the demanded taxes. The Applicant's case was that the Respondent had acted beyond its powers to demand taxes that had been deemed extinguished or abandoned by the CS, National Treasury. It was thus submitted that the Respondent's decision to demand the full taxes was unprocedural, illegal, unfair, prejudicial, made in bad faith, and violated the legitimate expectation of the Applicant. The Applicant claimed that the letter from the National Treasury on abandonment of 80% of the taxes had not been revoked and the decision by the Respondent constituted an abuse of power.
The Respondent asserted that the letter from National Treasury dated 20 January 2022 abandoning taxes was void ab initio since only the Commissioner can initiate the process of abandonment of taxes as stipulated under Section 37 of the TPA. The Respondent claimed that the Attorney General, who is the legal advisor to the Government, had written to the National Treasury on 22 February 2022 reaffirming the Respondent's position that an abandonment could only be initiated by the Commissioner.
The Respondent further submitted that it was obligated to advise the Government on all matters relating to the administration and collection of revenue under the written laws, as provided for under Section 5(2) (b) of the Kenya Revenue Authority Act. It was the Respondent's submission that the National Treasury lacked the power to initiate abandonment of taxes and that the decision by the CS, National Treasury, to abandon taxes on their own motion could not override the provisions of the law on abandonment of taxes, which was reserved for the Commissioner.
Finally, the Respondent submitted that the letter dated 20 February 2022 from the National Treasury on abandonment of taxes had not created a legitimate expectation on the Applicant as it was based on an illegality.
Analysis and determination
The issue for determination was whether the decision by the Respondent dated 2 March 2022 demanding full taxes despite the decision by the National Treasury to abandon 80% of the taxes was irrational, illegal, unreasonable and untenable.
The High Court in its ruling made the following observations:
Based on the foregoing, the High Court noted that only the Respondent can invoke the provisions for abandonment of taxes under Section 37 of the TPA. Upon invoking the provisions, the Respondent refers the matter to the CS, National Treasury for approval. In this regard, the National Treasury had no business to purport to allow for abandonment of 80% of the demanded taxes and this was abuse of power and office on part of the National Treasury. The National Treasury purported to exercise a power it did not have and as such the abandonment was void ab initio.
Having found the decision to be illegal, the decision could not confer any right on the Applicant or any obligation on the Respondent. Further, no legitimate expectation could arise from an illegality. As such, the Respondent should not be put in a position whereby it complies with ministerial directives which are illegal or unlawful.
The Respondent, being the master of taxes and tax laws, had a duty to evaluate the application for abandonment of taxes vis a vis the statutory requirements and procedures to be met before such approvals are issued. Accordingly, the High Court ruled that the Respondent's decision to collect the full taxes was lawful and not illegal, irrational or unprocedural as contended.
In conclusion, the High Court ruling has made it clear that a decision by the National Treasury for abandonment of taxes is upon initiation and determination by the Commissioner. The ruling further has made it clear the importance of taxpayers following procedures as set forth in the TPA and other tax laws.
For additional information with respect to this Alert, please contact the following:
Ernst & Young (Kenya), Nairobi
Ernst & Young Société d'Avocats, Pan African Tax – Transfer Pricing Desk, Paris
Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London
Ernst & Young LLP (United States), Pan African Tax Desk, New York