June 28, 2023
Kenya High Court clarifies 'use of an asset' definition for purposes of claiming of investment allowance
The High Court of Kenya, on 12 May 2023, upheld a Tax Appeals Tribunal (or "the Tribunal") ruling that in the absence of an express definition of the term "use" for purposes of claiming investment allowance,1 the dictionary definition of "use" applied. The Kenya Revenue Authority (KRA) had appealed a 4 March 2020 decision of the Tribunal, which had ruled in favor of the taxpayer.
In this case, the taxpayer (Respondent) averred that its manufacturing plant was put into use in June 2019, following the production of the first and second batches of its products. In contrast, the KRA (Appellant) averred that the manufacturing plant was put into use in August 2019, when the project architect issued a certificate of completion. The KRA further asserted that the production of the first and second batches of the taxpayer's products were just test runs and the actual use of the manufacturing plant did not commence until the completion certificate for installation of the machinery for production was issued.
The parties' different interpretations of the term "use" directly affected the rate of investment allowance, with the period of use as averred by the taxpayer qualifying for a 150% investment allowance and the period of use as averred by the KRA qualifying for a 100% investment allowance.
In its ruling dated 12 May 2023, the High Court found no reason to interfere with the Tribunal ruling and dismissed the application.
The Respondent is a private limited company registered in Kenya that manufactures animal feeds. In the financial year ending June 2019, the Respondent constructed an animal feeds supplement manufacturing plant at a cost KES2 277,271,427. The manufacturing plant was constructed within a large privately controlled development site located in Kiambu County. The manufacturing plant was required to meet certain compliance standards set by the promoters of the controlled development site. In this regard, the promoters of the controlled development site issued a certificate of building compliance to the Respondent on 17 June 2019.
The respondent claimed an investment allowance at the rate of 150% on the building cost for the year ending June 2019. On 4 November 2020, the Appellant audited the Respondent's investment allowance costs and disallowed the claimed investment allowance of KES 423,033,494 for the financial year ending June 2019, stating that the allowance ought to be claimed in the subsequent year at the lower 100% rate. The relevant provision of the law that provided the rate of investment allowance had been amended and reduced to 100% for 2020.
On 29 January 2021, the Appellant issued an audit report disallowing the investment and demanded corporation tax based on the disallowance of the investment allowance. The Respondent objected the assessment via a letter dated 25 February 2021. The Appellant issued its objection decision on 30 April 2021, confirming its earlier position that the investment allowance ought to be claimed in the financial year ending June 2020 at the 100% rate. The Respondent filed an appeal with the Tribunal, which set aside the objection decision.
The Appellant then appealed the Tribunal's decision to the High Court on 9 May 2022.
The Appellant averred that:
On the other hand, the Respondent averred that:
Analysis and determination
The key issue for determination was whether the Tribunal erred in law and fact in finding that the Respondent's machinery was first used in June 2019 and qualified for a 150% investment allowance.
The High Court upheld that the Tribunal's ruling that that the Kenyan Income Tax Act did not expressly define the word "use" and therefore relied on the literal meaning provided in the Cambridge Dictionary, which defined "use" to mean "to put something such as a tool, skill or building to a particular purpose."
The High Court premised its ruling on the following:
Based on the foregoing, the High Court dismissed the appeal having found no fault in decision of the Tribunal.
The High Court's ruling emphasizes the importance of clarity in tax statutes. The law should be express with no room for ambiguity. Moving forward, taxpayers ought to ensure that they seek clarity on interpretation of tax statutes to ensure tax compliance and mitigate tax disputes with the revenue authority.
The contacts listed below can help taxpayers who need assistance in interpreting of tax statutes, as well assistance with claiming and verifying available investment allowances.
For additional information with respect to this Alert, please contact the following:
Ernst & Young (Kenya), Nairobi
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor
1 An investment allowance is an incentive granted on the cost of building and machinery to encourage investment.
2 KES refers to Kenyan Shillings