Imagine bidding for a project, confident that certain costs are covered. You secure the contract and begin work, only to be told—midway or even after completion—that you must now bear those very costs.
This was the predicament facing Japanese contractors and employees working on projects in Kenya under financing agreements with the Government of Japan. They had been assured their tax costs would be covered by the Government of Kenya, allowing them to proceed accordingly. However, this exemption was later challenged in court.
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Back in February 2023, a High Court ruled that the said tax exemptions were unconstitutional. This decision was met with opposition from the National Assembly, National Treasury, and the Attorney General, who filed an appeal which was determined at the Court of Appeal on 30 December 2024.
The Income Tax Act grants the Cabinet Secretary for National Treasury and Planning the authority to exempt certain income from tax. Exercising this power, Treasury issued a legal notice exempting Japanese companies, consultants, and employees involved in specified financing agreements from income tax.
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Petitioner Eliud Karanja Matindi challenged the legal notice, arguing it was discriminatory because Kenyan employees working for Japanese companies were not granted the same tax exemption. He also contended that Treasury did not have the authority to issue such exemptions.
The High Court agreed and ruled that section 13(2) of the Income Tax Act was unconstitutional. It cited Article 210 of the Constitution of Kenya, which states that no tax or licensing fee may be waived or varied except as provided by legislation.
Dissatisfied with this decision, the Attorney General, National Treasury, and National Assembly filed separate appeals at the Court of Appeal, arguing that the High Court had erred in declaring the legal notice unconstitutional.
The Court of Appeal ruled that while Parliament holds legislative authority and can delegate certain powers when expressly permitted by the Constitution or legislation.
The court found the Treasury had exercised powers legally under Article 94(5) of the Constitution and section 13(2) of the Income Tax Act. It also noted the legal notice was issued following negotiations between the Governments of Kenya and Japan and was not unique to Kenya, as similar financing agreements applied to other countries.
Additionally, the court clarified that since the legal notice resulted from government-to-government negotiations, it was an executive action and did not require mandatory public participation, as it was not a statutory instrument.
Eliud argued that tax exemptions or waivers could only be granted by the National Assembly through legislation, specifically as a money bill under the Constitution.
The Court of Appeal reiterated that while legislative authority is vested in Parliament, there are instances where it may be delegated to specific entities, provided there is express authorisation from either the Constitution or Parliament itself.
The court affirmed the Income Tax Act empowers Treasury to grant income tax exemptions via legal notice, which must then be transmitted to the National Assembly for consideration, as was done with Legal Notice 15 of 2021.
Looking ahead, this decision provides clarity on the status of tax exempt projects. It could encourage further development in infrastructure, renewable energy, and other sectors. That is, if Kenya continues to attract funding through such agreements. However, tax exemptions alone do not guarantee successful project completion. The Government will need to ensure that tax-exempt projects are effectively managed and deliver real value to Kenyans.
By Alex Kanyi
The writer is a Partner in the Tax and Exchange Control division at CDH Kenya.
