Kenya operates a self-assessment tax system with taxpayers shouldering the ultimate responsibility to correctly declare their incomes and meet their tax obligations.

Tax controversies are largely triggered by taxpayers’ actions or inactions; for example, tax refund applications, erratic filing of returns, payment returns without corresponding tax payments, failure to register for tax obligations despite having attained the set thresholds or huge capital allowances claims. 

The actions and inactions trigger tax audits and compliance checks by the Kenya Revenue Authority (KRA). Changes in law and taxpayers’ risk profile may also trigger audit and compliance checks. Any discrepancies or suspected irregularities identified during the processes often lead to tax disputes crystallised through the issuance of tax assessments that take various forms, including amended assessments, default assessments or advance assessments. Taxpayers have the right to challenge tax assessments through the KRA internal dispute resolution mechanism, the Tax Appeals Tribunal (“Tribunal”), which is a quasi-judicial forum, and at the Kenyan courts. 

Currently, tax controversies arise out of all tax heads including corporate income tax, capital gains tax, value added tax, custom duties, excise duty, pay as you earn (PAYE) and withholding tax.

The risk of tax controversy cannot be eliminated entirely, although it can be mitigated. There are no full-proof ways to mitigate the risk but, generally, taxpayers may achieve this by:

• ensuring that they remain up to date with their tax compliance obligations; 
• responding to any communication from the KRA within the expected timelines; 
• seeking professional advice from qualified experts when it comes to decisions that have a tax impact; 
• ensuring that they stay up to date with amendments to existing tax laws and obligations; and
• staying abreast of private and public rulings issued by the KRA that set out the manner in which they will interpret and apply the law (these are binding on the KRA). 

Where necessary, seeking private and public rulings from the KRA where there are doubts on the applicable laws prior to carrying out transactions that are relatively high-risk from a tax perspective to determine KRA’s position in advance. 

Since 2017, Kenya is a member of the OECD/G20 BEPS Project Inclusive Framework, which formulated 15 action plans geared towards tackling tax avoidance, improving coherence of international tax rules and ensuring transparent of the global tax environment. Kenya has implemented some of the BEPS measures including:

• unilateral taxation of the digital economy through introduction of the Digital Service Tax (DST); 
• limiting the amount of deductible interest for income tax purposes to 30% of earnings before interest, tax, depreciation and amortisation (EBITDA); 
• countering harmful tax practices occasioned through business conducted between residents and other persons situate in preferential tax regimes;
• the prevention of treaty abuse through introduction of limitation of benefits tests in the domestic law;
• the introduction of country-by-country reporting (CbCr) obligations; and
• the ratification of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.

The implementation of BEPS-related measures have intensified tax controversies largely due to interpretational issues occasioned by the changes in law.

There is, generally, no requirement to pay the taxes in dispute during the KRA internal dispute resolution phase or prior to lodging an appeal at the Tribunal. Where a tax assessment is upheld and the taxpayer intends to lodge an appeal at the High Court or the Court of Appeal, the courts will require the taxpayer to give security as a condition for stay of any enforcement action. The security may take the form of a bank guarantee from a commercial bank or cash payment of a percentage of the tax in dispute.

The KRA audit case selections are premised on four distinct approaches:

• a risk-based case selection system that entails systematic identification of audit cases on the basis of defined risk factors identified through a risk profiling analysis;
• use of automated systems that have imbedded in them certain intelligence gathering mechanisms capable of detecting non-compliance behaviours based on specific inbuilt parameters;
• use of industry benchmarks comparing a taxpayer’s performance to that of other taxpayers in the same industry using objective criteria; and
• referrals from intelligence agencies.

The law permits the KRA to only issue assessments within five years immediately following the last date of the reporting period to which the assessment relates. As a result, the KRA tends to match the scope of its audits with this five-year period. The exception to the five-year statutory limitation is instances in which there is gross or wilful neglect, evasion or fraud by a taxpayer. In such instances, the scope of a KRA audit can extend beyond the five-year limitation period. 

Once the KRA commences an audit, there is no statutory timeline within which it is required to conclude it. The five-year limitation does, however, incentivise it to close audits as soon as possible so as to ensure that any resultant assessments issued do not breach this. 

There is no statutory rule providing the location where tax audits are carried out. The KRA has the discretion to conduct these on the taxpayers’ premises or at their own offices. The KRA also has discretion to seek the information it deems relevant to the audit. This may take the form of written documents, viewing certain aspects of a taxpayer’s electronic systems, and oral interviews conducted with the taxpayer. 

Managing information requests by the KRA during the tax audit exercise informs the ultimate outcome of the tax audit. A timely response to such information requests is therefore key. It is highly advisable to have a single point of communication with the KRA during the course of a tax audit.

The KRA now has access to a lot more information, especially concerning the non-resident aspects of multinational groups that have a presence in Kenya. The KRA is collaborating with other tax jurisdictions with respect to exchange of information for tax purposes. 

A taxpayer undergoing a KRA audit should, as far as possible:

• proactively manage the process;
• communicate with the KRA to determine the timing and scope of the audit;
• from the onset, have a clear paper trail of correspondence; and
• seek professional assistance from tax advisors and lawyers as soon as possible.

The audit may be concluded amicably but, in many instances, it will lead to a tax dispute. 

The administrative claim phase, which includes a response to preliminary audit findings and an objection to a tax assessment, is a mandatory requirement before initiating the judicial phase. A taxpayer who wishes to dispute an additional tax assessment shall do so by first lodging a notice of objection within 30 days of being notified of the assessment. This period may be extended on application by the taxpayer where the taxpayer was prevented from lodging an objection owing to illness, absence from Kenya or other reasonable cause and where the delay was not unreasonable.

The objection is treated as having been validly lodged where it is accompanied by supporting documentation, states precisely the grounds of objection, the amendments required to be made, the reason for the amendments and where any undisputed taxes have been paid.

The objection stage is very crucial as the grounds relied on and documents provided for at this stage are the only ones that may be relied on once the matter progress to the Tribunal and, ultimately, the courts. Failure to object to an assessment would mean the amounts assessed are due and payable. 

Where a taxpayer has lodged a notice of objection to an assessment, the KRA may either:

• deem that the taxpayer’s notice of objection has not been validly lodged, in which case they will notify the taxpayer in writing of this fact within 14 days of receiving the defective notice of objection; or 
• where the KRA finds that the taxpayer’s notice of objection has been validly lodged, make an objection decision within 60 days from the date of receipt of a valid notice of objection.

If the KRA fails to issue an objection decision within 60 days, the taxpayer’s notice of objection is deemed allowed. This position has been litigated and upheld by the Kenyan courts. 

Where a taxpayer is dissatisfied with a decision issued by the KRA, they may lodge an appeal before the Tribunal provided that the taxpayer pays a non-refundable fee of KES20,000 (approximately USD150) (this is the court of first instance for tax disputes). The documents required to lodge an appeal at the Tribunal include: 

• a notice of appeal;
• a memorandum of appeal;
• a statement of facts; and 
• the appealable decision.

Tax Appeals Tribunal

A taxpayer seeking to initiate tax litigation may do so by filing a Notice of Appeal at the Tribunal within 30 days of being issued with the decision of the KRA. The taxpayer is thereafter required to file a memorandum of appeal accompanied by a statement of facts, the decision being appealed against and any other supporting documentation with 14 days of filing and serving the Notice of Appeal on the KRA. 

Once the KRA has been served with the appeal, they will be required to file a statement of facts within 30 days. 

The Tribunal will, thereafter, set the matter down for mention, during which the parties will decide how they would like the matter to proceed. Parties may opt to file witness statements or may simply opt to proceed by way of written submissions.

If the parties decide to proceed with an oral hearing, the parties shall file witness statements and appear before the Tribunal for cross examination before being granted an opportunity to file their written submissions. If the parties proceed through written submissions, they shall proceed to file and serve their submissions within the timelines given by the Tribunal. 

In practice, the Tribunal often mentions the matter one final time to confirm compliance by the parties before retiring to render its judgment. The judgment is delivered upon notice. The parties are provided with a copy of the written signed judgment. 

Evidence is more instrumental in the initial stages of judicial tax litigation, that is, at the Tribunal stage rather than in the subsequent stages. This is because the Tribunal has jurisdiction to determine both matters of fact and questions of law. Appeals arising from any decision of the Tribunal are limited to questions of law. In essence, evidence is key at the objection stage and when the matter is being heard before the Tribunal.

Taxpayers should ensure that they produce all the documentary evidence that they intend to rely on when lodging their notice of objection. Documents may not be produced at any other stage without leave of the judicial body.

Taxpayers may opt to call a witness at the Tribunal. The witness will be required to file a witness statement and appear before the Tribunal to be cross examined. A witness may be a person who has intricate knowledge and details of the taxpayers’ affairs or a subject-matter expert who has technical knowledge that could assist the Tribunal in reaching the correct determination. 

The burden of proof is on taxpayers. Where a taxpayer discharges their obligation to prove their position, the burden shifts to the KRA. 

Taxpayers ought to take the long view in their engagements with the KRA. An interaction with the KRA, no matter how routine, may result in a dispute. As such, taxpayers ought to maintain a paper trail documenting their interactions with the KRA. The information in support of the taxpayer’s position ought to be provided to the KRA and filed at the Tribunal as there are several precedents where taxpayers have been found liable to pay taxes based on the simple fact that they failed to provide evidence. Taxpayers also ought to bear in mind the timelines within which certain actions ought to be done at the different stages of the tax disputes process. 

The sources of law in Kenya include the constitution, the acts of parliament, judicial precedent or common law, general rules of international law and treaties and conventions ratified by Kenya.

This notwithstanding, the Kenyan courts consider and apply international best practice when it comes to tax disputes. They have considered material from the OECD as well as non-commonwealth jurisdictions including the USA and the EU. 

Taxpayers have the right to appeal an appealable decision to the Tribunal. If they are aggrieved by the decision of the Tribunal, they may lodge an appeal at the High Court and the court of appeal. There is no automatic right of appeal to the Supreme Court, which is the apex court in Kenya, but leave may be granted to do so in some instances. 

In this context, an appealable decision is defined as an objection decision and any other decision made under a tax law other than a tax decision or a decision made while making a tax decision. A tax decision is defined as:

• an assessment;
• a determination under Section 17(2) of the TPA, 2015 of the amount of tax payable or that will become payable by a taxpayer;
• a determination of the amount that a tax representative, appointed person, director or controlling member is liable for under Section 15, Section 17 and Section 18 of the TPA, 2015;
• a decision on an application by a self-assessment taxpayer under Section 31(2) of the TPA, 2015 ;
• a refund decision;
• a decision requiring repayment of a refund; or
• a demand for a penalty. 

The first stage in the appeal process involves a taxpayer lodging an appeal at the Tribunal. This must be done within 30 days of being issued with an appealable decision by the KRA.

If a party is dissatisfied with the judgment of the Tribunal, they may appeal to the High Court on a question of law within 30 days of being notified of the judgment of the Tribunal or within such further period as the High Court may allow.

Where a party is dissatisfied with the judgment of the High Court the party may appeal to the Court of Appeal on a question of law within 14 days of the delivery of the decision by the High Court.

An appeal to the Supreme Court can only be made by first seeking the leave of the Court. Leave is only granted where the matter is deemed to be of general public importance or where it relates to interpretation of the Constitution. The appeal must be lodged within 14 days of the delivery of the Court of Appeal’s decision. 

The Tribunal is composed of a chairperson and members. The chairperson and members of the Tribunal are appointed by the Judicial Service Commission and are independent of the KRA. For each dispute, the Tribunal panel is composed of the chairperson, or a member appointed by the chairperson to preside over the proceedings and at least three members, at least one of whom is an advocate of the High Court.

Appeals at the High Court are generally presided over by a single High Court judge from the commercial and tax division. The presiding judge of the division is responsible for the general management and distribution of business before the Court among the judges in the division. 

At the Court of Appeal, the appeal is handled by the civil division of the Court of Appeal. The President of the Court is responsible for allocation of cases and the constitution of benches to hear disputes. Normally, the bench consists of three judges, however parties may apply informally but in writing to the President of the Court with notice to the other party for an extended bench consisting of five or more judges of an uneven number.

The parties may thereafter appeal to the Supreme Court. The Chief Justice is responsible for the allocation of cases, constitution of benches and determination of sittings of the Court. While the Supreme Court is composed of seven judges, for the purposes of the hearing and determination of any proceedings, the Supreme Court shall comprise of at least five judges.

Kenya’s tax laws provide for an ADR process that permits tax disputes to be resolved without the need for litigation. 

The Tribunal and courts uphold these provisions and often give the parties time to engage in the ADR process. It is, however, important to note that despite any engagement between the parties, the timelines and procedures in the judicial system continue to run.

The ADR process is facilitated by a dedicated tax dispute resolution division that is part of the KRA. Parties to a tax dispute can opt to engage in the ADR process voluntarily and the process involves them engaging in good-faith discussions on a without prejudice basis with a view to entering into an agreement and ultimately a consent. The law provides that ADR engagements must be concluded in 90 days. 

Failure to resolve the dispute within the 90-day timeline will result in the matter proceeding before the Tribunal or the courts. Even then, the parties may still continue to engage with a view to resolving the matter out of court. 

Any agreement reached through the ADR process must be supported by the law. Parties cannot agree to resolve a dispute in a manner that is contrary to legislation. As such, ADR is not suited to resolve disputes that involve questions of law, but rather, is ideal where the dispute revolves around matters of fact. Such issues include accounting and reconciliation issues, the accuracy of the figures set out in tax assessments, etc. 

Kenya’s tax laws provide for two types of rulings, that is, public and private rulings. 

• The KRA has the authority to make a public ruling on the interpretation of a tax law by publishing a notice in at least two newspapers with a nationwide circulation. This ruling can only be withdrawn in a similar manner or by making a subsequent public ruling inconsistent with the existing ruling. 
• On the other hand, a taxpayer may apply to the KRA for a private ruling. A private ruling sets out the KRA’s interpretation of a tax law in relation to a transaction entered or to be entered into by the taxpayer.

Public and private rulings are binding on the KRA and remain in place until they are withdrawn. This notwithstanding, tax disputes still arise in relation to issues covered by both private and public rulings. The courts, however, hold the KRA to the positions set out in these rulings. The courts have consistently found that such rulings create a legitimate expectation to the taxpayer on how taxes are to be administered.

There is no limitation on the tax head or the value of a dispute that may be subjected to the ADR process. The process is voluntary and conducted on a without prejudice basis; therefore, once the parties reach an agreement there is no right of appeal. 

Since there is no limitation on the nature and scope of tax disputes that may be subject to ADR, taxpayers may opt to settle transfer pricing disputes through ADR mechanisms. 

When the tax authorities identify discrepancies and make additional tax assessments ‒ whether due to errors, misuse of tax credits, or avoidance tactics through GAAR or SAAR ‒ it does not automatically subject the taxpayer to criminal offences. Initially, the response is administrative rather than criminal. The KRA pursues a single option. 

The KRA generally tends to pursue criminal proceedings where a taxpayer has committed tax offences such as fraud. 

This process begins with a complaint to the police, potentially by the KRA. Following an investigation, if there is sufficient evidence suggesting criminal activity, the case is referred to the Director of Public Prosecutions (DPP). The DPP then evaluates the evidence, deciding whether to pursue criminal charges based on the seriousness of the offence and the public interest.

The criminal procedure laws allow for private prosecution. This is done by seeking consent from the DPP. This means that the authority can also initiate criminal proceedings and prosecute the matters themselves through their prosecution department.

The tax authorities, however, refrain from initiating criminal proceedings in general or prosecuting the matters themselves.   

The KRA only pursues a single option, that is, either the administrative process or the criminal process in respect of each potential instance of non-compliance. 

The tax authorities often initiate administrative processes rather than criminal tax cases because their intention is to recover the unpaid taxes. Furthermore, the burden of proof is on taxpayers in the administrative process. Under the criminal option, the KRA would have to prove a taxpayer’s guilt beyond reasonable doubt. This is much more difficult. 

Criminal cases are dealt with by the criminal court system. The typical stages of criminal proceedings are as follows. 

• The prosecution prepares a charge sheet that clearly describes the offence with which the accused is charged.
• The accused is then asked to enter a plea.
• The prosecution proceeds to present its evidence and case.
• The court evaluates the evidence to decide if the accused must present a defence.
• Should the court find insufficient evidence for a case, it will be dismissed. Otherwise, the accused will present their defence.
• Lastly, after hearing from both sides, the court delivers its verdict or sentence.

The tax laws provide that a person liable to a penalty or interest may apply in writing to the KRA for the remission of the penalty or interest payable and such application shall include reasons. The KRA may remit in whole or in part the penalty or interest if it is satisfied that the remission is by reason of consideration of hardship or equity or impossibility or undue difficulty or expense of recovery of the tax. The Commissioner, however, needs to seek the approval of the Cabinet Secretary responsible for the National Treasury where the penalty or interest amount exceeds KES1,500,000.

Currently, there is a tax amnesty in place that runs up to 30 June 2024. Under the terms of the amnesty, taxpayers may benefit from the remission of penalties and interest that crystallised out of non-compliance that occurred up to December 2022 if they pay the outstanding principal taxes.

The tax laws do not expressly provide for the option to enter into an agreement to pay the taxes assessed plus penalties and interest in place of a criminal trial. However, where a person has paid a penalty under a tax law and the KRA commences prosecution in respect of the same act or omission, the penalty ought to be repaid to the taxpayer as a refund of tax. The taxpayer shall also not pay a penalty in the case of a prosecution, unless the prosecution is withdrawn.

Where a decision on a criminal tax offence has been made by the court of first instance, the decision may be appealed as per the dictates of the criminal laws. Where the case was first heard by the Magistrate Courts, any party may appeal to the High Court and subsequently the Court of Appeal.

Transactions that fall afoul of GAAR, SAAR, transfer pricing rules or anti-avoidance rules often give rise to administrative cases. 

Kenya’s double taxation treaties provide for the mutual agreement procedure (MAP). Taxpayers are at liberty to trigger a MAP process under the relevant double taxation agreement. Uptake of the MAP process is very low, owing to the administrative process involved in the initiation of the process and the inevitable unwillingness of the involved tax jurisdictions to give up or part with their crystallised tax positions. In the few instances where the MAP process has been invoked, no amicable solutions have been found. The general practice is for taxpayers to make the relevant objections and appeals provided for in legislation. Please see 4. Judicial Litigation: First Instance and 5. Judicial Litigation: Appeals. 

Kenya applies a simple limitation of benefits rule, which is enshrined in its domestic law.

In the past, most transfer pricing disputes are resolved outside the court system through the domestic ADR mechanism. However, taxpayers are increasingly willing to have such cases litigated and decided by the domestic tax courts. 

Kenyan law does not allow for advance pricing agreements.

All aspects of cross-border operations have generated litigation. The KRA, however, does not publish data on the exact number of cases and the cross-border issues arising therefrom. The said cases are, however, largely accessible to the public.

This is not applicable in Kenya.

This is not applicable in Kenya.

This is not applicable in Kenya.

This is not applicable in Kenya.

While Kenya is a signatory to the MLI, this treaty has not yet been ratified by Parliament. The MLI needs to be considered and approved by Parliament and undergo public participation. The MLI is therefore not yet applicable in Kenya. 

This is not applicable in Kenya.

This is not applicable in Kenya.

This is not applicable in Kenya.

This is not applicable in Kenya.

The KRA generally takes an approach that maximises tax collections. In light of this, no changes are expected in their approach. 

This is not applicable in Kenya.

Disputes related to double taxation are generally resolved through the mechanism provided by the relevant double tax treaty. 

This is not applicable in Kenya.

Taxpayers are only required to pay filing fees of KES20,000 at the point of lodging an appeal at the Tribunal. There are generally no other fees payable. 

The cost to file an appeal to the Tribunal regarding a decision from the KRA is KES20,000. This fee is paid by the taxpayer and is paid before the beginning of the proceedings. This fee is non-refundable.

Whilst there is no fee for litigating tax disputes before the courts, parties do pay fees for filing documents before the courts. These fees are dependent on the type of document being filed. 

Generally, in disputes before the court system, costs follow the suit.

There is generally no indemnity but courts may award a taxpayer the costs of the suit. 

Before the Tribunal, each party generally bears its own costs. 

No costs or fees are payable in respect of the use of the ADR mechanism. The process is facilitated by employees of the KRA and, as a result, there are no costs. 

This information is currently not readily available in the public domain. 

This information is currently not readily available in the public domain. 

This information is currently not readily available in the public domain. 

Please see 2.6 Strategic Points for Consideration During Tax Audits and 4.5 Strategic Options in Judicial Tax Litigation. Taxpayers ought to consider the relative strengths and weakness of their individual cases and circumstances.