The Supreme Court has upheld the government’s decision to grant tax exemptions to Japanese companies, consultants and workers involved in development projects in Kenya, dismissing a petition that challenged the legality of the move.
The apex court found that petitioner Eliud Karanja Matindi failed to prove that the tax waiver, granted by the National Treasury through a 2021 Legal Notice, was unconstitutional or discriminatory.
The court held that income earned from foreign sources by persons working in Kenya under technical assistance or development services agreements can lawfully be exempted from income tax under the Income Tax Act.
“The Legal Notice did not also create any rule, order or regulation in the manner specified above. Consequently, we find that the impugned Legal Notice was administrative in nature and did not acquire a legislative character to demand the procedure that the appellant has pleaded,” the court said.
Mr Matindi had argued that the tax exemption violated the Constitution because it was introduced via a legal notice rather than legislation enacted by Parliament.
He also argued that the exemption was unlawful because the loan agreements between the governments of Kenya and Japan, which formed the basis of the tax waiver, were negotiated without sufficient transparency.
According to Mr Matindi, the exemption contravened Article 210 (1) of the Constitution, which provides that no tax or licensing fee may be imposed, waived or varied except as authorised by legislation.
The government opposed the petition, maintaining that the exemptions were lawful and arose from binding bilateral agreements tied to foreign-funded development projects.
Attorney-General Dorcas Oduor argued that the CS Treasury acted within the powers granted under Section 13(2) of the Income Tax Act and that the Legal Notice had been properly tabled before the National Assembly.
The government also maintained that public participation was not required because the exemptions stemmed from intergovernmental agreements and the Legal Notice did not amount to a statutory instrument.
Further, the income tax exemption was a standard condition imposed by the Japanese government in financing agreements and applied to all countries receiving such funding, not Kenya alone.
The state further argued that Kenya was obliged to honour the agreements to secure foreign financing and maintain its international obligations.
The disputed Legal Notice exempted from income tax the earnings of Japanese companies, consultants and workers engaged in 16 development projects worth about Sh328 billion.
The projects include the improvement of power distribution systems in Nakuru and Mombasa, infrastructure development in the Mombasa Special Economic Zone near Dongo Kundu, the Olkaria I Unit 4 Geothermal Power Project and the Mwea Irrigation Development Project.
In the judgment, the Supreme Court held that the Legal Notice was administrative rather than legislative in nature and therefore did not qualify as a statutory instrument under Section 2 of the Statutory Instruments Act.
The court said the notice merely informed the public of the implementation of financing agreements between the governments of Kenya and Japan and was therefore not subject to the public participation requirements under the Statutory Instruments Act.
The judges also found that the Treasury Cabinet Secretary acted within the authority delegated by Parliament under Section 13 of the Income Tax Act.
“Had such authority not been provided in law, then the position would certainly have been different, noting the express provisions of Article 94 (5) where other persons or bodies may be conferred certain functions having the force of law by the Constitution or by legislation,” the court said.
