Rules on interpretation of tax legislation in Kenya

A. Introduction

The rules on interpretation of tax legislation are important to understand as they play a key role in the outcome of tax disputes in Kenya. Chinese companies operating in Kenya would greatly benefit from this knowledge.

The thesis considers several High Court decisions on the issue. It then considers possible queries that arise from application of the rules set by the Courts. You may find links to access the full courts decisions at the end of the document.

1. Kenya Courts decisions on interpretation of tax legislation in Kenya

a) Republic vs. Commissioner of Domestic Taxes Large Tax Payer’s Office Ex-Parte Barclays Bank of Kenya Ltd [2012] eKLR (‘Barclays case’)

The High Court Judge Majanja, in this case held: “The approach to this case is that stated in the oft cited case of Cape Brandy Syndicate v Inland Revenue Commissioners [1920] 1 KB as applied in T.M. Bell v Commissioner of Income Tax [1960] EALR 224 where Roland J. stated, “ …in a taxing Act, one has to look at what is clearly said. There is no room for intendment as to a tax. Nothing is to be read in, nothing it to be implied. One can only look fairly at the language used… If a person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be.”

Judge Majanja also referred to the dictum of Lord Simonds in Russell v Scott [1948] 2 ALL ER 5 where he stated, “My Lords, there is a maxim of income tax law which, though it may sometimes be overstressed yet ought not to be forgotten. It is that the subject is not to be taxed unless the words of the taxing statute unambiguously impose the tax upon him”

Stanbic Bank Kenya Limited v Kenya Revenue Authority CA Civil Appeal No. 77 of 2008 (Unreported) [2009] eKLR per Nyamu JA adopted the Barclays decision.

Commentary on Barclays case

The Kenya Court here relied on the Cape Brandy Case and Russell vs. Scott, decisions from the United Kingdom (‘UK’). This is because court decisions from the UK have persuasive authority in Kenya.

On the strict rule of interpretation the Court stressed that a taxpayer can be free from tax. This is if the words of a tax statute are ambiguous. The Courts in the next decisions will repeat this severally. Based on the same strict rule of interpretation hardship cannot exempt a taxpayer from tax liability. This is if the law clearly imposes a tax on the taxpayer. The subsequent court decisions will develop this further.

b) Republic v Kenya Revenue Authority Ex Parte Cooper K-Brands Limited [2016] eKLR (‘Cooper case’).

This case referred to a number of cases on the issue of interpretation of tax legislation. The decisions expounded on the rule that a taxpayer only ought to be taxed on clear words of a statute. The cases also state that the remedy for ambiguous legislation as amendment of the legislation through parliament. One case states that burden of proving a taxpayer falls within clear words of statute falls on the ‘crown’. We consider the cases cited in the Cooper case with approval in the discourse below.

• Jafferali Alibhai v Commissioner of Income Tax [1961] EA 610, Kanjee Naranjee v Income Tax Commissioner [1964] EA 257)

where it was held that, ‘any tax imposed on a subject is dictated by the terms of legislation and taxing authority must satisfy itself that the transaction fits within the definition of the statute’.

• Adamson v Attorney General (1933) AC 257 where it was held that,

“The section is one that imposes a tax upon the subject, and it is well settled that in such cases it is incumbent on the Crown to establish that its claim comes within the very words used, and if there is any doubt or ambiguity this defect-if it be in view of the Crown a defect can only be remedied by legislation.”

• The Court also cited, Tanganyika Mine Workers Union vs. The Registrar of Trade Unions [1961] EA 629,

where it was held that where the provisions of an enactment are penal provisions, they must be construed strictly and that in such circumstances you ought not to do violence to its language in order to bring people within it, but ought rather to take care that no-one is brought within it who is not brought within it in express language.

• Vestey vs. Inland Revenue Commissioners [1979] 3 All ER at 984

that stated: “Taxes are imposed on subjects by parliament. A citizen cannot be taxed unless he is designated in clear terms by a taxing Act as a taxpayer and the amount of his liability is clearly defined.”

• Russell (Inspector of Taxes) vs. Scott [1943] AC 422 at 433 where it was stated,

“I must add that the language of the rule is so obscure and so difficult to expound with confidence that – without seeking to apply any different principle of construction to a Revenue Act than would be proper in the case of legislation of a different kind I feel that the tax payer is entitled to demand that his liability to a higher charge should be made out with reasonable clearness before he is adversely affected.…

In Cooper the Court concluded that, ‘in tax cases … the Court is not entitled to attempt a discovery at the intention of the Legislature but must restrict itself to the clear words of the statute’.

Commentary on Cooper Case

The cases referred in Cooper state very important rules around application of the strict rule of interpretation. Some important points are; the tax legislation should be ‘reasonably clear’. The statute should also clearly define the tax liability imposed under the statute. It is also interesting that the court views tax statutes in the same light as penal statutes.

c) Commissioner of Income Tax vs. Westmont Power (K) Ltd Nairobi High Court Income Tax Appeal No. 626 of 2002 (‘Westmont case’)

The Court while citing Inland Revenue vs. Scottish Central Electricity Company [1931] 15 TC 761 expressed itself as follows: “Even though taxation is acceptable and even essential in democratic societies, taxation laws that have the effect of depriving citizens of their property by imposing pecuniary burdens resulting also in penal consequences must be interpreted with great caution. In this respect, it is paramount that their provisions must be express and clear. So as to leave no room for ambiguity. Any ambiguity in such a law must be resolved in favour of the taxpayer and not the Revenue Authorities ...”

Commentary on Westmont case

This case considers the Constitutional right to property. It views tax laws as having the effect of depriving citizens of this right. Of note, a number of constitutional petitions on tax legislation follow this argument.

The court articulated the rule that, in case of ambiguity the interpretation should be resolved in favour of the taxpayer. Rather than the revenue authority. Courts have reiterated this rule severally.

2. Other aspects to the rule of strict interpretation

Having established the strict rule of interpretation as the rule that applies in interpreting tax statutes, a few queries would follow. Like, does the rule apply to both taxpayers and the revenue authority? Is there room for industry practice, past practice or government policy in interpreting tax statutes? We consider these aspects below.

• Does rule apply to both taxpayer and tax authority?

The Judge in the High Court in the Cooper case stated that,

‘the strict rule, in my view applies to both the taxpayers and the taxing authority’. The taxpayer in this case was urging the Court to consider past practice by KRA in interpreting a tax statute. The Court rejected the notion.

• Does past practice have a role in interpretation of tax legislation in Kenya?

The Court in Cooper Case said,

‘in my view this Court does not have the liberty to read into the tax legislation the effect of what was not expressed therein. Similarly, this Court is not permitted to draw on the past episodes to determine whether or not the tax is payable’.

• Can a government policy not contained in a tax statute influence interpretation of tax legislation in Kenya?

The Court in the Cooper case rejected use of government policies in interpreting a tax statute. It noted that, ‘the Constitution in Article 210(1) expressly provides that: (1) No tax or licensing fee may be imposed, waived or varied except as provided by legislation. (2) If legislation permits the waiver of any tax or licensing fee— (a) a public record of each waiver shall be maintained together with the reason for the waiver; and (b) each waiver, and the reason for it, shall be reported to the Auditor-General.

The Court then concluded that,

‘it is therefore clear that public or Government policy cannot without more override the express provisions of the law’.

The Court made the following remarkable comments,

‘this is a country governed by the rule of law and any action must be rooted in the rule of law rather than on some perceived public policies or dogmas. The former has been branded an unruly horse, and when you get astride it, you never know where it will carry you’.

• What recourse does one have to deal with vague tax legislation?

As was stated earlier, the courts provide the recourse in this to be a change in the law. This is the recourse available to both the taxpayer and the Revenue Authority. The Court in the Cooper Case citing a number of cases in this regard stated the following important points (quoting the Court verbatim):

• “so long as the body entrusted with the task of framing the rules or regulations acts within the scope of the authority conferred on it in the sense that the rules or regulations made by it have a rational nexus with the object and purpose of the statute, the court should not concern itself with the wisdom or the efficaciousness of such rules or regulations.
• It is not (for) the court to examine the merits or demerits of such a policy because its scrutiny has to be limited to the question as to whether the impugned regulations fall within the scope of the regulation – making power conferred on the delegate by the statute.
• The responsible representative entrusted with the power to make bylaws must ordinarily be presumed to know what is necessary, reasonable, just and fair…It is not for the court to concern itself with the policy behind the Act and the regulations as long as the latter are within the purview of the parent Act. This court prefers to keep away from usurpation of power or any manifestation of usurpation of power clearly vested in a competent authority by Parliament.”

The position taken by the Courts is therefore that, the Parliament has the power of legislating. The Courts will not question the wisdom of the legislators. This is as long as the legislators exercise their power within the regulation making power. The Court also noted that its for the legislators to determine what is necessary, reasonable, fair or just. The question then is, what if a tax statute is clearly unfair? Can the courts do anything?

• What if a tax law is unfair?

The Court in the Cooper case said, no that is not for the courts to deal with. Citing the case of Council of Civil Service Unions vs. Minister for the Civil Service [1985] AC 374 HL the Cooper Case reiterated that:

• “It is not for the courts to determine whether a particular policy or particular decisions taken in fulfilment of that policy are fair. They are only concerned with the manner in which those decisions have been taken and the extent of the duty to act fairly will vary greatly from case to case as indeed the decided cases since 1950 consistently show.”
• The Court’s role in such matters was … “Every public body has its own role and has matters which it is to be trusted to decide for itself. The courts are careful to avoid usurping that role and interfering whenever it might disagree as regards those matters.”

B. Conclusion

The interpretation of tax legislation in Kenya follows the strict rule of statutory interpretation. The Courts have habitually kept away from questioning tax legislation for its fairness, reasonableness or justice. Likewise, the courts interpret a tax statute in favour of the taxpayer if it is unclear or is ambiguous . The ambiguity could be on the meaning of words or amount of tax liability. Where two possible meanings exist, the Courts adopt the meaning that is most favourable to the taxpayer. One can therefore argue that a taxpayer’s right to property trumps the Country’s right to collect tax revenue. Nonetheless, a taxpayer who comes within clear words of a taxing statute will be taxed. This is despite any hardship the taxpayer may suffer from the clear words of the statute. Moreover, a taxpayer cannot ask the Courts to look for interpretations of a tax statute outside its clear meaning.

C. Helpful Links

You may access the full court decisions on each of these links

Barclays case – https://yazitaxafrica.com/barclays-case/

Cooper case – https://yazitaxafrica.com/cooper-case/

Westmont Case – https://yazitaxafrica.com/westmont-case/

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Should you have any queries on interpretation of tax legislation in Kenya please contact [email protected].

Disclaimer: The contents of this article are for information purposes only and do not constitute an advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up.  The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.