Month: December 2023

Introduction

The doctrine of exhaustion has become a central principle in Kenya’s tax dispute resolution framework. The doctrine requires a litigant to first utilize all available statutory and administrative dispute resolution mechanisms before approaching the courts. In tax matters, this principle seeks to ensure that specialized bodies such as the Commissioner of Domestic Taxes and the Tax Appeals Tribunal (TAT) are accorded the first opportunity to determine disputes falling within their jurisdiction.

The significance of this doctrine was reaffirmed by the High Court in Mubea Group Limited v Kenya Revenue Authority (2025), where the Court emphasized that taxpayers must exhaust the remedies provided under the Tax Procedures Act and the Tax Appeals Tribunal Act before invoking the judicial review jurisdiction of the High Court. The decision reinforces a growing body of jurisprudence that places the Tax Appeals Tribunal at the centre of tax dispute resolution in Kenya.

Statutory Foundation of the Doctrine

The doctrine of exhaustion is anchored in Article 159(2)(c) of the Constitution of Kenya, 2010, which encourages alternative forms of dispute resolution. It is further codified under section 9(2) of the Fair Administrative Action Act (FAAA), which provides that a court shall not review an administrative action unless the mechanisms for appeal or review available under any written law have first been exhausted.

In tax disputes, the primary statutory framework consists of the Tax Procedures Act, 2015 (TPA) and the Tax Appeals Tribunal Act, 2013 (TATA). Section 51 of the TPA allows a taxpayer dissatisfied with a tax decision to lodge an objection before the Commissioner. If dissatisfied with the objection decision, section 52 of the TPA grants the taxpayer the right to appeal to the Tax Appeals Tribunal. Appeals from the Tribunal lie to the High Court on matters of law and subsequently to the Court of Appeal.

The legislative intention is therefore clear: tax disputes should follow a structured hierarchy beginning with the Commissioner, proceeding to the Tribunal, and only thereafter reaching the superior courts.

Judicial Development of the Doctrine

The foundation of the doctrine in Kenyan jurisprudence can be traced to Speaker of the National Assembly v James Njenga Karume [1992] eKLR, where the Court of Appeal held that where a statute provides a clear procedure for redress, that procedure must be strictly followed before resorting to the courts. This principle has since become a cornerstone of administrative law and tax litigation.

The Court of Appeal further elaborated the rationale of the doctrine in Geoffrey Muthinja Kabiru & 2 Others v Samuel Munga Henry & 1756 Others [2015] eKLR. The Court observed that courts should be forums of last resort and that parties should first utilize the dispute resolution mechanisms specifically established by law. The decision emphasized that exhaustion promotes efficiency, expertise, and orderly administration of justice.

Similarly, in Mutanga Tea & Coffee Company Ltd v Shikara Limited & Another [2015] eKLR, the Court of Appeal stressed that statutory mechanisms should not be bypassed merely because a party believes the courts may offer a more favourable remedy.

The Decision in Mubea Group Limited v KRA (2025)

In Mubea Group Limited v Kenya Revenue Authority (2025), KRA issued an agency notice to the taxpayer’s bank demanding payment of alleged tax liabilities amounting to approximately KShs. 10 million. Mubea contended that the liability arose from system migration errors during KRA’s transition from the Integrated Tax Management System (ITMS) to iTax and that there had been no valid assessment or tax decision upon which the demand could be founded. Consequently, the company approached the High Court through judicial review proceedings seeking to challenge the agency notice.

KRA raised a preliminary objection arguing that the dispute fell within the jurisdiction of the Tax Appeals Tribunal and that the proceedings offended the doctrine of exhaustion. The Authority relied on section 52 of the Tax Procedures Act and section 9 of the Fair Administrative Action Act.

The High Court upheld the preliminary objection and struck out the proceedings. The Court held that an agency notice issued under section 42 of the Tax Procedures Act constitutes an appealable tax decision capable of being challenged through the statutory dispute resolution process. Since an alternative remedy existed before the Tax Appeals Tribunal, the taxpayer was obligated to exhaust that mechanism before approaching the High Court.

The Court further found that the taxpayer had failed to demonstrate exceptional circumstances that would justify exemption from the exhaustion requirement under section 9(4) of the Fair Administrative Action Act.

Whether an Agency Notice is an Appealable Decision

A key issue in Mubea was whether an agency notice amounts to an appealable tax decision. The Court relied on earlier authorities, particularly Krystalline Salt Limited v Kenya Revenue Authority [2019] eKLR, where it was held that an agency notice issued under section 42 of the Tax Procedures Act is capable of challenge before the Tax Appeals Tribunal.

The significance of this finding is that taxpayers cannot circumvent the Tribunal by characterizing enforcement actions as purely administrative measures. Once the action falls within the statutory definition of a tax decision, the dispute must first pass through the established tax dispute resolution framework.

Exceptional Circumstances and the Exhaustion Requirement

Although the doctrine is mandatory, Kenyan courts have recognized exceptions. Section 9(4) of the Fair Administrative Action Act empowers courts to exempt a party from exhausting alternative remedies where exceptional circumstances exist and where exemption is in the interests of justice.

In Republic v Kenya Revenue Authority & Another; Ex Parte Nairobi City County Government [2019] eKLR, the Court held that the mere existence of an alternative remedy does not automatically bar judicial review. However, a party seeking exemption must demonstrate exceptional circumstances.

Similarly, in Republic v National Environment Management Authority Ex Parte Sound Equipment Ltd [2011] eKLR, the Court acknowledged that judicial review remains available where statutory mechanisms are inadequate, ineffective, or incapable of addressing the complaint.

Nevertheless, courts have consistently interpreted the exception narrowly. In Mubea, the High Court found that the taxpayer had not shown any exceptional circumstances because the Tax Appeals Tribunal was fully capable of addressing the legality and validity of the agency notice.

Importance of the Doctrine in Tax Administration

The doctrine of exhaustion serves several important objectives within Kenya’s tax administration system. First, it promotes the use of specialized expertise. Tax disputes often involve complex questions of accounting, valuation, customs procedures, and statutory interpretation. The Tax Appeals Tribunal possesses the technical competence necessary to handle such disputes effectively.

Second, the doctrine enhances efficiency by reducing the burden on the courts. If every tax disagreement were filed directly in the High Court, the judicial system would become overwhelmed and tax administration would suffer.

Third, exhaustion promotes consistency in tax jurisprudence. The Tribunal develops expertise and establishes coherent principles that contribute to predictability in tax law.

Finally, the doctrine respects legislative intent. Parliament deliberately established a comprehensive dispute resolution mechanism under the Tax Procedures Act and the Tax Appeals Tribunal Act. Permitting litigants to bypass these mechanisms would undermine that statutory framework.

Conclusion

The decision in Mubea Group Limited v Kenya Revenue Authority (2025) represents another significant affirmation of the doctrine of exhaustion within Kenya’s tax dispute resolution regime. The High Court reiterated that taxpayers must first pursue the remedies provided under the Tax Procedures Act and the Tax Appeals Tribunal Act before seeking judicial intervention. The Court further clarified that agency notices constitute appealable tax decisions and that judicial review will only be available in exceptional circumstances.

Together with decisions such as Speaker of the National Assembly v James Njenga Karume, Geoffrey Muthinja Kabiru, Mutanga Tea & Coffee Company Ltd, Krystalline Salt Ltd, and Ex Parte Nairobi City County Government, the Mubea case strengthens the principle that courts are forums of last resort in tax disputes. The decision therefore contributes to the development of a coherent, efficient, and specialized system of tax dispute resolution in Kenya while preserving the supervisory role of the High Court for truly exceptional cases.

Introduction

Tax disputes are an inevitable aspect of tax administration. Differences frequently arise between taxpayers and the Kenya Revenue Authority (KRA) regarding assessments, tax liabilities, penalties, interest, and the interpretation of tax laws.

One of the tax dispute resolution avenue provided for under the tax legislation is tax litigation before the Tax Appeals Tribunal and the courts. However, litigation is often expensive, time-consuming, and adversarial. To address these challenges, tax legislation and in line with the Constitution of Kenya  has embraced Alternative Dispute Resolution (ADR) as a mechanism for resolving tax disputes efficiently and amicably.

The adoption of ADR in tax administration reflects the constitutional commitment to promoting alternative forms of dispute resolution and enhancing access to justice. Today, ADR has become an important component of Kenya’s tax dispute resolution framework, enabling taxpayers and KRA to settle disputes through dialogue and mutual agreement without the need for prolonged litigation.

What is Alternative Dispute Resolution (ADR)?

Generally, Alternative Dispute Resolution  refers to mechanisms used to resolve disputes outside the traditional court process. ADR encompasses various methods such as mediation, negotiation, conciliation, and arbitration. In the tax context, ADR primarily involves facilitated negotiations between KRA and taxpayers with the assistance of a facilitator or mediator aimed at reaching a mutually acceptable settlement.

Unlike litigation, which produces a winner and a loser, ADR process is a win-win situation which seeks to foster cooperation and preserve relationships between disputing parties. The process encourages open communication, flexibility, and practical problem-solving. The objective is not merely to determine who is right or wrong but to arrive at a fair and lawful resolution that is acceptable to both parties.

Statutory Framework Governing ADR in Tax Disputes

The legal foundation for ADR in tax disputes is principally found in Section 55 of the Tax Procedures Act, 2015. The provision empowers the Commissioner and a taxpayer to resolve a tax dispute through an ADR mechanism before the matter is determined by the Tax Appeals Tribunal or the courts.

Section 55(1) provides that a taxpayer and the Commissioner may, at any stage of proceedings before the Tribunal, apply for settlement of the dispute through ADR. Once parties agree to pursue ADR, the proceedings before the Tribunal are generally suspended to allow negotiations to take place.

ADR in tax disputes is also supported by Section 28 of the Tax Appeals Tribunal Act, 2013, which empowers the Tribunal to facilitate settlement discussions and encourage alternative resolution of disputes.

Further support is derived from the Fair Administrative Action Act, 2015, which promotes efficient, expeditious, and cost-effective resolution of disputes involving public authorities.

How KRA Conducts the ADR Process

KRA has developed ADR Guidelines to facilitate the implementation of Section 55 of the Tax Procedures Act. The process may be initiated either by the taxpayer, KRA, or upon recommendation by the Tax Appeals Tribunal.

Once a request for ADR is made and accepted, the matter is referred to the ADR team within KRA. A facilitator is then appointed to guide discussions between the parties. The facilitator does not determine the dispute or impose a decision but assists the parties in identifying issues, clarifying facts, and exploring possible solutions.

The ADR process is conducted through structured meetings involving representatives of KRA and the taxpayer. During these meetings, parties exchange information, explain their positions, and identify areas of agreement and disagreement. The discussions are confidential and conducted on a without-prejudice basis, meaning that statements made during negotiations cannot ordinarily be used against either party if the matter proceeds to litigation.

If the parties reach an agreement, the settlement is reduced into writing and signed by both parties. The consent is then presented to the Tax Appeals Tribunal for adoption as an order of the Tribunal. Once adopted, the settlement becomes binding and enforceable.

Where ADR fails to produce an agreement and consent, the dispute returns to the Tribunal for determination through the ordinary litigation process. Importantly, parties do not lose their right to pursue the matter before the Tribunal merely because ADR was unsuccessful.

Disputes Amenable to ADR

Not every tax dispute is suitable for ADR. Generally, disputes involving questions of fact, or reconciliation matters are best resolved under the ADR.

However, disputes that are technical in nature and raise significant constitutional questions, issues of public policy, allegations of tax fraud, criminal tax offences, or matters requiring authoritative judicial interpretation of the law may not be suitable for ADR and are best resolved in the Tribunal or the Court process.

The suitability of a dispute for ADR therefore depends on whether the issues can be resolved through negotiation without undermining statutory obligations or public interest considerations.

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Advantages of Resolving Tax Disputes through ADR

One of the greatest advantages of ADR is its efficiency. Litigation can take several years before a final determination is reached, particularly where appeals proceed through multiple levels of the judicial system. ADR significantly reduces the time required to resolve disputes, enabling parties to achieve certainty more quickly.

ADR is also cost-effective. Court proceedings often involve substantial legal fees, filing costs, expert witness expenses, and administrative burdens. By contrast, ADR minimizes these costs and reduces the financial strain associated with prolonged litigation.

Another important benefit is flexibility. Unlike court proceedings, ADR allows parties to tailor discussions to the specific circumstances of the dispute. This flexibility encourages practical solutions that may not be available through formal adjudication.

ADR further promotes voluntary compliance and preserves the relationship between taxpayers and KRA. Because the process is collaborative rather than adversarial, it helps build trust and encourages future cooperation in tax compliance matters.

Confidentiality is another significant advantage. Tax disputes frequently involve sensitive financial information. ADR proceedings are generally conducted privately, protecting the interests of taxpayers while allowing candid discussions between the parties.

Finally, ADR reduces the backlog of cases before the Tax Appeals Tribunal and the courts. By diverting suitable disputes away from litigation, ADR contributes to the efficient administration of justice and allows judicial resources to be allocated to disputes that genuinely require adjudication.

Conclusion

The incorporation of ADR into Kenya’s tax dispute resolution framework reflects a recognition that not all tax disputes require formal adjudication. By providing a structured forum for constructive engagement between taxpayers and KRA, ADR facilitates the timely resolution of disputes while supporting the broader objectives of fairness, efficiency, and voluntary tax compliance. Its continued use is expected to strengthen confidence in the tax system and contribute to more effective tax administration.