Author: lnmadmin

Pursuant to the Finance Act, 2026, which amended the First Schedule to the Excise Duty Act, Cap. 472, excise duty on bottled water was removed with effect from 1 July 2026. Accordingly, bottled water manufactured or imported on or after this date is no longer subject to excise duty and will not require excise stamps.

The Commissioner is expected to issue detailed guidelines on the return of unutilized excise stamps and the decommissioning of digital stamps.

Whether you’re a startup, SME, multinational company, or established business, staying informed about Kenya’s changing tax environment is essential for sustainable growth. From tax compliance and VAT to corporate tax, payroll taxes, and KRA requirements, informed decisions can save both time and money. If you have questions about how these developments affect your business, the team at LNM Tax Limited is always available to provide professional guidance and help you make confident, compliant decisions.

Pursuant to the Finance Act, 2026, which amended the First Schedule to the Excise Duty Act, Cap. 472, excise duty on bottled water was removed with effect from 1 July 2026. Accordingly, bottled water manufactured or imported on or after this date is no longer subject to excise duty and will not require excise stamps.

The Commissioner is expected to issue detailed guidelines on the return of unutilized excise stamps and the decommissioning of digital stamps.

Whether you’re a startup, SME, multinational company, or established business, staying informed about Kenya’s changing tax environment is essential for sustainable growth. From tax compliance and VAT to corporate tax, payroll taxes, and KRA requirements, informed decisions can save both time and money. If you have questions about how these developments affect your business, the team at LNM Tax Limited is always available to provide professional guidance and help you make confident, compliant decisions.

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.

 

A Banking Test Analysis During KRA Audits in Light of Virginia Wangari Ng’ang’a v Commissioner of Legal Services and Board Coordination (2026) and Digital Box Ltd v Commissioner of Investigations and Enforcement (Tax Appeal No. 115 of 2017)

Introduction

One of the most contentious issues in Kenyan tax audits is whether deposits appearing in a taxpayer’s bank account automatically constitute taxable income. In recent years, the Kenya Revenue Authority (KRA) has increasingly relied on the banking analysis method, commonly referred to as the “banking test”, particularly where taxpayers have inadequate records, file nil returns, or where declared income appears inconsistent with banking transactions.

The Tax Appeals Tribunal’s decision in Virginia Wangari Ng’ang’a v Commissioner of Legal Services and Board Coordination (2026) has reignited discussion on the circumstances under which bank credits may be treated as taxable income. The decision builds upon earlier jurisprudence, including the influential case of Digital Box Limited v Commissioner of Investigations and Enforcement (Tax Appeal No. 115 of 2017), which established important principles concerning unexplained bank deposits and the burden of proof in tax disputes.

The emerging jurisprudence demonstrates that while bank deposits are not automatically taxable, taxpayers bear a significant evidential burden to prove that particular deposits do not represent taxable income.

The Statutory Framework

The legal basis for taxation in Kenya is found in Article 210 of the Constitution, which provides that no tax may be imposed except as authorized by legislation. Taxable income is principally governed by section 3 of the Income Tax Act, which imposes tax on gains or profits derived from business, employment, property, or other specified sources.

Under section 23 of the Tax Procedures Act (TPA), every taxpayer is required to maintain adequate records necessary for determining tax liability. Where such records are unavailable or unreliable, section 31 of the TPA empowers the Commissioner to make an assessment using the information available and according to the Commissioner’s best judgment.

It is this statutory power that forms the foundation of the banking analysis method. During an audit, KRA may obtain bank statements and compare deposits against declared income. Where significant variances exist, the Commissioner may presume that unexplained deposits represent taxable income unless the taxpayer demonstrates otherwise.

Understanding the Banking Analysis Method

The banking analysis method is an indirect method of determining taxable income. Instead of relying solely on books of account, KRA reconstructs a taxpayer’s income by examining credits flowing into bank accounts and mobile money platforms.

The rationale is straightforward. Business income must ordinarily find its way into a taxpayer’s bank account or financial system. Consequently, where substantial deposits exist but corresponding income is not declared, KRA may infer that income has been concealed.

However, not every bank credit constitutes income. Bank accounts frequently contain non-taxable receipts such as loans, gifts, capital injections, transfers between personal accounts, refunds, insurance proceeds, or recoveries of earlier advances. Consequently, the crucial question becomes whether the taxpayer can sufficiently explain the source and nature of the deposits.

The Decision in Virginia Wangari Ng’ang’a v Commissioner of Legal Services and Board Coordination (2026)

The appellant operated a hotel and hospitality business in Naivasha. Following investigations, KRA analysed her bank and M-Pesa transactions between 2018 and 2022 and established gross credits exceeding KShs. 52 million. After adjusting for certain non-income items, KRA assessed additional income tax and VAT. The final assessment, after objection review, amounted to KShs. 6,548,075.

The taxpayer argued that KRA had wrongly equated all bank deposits with taxable income and had failed to properly account for non-income transactions. She further contended that the Commissioner had disregarded explanations and documentary evidence presented during the objection stage.

The Tribunal nevertheless upheld the assessment. It found that KRA had already excluded certain non-income items and had adjusted the assessment after reviewing the documents submitted by the taxpayer. Most importantly, the Tribunal held that the taxpayer had failed to discharge the statutory burden imposed under section 56(1) of the Tax Procedures Act and section 30 of the Tax Appeals Tribunal Act. The taxpayer did not provide sufficient documentary evidence to demonstrate which specific deposits should have been excluded from taxation.

The case therefore reaffirmed a critical principle: once KRA establishes unexplained bank credits and issues an assessment, the burden shifts to the taxpayer to prove that the deposits are not taxable income.

The Significance of Digital Box Limited v Commissioner of Investigations and Enforcement

The Tribunal in Virginia Wangari Ng’ang’a expressly relied on the earlier decision in Digital Box Limited v Commissioner of Investigations and Enforcement (Tax Appeal No. 115 of 2017). In that case, the Tribunal dealt with a similar dispute involving bank statement analysis and unexplained deposits.

The Tribunal held that a taxpayer cannot merely allege that deposits are non-taxable. The taxpayer must specifically identify the disputed entries and provide evidence showing why those amounts should not be included in taxable income. Mere assertions are insufficient.

The Tribunal observed that where a taxpayer fails to identify particular deposits and fails to produce supporting records, KRA is entitled to treat the unexplained credits as income for tax purposes. This decision has since become one of the leading authorities on banking analysis assessments in Kenya.

The importance of Digital Box lies in its clarification that the burden of proof is evidential rather than argumentative. Tax disputes are won through documents, not assertions.

The Burden of Proof in Tax Disputes

The principle emerging from both Virginia Wangari Ng’ang’a and Digital Box is firmly rooted in section 56(1) of the Tax Procedures Act and section 30 of the Tax Appeals Tribunal Act. Unlike ordinary civil litigation where the burden largely rests upon the claimant, tax law places a statutory burden on the taxpayer to prove that a tax decision is incorrect.

This principle has repeatedly been affirmed by Kenyan courts. In Republic v Kenya Revenue Authority Ex Parte Bata Shoe Company (Kenya) Ltd [2014] eKLR, the High Court observed that tax assessments are presumed valid until successfully challenged by the taxpayer.

Similarly, in Commissioner of Investigations and Enforcement v TAT & Equity Group Holdings Ltd [2023] eKLR, the courts emphasized that documentary evidence remains the primary means through which taxpayers rebut assessments.

Consequently, once KRA demonstrates unexplained banking activity, the taxpayer must provide loan agreements, transfer instructions, gift deeds, bank transfer records, contracts, invoices, or other supporting documentation establishing that the deposits were not taxable receipts.

When Are Bank Credits Not Taxable?

Kenyan tax law does not treat every bank deposit as income. Several categories of deposits may legitimately be excluded from taxation if properly supported by evidence.

First, loans and credit facilities do not constitute income because they create a repayment obligation. Secondly, transfers between a taxpayer’s own accounts merely represent movement of funds rather than income generation.

Thirdly, capital contributions by shareholders or business owners are generally not taxable because they represent investment rather than earnings. Fourthly, gifts and inheritances are ordinarily not chargeable to income tax under the Income Tax Act.

Insurance compensation,  transaction reversals, refunds, and reimbursements may also fall outside the tax net depending on their nature. However, the taxpayer bears the responsibility of proving that the deposits belong to one of these categories.

The lesson from both Virginia Wangari Ng’ang’a and Digital Box is that unsupported explanations carry little evidential value. Documentary proof remains essential.

Practical Implications for Taxpayers

These decisions carry important lessons for taxpayers facing KRA audits.

First, taxpayers must maintain proper books of account as required by section 23 of the Tax Procedures Act. The absence of records often triggers the use of indirect audit methods such as banking analysis.

Secondly, taxpayers should maintain documentation explaining unusual deposits, including loan agreements, transfer records, shareholder contribution schedules, and gift documentation.

Thirdly, when objecting to an assessment, taxpayers should identify every disputed bank entry individually and provide evidence supporting its exclusion from taxable income. General allegations that deposits are non-taxable are unlikely to succeed.

Finally, taxpayers should appreciate that the Tribunal will not simply substitute its judgment for that of the Commissioner. The taxpayer must positively demonstrate that the assessment is excessive or incorrect.

Conclusion

The decisions in Virginia Wangari Ng’ang’a v Commissioner of Legal Services and Board Coordination (2026) and Digital Box Limited v Commissioner of Investigations and Enforcement (Tax Appeal No. 115 of 2017) have significantly clarified the operation of the banking test during KRA audits. Together, the cases establish that unexplained bank credits may legitimately be treated as taxable income where a taxpayer fails to provide satisfactory evidence to the contrary.

The jurisprudence does not suggest that every bank deposit is taxable. Rather, it recognizes that where deposits remain unexplained, KRA is entitled to infer that they represent undeclared income. The decisive factor is therefore not the existence of the deposit itself, but the taxpayer’s ability to provide credible documentary evidence demonstrating its true nature.

Ultimately, the banking test has become one of KRA’s most powerful audit tools, and the courts have consistently upheld its use where taxpayers fail to maintain adequate records. The message emerging from Kenyan tax jurisprudence is clear: unexplained bank credits are highly vulnerable to taxation, while properly documented transactions remain protected.

Introduction

As the Kenya Revenue Authority (KRA) continues to enhance tax compliance measures through audits, data analytics, and increased enforcement, tax disputes have become an increasingly common aspect of doing business in Kenya. While taxpayers often focus on meeting their tax obligations, many disputes are ultimately determined not by complex legal arguments but by the availability and quality of supporting documentation. Under Kenya’s tax framework, the burden of proving that a tax assessment or decision is incorrect rests primarily on the taxpayer. Consequently, proper record keeping is not merely a statutory obligation; it is a critical safeguard that can determine the outcome of a tax dispute.

The Legal Framework on Burden of Proof

The burden of proof in Kenyan tax disputes is principally governed by Section 56(1) of the Tax Procedures Act, 2015, which provides that in any proceedings under a tax law, the burden shall be on the taxpayer to prove that a tax decision is incorrect. Similarly, Section 30 of the Tax Appeals Tribunal Act, 2013 places the burden on the appellant to demonstrate that a tax assessment or decision is excessive, incorrect, or should not have been made.

These provisions establish a unique position in tax litigation. Unlike ordinary civil proceedings where the party making an allegation bears the burden of proof, tax disputes begin with a presumption that KRA’s assessment or decision is correct. The taxpayer must therefore provide sufficient evidence to rebut that presumption.

Kenyan courts have consistently upheld this principle. In Timsales Limited v Commissioner of Domestic Taxes [2018] eKLR, the High Court emphasized that a taxpayer challenging an assessment must produce credible evidence demonstrating why the assessment is incorrect. Mere assertions or explanations unsupported by documentary evidence are insufficient to discharge the statutory burden.

The Statutory Duty to Keep Records

The burden of proof is closely linked to the statutory obligation to maintain records. Section 23 of the Tax Procedures Act requires every taxpayer to maintain documents and records sufficient to enable the determination of tax liability for a period of at least five years after the end of the relevant reporting period.

These records include invoices, receipts, contracts, accounting books, bank statements, customs documentation, payroll records, electronic records, and any other documents relevant to the taxpayer’s affairs. Failure to maintain adequate records can expose a taxpayer to penalties and significantly weaken their position during audits and appeals.

The rationale behind this requirement is straightforward. Taxpayers are best placed to maintain evidence relating to their transactions and business activities. Where records are unavailable or incomplete, KRA may rely on alternative methods to assess tax liability, leaving the taxpayer with the difficult task of disproving the assessment without supporting evidence.

Lessons from the Hapag-Lloyd Decision

The recent decision in Hapag-Lloyd (Kenya) Limited v Commissioner of Domestic Taxes (Tax Appeal E114 of 2025) [2025] KETAT 256 (KLR) serves as a timely reminder of the importance of procedural compliance and documentary evidence in tax disputes.

The dispute arose from KRA’s rejection of a VAT refund claim by the taxpayer. Before delving into the substantive merits of the claim, the Tax Appeals Tribunal examined whether the appeal had been properly instituted and whether the statutory requirements governing appeals had been satisfied. The Tribunal ultimately struck out the appeal on procedural and jurisdictional grounds.

Although the case primarily concerned procedural compliance, it underscores a broader principle in tax litigation: taxpayers must strictly comply with statutory requirements and be prepared to support every claim with adequate evidence and documentation. The decision illustrates that even where a taxpayer may have substantive arguments, failure to meet procedural and evidentiary requirements can prove fatal to a claim.

Why Records Matter in Tax Disputes

Tax disputes are fundamentally evidence-driven. Whether the dispute concerns income tax, VAT, withholding tax, customs duties, or transfer pricing adjustments, the taxpayer’s success often depends on the quality and completeness of their records.

In disputes involving deductible expenses, Section 15 of the Income Tax Act permits deductions only where expenditure is wholly and exclusively incurred in the production of income. Taxpayers must therefore maintain invoices, payment vouchers, contracts, and supporting documentation demonstrating the business purpose of the expenditure.

In Republic v Commissioner of Domestic Taxes ex parte Barclays Bank of Kenya Limited [2012] eKLR, the court observed that entitlement to tax deductions must be supported by sufficient evidence. Unsupported claims cannot be sustained merely on the basis of assertions by the taxpayer.

Similarly, in Commissioner of Domestic Taxes v Kenya Commercial Bank Limited [2021] eKLR, the court reiterated that taxpayers bear the responsibility of maintaining records capable of substantiating their tax positions and demonstrating the correctness of deductions and exemptions claimed.

The Importance of Documentation in VAT Claims

The significance of proper records is particularly evident in VAT disputes. Section 17 of the Value Added Tax Act, 2013 allows taxpayers to claim input VAT only where they possess valid tax invoices and supporting documentation.

The Tax Appeals Tribunal has consistently held that a taxpayer seeking to recover input VAT or obtain a refund must provide documentary evidence demonstrating that the transaction occurred and that the VAT claimed was properly incurred. Where invoices are missing, incomplete, or fail to comply with statutory requirements, taxpayers often find it difficult to discharge the burden imposed by Section 56 of the Tax Procedures Act.

As a result, maintaining proper invoicing systems and preserving supporting records is essential for any business seeking to protect its VAT position.

Record Keeping and Transfer Pricing Compliance

For multinational enterprises, record keeping assumes even greater significance in transfer pricing disputes. The Income Tax (Transfer Pricing) Rules, 2006 require taxpayers engaged in transactions with related parties to maintain contemporaneous documentation demonstrating that such transactions comply with the arm’s length principle.

Where transfer pricing documentation is unavailable or inadequate, KRA may make adjustments based on available information. In such circumstances, the taxpayer bears the burden of proving that the adjustments are incorrect. Without proper documentation, meeting this burden becomes exceedingly difficult.

Are There Exceptions to the Burden of Proof?

Although taxpayers generally bear the burden of proof, there are circumstances in which KRA must establish certain facts. For example, where KRA alleges fraud, wilful neglect, or misrepresentation in order to issue assessments outside the ordinary statutory limitation period under Section 31 of the Tax Procedures Act, the authority must provide evidence supporting those allegations.

Kenyan courts have repeatedly held that fraud cannot be presumed and must be specifically proved. This ensures that taxpayers are protected from unsupported allegations that could otherwise justify extended assessments and additional liabilities.

Conclusion

The combined effect of Section 56 of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act is clear: taxpayers carry the primary responsibility of proving that KRA’s decisions are wrong. This statutory burden makes proper record keeping one of the most important aspects of tax compliance and dispute management.

The decision in Hapag-Lloyd (Kenya) Limited v Commissioner of Domestic Taxes reinforces the importance of strict adherence to procedural requirements and the need for taxpayers to maintain comprehensive supporting documentation. Whether a dispute concerns deductible expenses, VAT refunds, transfer pricing adjustments, or any other tax issue, documentary evidence remains the taxpayer’s strongest weapon.

In the end, tax disputes are rarely won through recollection or verbal explanations. They are won through records. Businesses that invest in robust record-keeping systems, maintain accurate documentation, and preserve evidence of their transactions place themselves in the strongest possible position to withstand audits and successfully challenge adverse tax decisions. In Kenya’s evolving tax landscape, proper record keeping is not simply a legal requirement—it is the taxpayer’s best defence.

 

The Court of Appeal has delivered a significant decision for taxpayers dealing with foreign currency-denominated financing arrangements, holding that realised foreign exchange (FX) losses arising from the conversion of debt into equity are deductible for income tax purposes under section 4A of the Income Tax Act.

In Commissioner of Domestic Taxes v Del Monte Kenya Limited (Civil Appeal No. E174 of 2022), the Court dismissed the Kenya Revenue Authority’s (KRA) appeal and upheld the High Court’s finding that the manner in which a foreign currency liability is settled does not affect the deductibility of a realised FX loss.

Background

The dispute stemmed from KRA’s audit of Del Monte Kenya Limited for the 2009–2011 years of income. Del Monte had obtained foreign currency-denominated loans from a related party, which were used to fund its ordinary business operations, including the payment of suppliers, purchase of raw materials and staff costs.

As exchange rates fluctuated over the years, unrealised FX losses accumulated on the outstanding loans. In 2009, the loans were settled through a combination of offsets against intercompany receivables and the issuance of shares under a debt-to-equity conversion. This extinguishment of the foreign currency obligations crystallised the previously unrealised FX losses.

Del Monte claimed the realised FX losses as deductible expenses under section 4A of the Income Tax Act. KRA disallowed the deduction on the basis that the portion of the debt settled through the issuance of shares was capital in nature and therefore not deductible.

The matter progressed through the judicial hierarchy as follows:

• The Tax Appeals Tribunal (2016) held that the FX losses had been realised but disallowed the portion attributable to the debt-toequity conversion;

• The High Court (2019) overturned that finding and held that the realised FX losses were deductible under section 4A; and

• The Court of Appeal (2026) affirmed the High Court’s decision and dismissed KRA’s appeal.

The Court’s Determination

The central issue before the Court of Appeal was whether realised FX losses arising from the settlement of foreign currency debt through conversion into equity qualify as allowable deductions under section 4A.

The Court answered this question in the affirmative. First, it held that the realisation of a foreign currency gain or loss is not confined to cash repayment. A foreign currency obligation may be extinguished through various means, including payment in kind, set-off against receivables or conversion of debt into equity. Once the liability ceases to exist, the corresponding FX gain or loss is realised.

Secondly, the Court found that section 4A does not distinguish between losses realised through transactions perceived to be revenue in nature and those arising where settlement occurs through equity conversion. The statutory provision simply requires that a foreign exchange loss be realised in the course of business.

Importantly, the Court declined KRA’s invitation to import additional conditions into section 4A through reference to the capital expenditure restrictions under sections 15 and 16 of the Income Tax Act. Reiterating the principle of strict interpretation of tax statutes, the Court emphasised that tax obligations and restrictions must be expressly provided for in legislation and cannot be created by implication.

Why This Matters

The decision provides welcome certainty for businesses with foreign currency liabilities, particularly multinational groups that frequently restructure intercompany debt through debt-to-equity conversions.

The Court has clarified that the focus under section 4A is the realisation of the foreign exchange loss, rather than the mechanism used to settle the underlying liability. Consequently, a realised FX loss will not lose its deductibility merely because the debt is extinguished through the issuance of shares.

While the judgment is favourable to taxpayers, businesses should ensure that they maintain adequate documentation demonstrating that the foreign currency borrowings relate to business activities and that the losses claimed have in fact been realised.

Key Takeaway

The Court of Appeal’s decision confirms that, under the current wording of section 4A of the Income Tax Act, realised foreign exchange losses arising on the conversion of debt to equity are allowable for tax purposes. Unless Parliament legislates otherwise, the mode of settlement of a foreign currency obligation does not, by itself, alter the deductibility of the resulting realised FX loss