Introduction
1. This Judgment is in respect of an appeal filed by the Appellant, ASPAC INTERNATIONAL SPRL LIMITED, against the judgment of the Tax Appeals Tribunal delivered on 29th June 2023 in TAT Appeal No. 825 of 2021, in which the Tribunal substantially upheld the Respondent’s tax assessments relating to income tax and value added tax (VAT) on the payments received by the Appellant for services rendered in Kenya by the Appellant under contracts financed through a bilateral arrangement between the Governments of Kenya and Belgium.
2. The core issue in dispute in this appeal is whether payments received by the Appellant in respect of services rendered in Kenya by the Appellant under contracts financed through a bilateral loan arrangement between the Governments of Kenya and Belgium are tax exempt.
3. Whereas the Appellant contends that the services it rendered were exempt from tax pursuant to the bilateral financing agreements, the Respondent, on the other hand, asserts that no valid tax exemption existed in law and that the Appellant’s income and supplies were properly taxable.
Background and Factual Context
4. The Appellant is an Engineering-Procurement-Construction (EPC) services contractor engaged in the provision of safe drinking water projects. In Kenya, the company has an established presence through its Branch called Aspac Intl SPRL Limited Kenya Branch (“Aspac SPRL”). The company also has a fully-fledged subsidiary in Kenya called Aspac International East Africa Limited (“Aspac EA”).
5. During the period 2012 to 2019, (“Aspac SPRL”) won contracts and signed separate Commercial Agreements with two water agencies (Rift Valley Water Services Board & Tanathi Water Services) with for the following works: -
a) Sabor-Iten -Tambach Water Supply Project (Keiyo District) (“Iten 1”) worth 15,000,000 Euros
b) Construction of water pipes around Nakuru Town (“Iten 2”) worth 10,000,000 Euros
c) Recycling and supply of water from Athi River (“Mavoko”) worth 25,000,000 Euros
6. The dispute originates from buyer credit agreements entered into by the Government of the Republic of Kenya (the Borrower) and Belfius Bank SA/NV (the Lender) to finance the development and construction of drinking water supply systems.
7. The projects were financed under a Buyer Credit Agreement (“Loan Agreement”) entered into by the Government of the Republic of Kenya (the Borrower) and Belfius Bank SA/NV, a Belgian Bank (the Lender).
8. The Respondent carried out a tax audit on the operations of the Appellant and noted variances between contract amounts and revenue declared for tax purposes in Kenya. From the investigations, the Respondent established that out of Kshs. 1,393,148,78 7, which the Appellant had earned from the projects, the Appellant only declared a revenue of Kshs. 213,977,50 0, leading to a variance of Kshs. 1,179,171,287/-, being the undeclared revenue.
9. Arising out of the variances, the Respondent vide its letter of 31st March 2021 issued a confirmed tax assessment in the sum of Kshs. 1,948,193,149 inclusive of penalties and interest.
10. Dissatisfied with this decision, the Appellant filed an Appeal at the Tax Appeals Tribunal, which delivered judgment on 29th June 2023, upholding the Respondent’s Objection Decision (‘confirmed tax assessment”) on various grounds, key among them, that the Appellant did not have any tax exemptions against their income derived in Kenya.
The Appeal
11. Aggrieved by the Tribunal’s Judgment, the Appellant lodged the instant appeal, raising some thirteen (13) grounds of appeal, key among them being: -
i. The Tribunal erred in law and fact by finding that the agreements subject to the dispute required the Appellant to seek exemptions.
ii. The Tribunal erred in law and fact in not appreciating that one of the parties to the contract, the Government of Kenya, was represented by the minister of finance who signed the agreement expressly containing the tax waiver clause.
iii. The Tribunal erred in law and fact in finding that the agreement did not create a legitimate expectation in the mind of the Appellant on the question of tax exemption.
iv. The Tribunal erred in law and fact in finding that the Appellant was not exempt from tax when the facts demonstrated the contrary.
v. The Tribunal erred in law and fact by finding that the Appellant was making taxable supplies in Kenya and entitled to registration when the evidence suggested otherwise.
12. In response to the Appeal, the Respondent filed its Statement of Facts dated 8th November 2023. The Respondent supported the finding by the Tribunal and restated that the Appellant failed to demonstrate that it had any tax exemption within the meaning of Section 13 of the Income Tax Act and the other applicable laws.
13. The Respondent maintained that under the various commercial agreements signed between the Appellant and the named water bodies, there were no automatic tax exemptions. The exemptions were only obtainable after application and approval in accordance with the applicable law.
14. The Appeal was canvassed by way of written submissions, which were highlighted in Court on 17th June 2025. The Appellant filed its submissions dated 13th March 2024 and a further submission dated 23rd April 2024. The Respondent’s submissions are dated 4th April 2024.
Appellant’s submissions
15. The Appellant submitted that the Tribunal erred in law and fact by finding that the agreements required the Appellant to seek tax exemptions. According to the Appellant, Clause 10.2 of the Buyer Credit Agreements (e.g., dated 4th October 2013, page 485 of the record of appeal) explicitly provided that it was the “Buyer”, being the various water bodies – and not the Appellant “Supplier” who were to seek exemption for any such taxes, and that if exemption would not be granted, the buyer (and not the supplier) shall be liable to pay such taxes.
16. It was further the Appellant’s argument that the various commercial contract agreements, such as the one dated 21st November 2016 (page 698), placed the duty on the employer (the Water Company) to "give all notices, pay all taxes, duties and fees and obtain all permits, licenses and approvals.”
17. The Appellant maintained that the Tribunal erred by failing to appreciate that the Government of the Republic of Kenya, through the Minister for Finance, was a party to the Buyer Credit Agreements and committed to the tax exemption provisions. The Appellant argued that the representations made by the Government created a legitimate expectation that the transactions were tax-exempt.
18. The Appellant asserted that the Legal Opinion of the Attorney General dated 18th November 2013 confirmed the CS Treasury's full power and authority to enter into the credit agreements and perform its obligations. Additionally, Section 52 of the Public Finance Management Act, 2012, authorizes the Cabinet Secretary to execute loan documents for borrowing by the National Government.
19. According to the Appellant, the conduct of the Government and the Respondent was fraudulent. This was based on the Government being a party to agreements granting exemptions, the completion of contracts, the Ministry of Water acknowledging the buyer's duty to pay taxes, and the Respondent ignoring this and demanding taxes from the Appellant.
20. The Appellant therefore prays that the appeal be allowed and the Judgment by the Tribunal be set aside, with costs in their favour.
Respondent’s submissions
21. The Respondent submitted that the Tribunal was right in its finding that the Appellant enjoyed no tax exemption during the relevant period in respect of the works/services in question.
22. According to the Respondent, while Clause 10.2 of the Buyer Credit Agreement stated the supplier (Appellant) would not be liable for certain taxes and that the Buyer shall seek exemption, the Respondent submitted that this clause required the Appellant to obtain exemptions. The Appellant argued that if any exemptions existed, they were within the framework of the credit agreement, not the commercial contracts.
23. The Respondent submitted that there cannot be any exemption by agreement of the parties. The Respondent maintained that under Article 210(1) of the Constitution of Kenya, no tax may be imposed or waived except as provided under legislation. Furthermore, Furthermore, Section 13 of the Income Tax Act details that income can only be exempt if expressly specified in the First Schedule or if the Minister, by notice in the Gazette, provides for such exemption, which must then be laid before the National Assembly.
24. The Respondent asserted that contractual obligations cannot supersede tax obligations laid out in law. The Appellant sought exemption under contractual obligations entered into without due regard to subsisting tax obligations founded on law
25. On the claim for legitimate expectation, the Respondent submitted that legitimate expectation cannot exist against the law. Citing Communications Commission of Kenya & 5 others v the Royal Media Services Limited & 5 Others [2014], the Respondent reiterated that an expectation must be reasonable, competent, lawful for the decision-maker to make, and cannot be against clear provisions of the law or the Constitution.
26. In this case, the Respondent contended that the Appellant's claim of legitimate expectation was against, among others, Section 13 of the Income Tax Act, which requires exemptions to be made by way of a Gazette Notice.
27. The Respondent submitted that the Appellant had a permanent establishment in Kenya, derived income from projects in Kenya, and was a non-filer of taxes. Therefore, the Respondent was within its rights to assess and demand Income Tax and Withholding Taxes, and VAT. It was the Respondent’s case that the Appellant was under the obligation to prove that they had obtained a tax exemption, which they failed to.
28. The Respondent therefore urged the Court to uphold the Tax Appeals Tribunal judgment, and dismiss the Appeal with costs to the Respondent.
Analysis and Determination:
29. Having carefully considered the pleadings, the submissions of the parties, and the record of appeal, the following issues arise for determination: -
i. Whether the Appellant was exempt from income tax and VAT under the bilateral financing arrangement or the consultancy contracts.
ii. Whether the Appellant had a legitimate expectation that it would not be subjected to taxation in Kenya.
iii. Whether the Respondent lawfully assessed the Appellant to income tax and VAT.
Whether Appellant was exempt from tax under the bilateral financing arrangement or the consultancy contracts
30. The Appellant’s case is anchored on the financing agreement between Kenya and Belgium, and the three commercial agreements executed between the Appellant and the various water bodies, which it asserts required the Kenyan Government to bear any tax liabilities arising from the consultancy services. Appellant also relies on the actions of the Ministry of Finance, as supported by a legal opinion from the Attorney General, which, according to the Appellant, granted it tax exemption.
31. The Respondent, on the other hand, argued that the agreements did not provide the Appellant with an automatic tax exemption, and that any exemption can only be granted in accordance with the provisions of the Constitution and the applicable statutes, such as Section 13 of the Income Tax Act.
32. Of the two arguments, I find the Respondent’s submissions more plausible. While it is evident that the language of the “Buyer Credit Agreements” and the” Commercial Agreements” intended to shift the ultimate financial burden of paying the taxes away from the Appellant, such an arrangement cannot pass the legal test on tax exemption.
33. The principle that a statutory obligation cannot be shifted or avoided by agreement of parties is a well-established rule in statutory interpretation and contract law. It means that where the law imposes a duty or obligation, that duty must be complied with regardless of what the parties may privately agree.
34. Article 210 of the Constitution of Kenya 2010 is clear that Article 210 (1) and (2) of the Constitution provides that “[N]o tax or licensing fee may be imposed, waived or varied except as provided by legislation.” Section 13 of the Income Tax Act is the principal statute that deals with exemption from income tax. it provides as follows: -
“13. Certain income exempt from tax.
(1) Notwithstanding anything in Part II, the income specified in Part I of the First Schedule, which accrued in or was derived from Kenya shall be exempt from tax to the extent so specified.
(2) The Cabinet Secretary may, by notice in the Gazette, provide—
(a) that income or a class of income which accrued in or was derived from Kenya shall be exempt from tax to the extent specified in the notice;
(b) that any exemption under subsection (1) shall cease to have effect either generally or to the extent specified in the notice.
(3) A notice under subsection (2) shall be laid before the National Assembly without unreasonable delay, and if a resolution is passed by the Assembly within twenty days on which it next sits after the notice is so laid that the notice be annulled, it shall thenceforth be void, but without prejudice to the validity of anything previously done thereunder, or to the issuing of a new notice.”
35. Further, Paragraph 1 of the First Schedule to the Income Tax Act recognizes exemptions granted under other statutes in the following terms: -
“[S]o much of the income of a person as is expressly exempted from income tax by or under the provisions of any Act for the time being in force, to the extent provided by that Act.”
36. It follows, therefore, that no statute or legal instrument can validly confer an income tax exemption unless it satisfies the specific requirements set out in the Income Tax Act. For an exemption to be effective, it must not only be provided for in the granting instrument or statute but must also strictly comply with the express provisions of the tax law. Tax statutes are interpreted narrowly, and in cases of conflict between a tax statute and another statute or legal instrument of equal standing—as is the situation in this case—the tax statute must prevail.
37. This Court has had an opportunity to consider a similar argument in the case of Japan Port Consultants Limited – v - The Commissioner of Domestic Taxes (HCCOMMITA/E127/2024), where the Court, in a judgment delivered on 10th July 2025, held as follows: -
“This Court concurs with the Respondent’s reliance on the Indian decision in Universal Petrochemicals Limited v Rajasthan State Electricity Board (2001), where it was held that statutory obligations, including tax liabilities, cannot be evaded or reallocated through private contracts. The duty to withhold and remit taxes, as imposed by law, remains squarely on the Appellant regardless of the contractual arrangements made between it and KPA.
Upon a careful reading of the contract between the Appellant and KPA, it is clear that the parties intended the Appellant not to bear the economic burden of the tax. However, this contractual understanding does not relieve the Appellant of its statutory obligations under the tax laws. Regardless of the contractual allocation of risk or cost, the legal duty to keep proper records, declare income, and account for tax remains with the Appellant. The Appellant is required to make all necessary tax declarations and remittances under its Personal Identification Number (PIN). After fulfilling these obligations, the Appellant may pursue indemnification from KPA, to the extent permitted by their contract.”
38. I adopt the same reasoning in this case as well. The principle is well established in Kenyan tax law that tax exemptions must be expressly conferred by statute or Gazette notice. See the case of Republic v Commissioner of Domestic Taxes ex parte Kenton College Trust [2013] eKLR, cited by the Respondent where it was held that an entity claiming exemption bears the burden of proving that it falls within the exemption provided by law.
39. In the present case, no such Gazette Notice was produced by the Appellant. The consultancy/commercial agreements did not in themselves confer tax exemption; they merely obligated the implementing agency to seek exemption. Clause 10.2 of the Buyer Credit Agreement expressly contemplates the possibility that an exemption may not be obtained, in which case the Kenyan Government was to reimburse the Appellant. That clause does not purport to grant a tax exemption, nor could it override statutory tax obligations.
40. Further, I have perused the Attorney General’s opinion dated 18th November 2013, relied on by the Appellant, and note that the letter was limited in scope. It related to the Buyer Credit Agreement and expressly excluded any interpretation of the underlying commercial contracts. Letters from the National Treasury dated 2014 and 2016, on their face, do not purport to grant tax exemptions and even clarify that such correspondence should not be construed as an exemption under law.
41. As correctly submitted by the Respondent, in the absence of a Gazette Notice or other statutory instrument, the Appellant cannot be said to have been lawfully exempted from tax. This ground, therefore, fails.
Whether there was legitimate expectation created
42. The Appellant submitted that the presentation by the Government regarding tax exemption did indeed create a legitimate expectation that the transactions were tax exempt. The Respondent, on the other hand, argued that a legitimate expectation cannot exist where there is a violation of the law.
43. Both parties cited the Supreme Court decision in the case of Communications Commission of Kenya & 5 others v the Royal Media Services Limited & 5 Others [2014], in support of their respective arguments.
44. While the doctrine of legitimate expectation is available under the Kenyan administrative law, it is an equally established law in Kenya that the doctrine cannot override the express provisions of the law. In Shake Distributors Limited v Kenya Revenue Authority [2020] eKLR,, the Court stated as follows: -
“What is legitimate expectation? According to Harry Woolf, Jeffrey Jowell and Andrew Le Sueur at page 609 of the 6th Edition of DE SMITH’S JUDICIAL REVIEW, “Such an expectation arises where a decision-maker has led someone affected by the decision to believe that he will receive or retain a benefit or advantage (including that a hearing will be held before a decision is taken).” It follows therefore that the cornerstone of legitimate expectation is a promise made to a party by a public body that it will act or not act in a certain manner. For the promise to hold, the same must be made within the confines of the law. A public body cannot make a promise which goes against the express letter of the law.”
45. In the present case, the Court having found that the subject financing and commercial agreements cannot in law create or grant tax exemption contrary to the express provisions of Article 210 of the Constitution as read together with Section 13 of the Income Tax Act and the First Schedule thereto, I find that the Appellant’s claim for legitimate expectation cannot equally hold. The same is therefore accordingly dismissed.
Whether the Respondent lawfully assessed for the taxes
46. The Appellant has not, in this appeal, challenged the merits of the tax assessments issued by the Respondent. It is not in dispute that the Appellant failed to file income tax and VAT returns in Kenya during the period in question. As a result, the Respondent was entitled to apply the best judgment assessment method pursuant to the provisions of the Tax Procedures Act and the VAT Act.
47. It is further not disputed that the Appellant rendered services in Kenya through a registered branch and received payments from government agencies within Kenya. Under Section 3(2)(a) of the Income Tax Act, such income is deemed to have accrued in or to have been derived from Kenya and is therefore subject to income tax. Similarly, under Section 5 of the VAT Act, the supply of services in Kenya is subject to value-added tax.
48. From the record of appeal, it is clear that the Respondent’s assessments were based on the amounts received both by the Appellant and its subcontractors. This methodology was neither challenged at the Tribunal nor impugned in the present appeal. Accordingly, I find no reason to interfere with the Tribunal’s findings in this regard.
49. In the result, I find no merit in the Appeal. The decision of the Tax Appeals Tribunal is sound in fact and in law and is hereby affirmed. Accordingly, I make the following final orders: -
i. The appeal is dismissed in its entirety
ii. The judgment of the Tax Appeals Tribunal dated 29th June 2023 is hereby upheld.
iii. The Appellant shall bear the costs of this appeal.
50. It is so ordered.
SIGNED, DATED, and DELIVERED IN VIRTUAL COURT THIS
31ST DAY OF JULY 2025
ADO MOSES
JUDGE
In the presence of: -
C/A – Moses
1. This Judgment is in respect of an appeal filed by the Appellant, ASPAC INTERNATIONAL SPRL LIMITED, against the judgment of the Tax Appeals Tribunal delivered on 29th June 2023 in TAT Appeal No. 825 of 2021, in which the Tribunal substantially upheld the Respondent’s tax assessments relating to income tax and value added tax (VAT) on the payments received by the Appellant for services rendered in Kenya by the Appellant under contracts financed through a bilateral arrangement between the Governments of Kenya and Belgium.
2. The core issue in dispute in this appeal is whether payments received by the Appellant in respect of services rendered in Kenya by the Appellant under contracts financed through a bilateral loan arrangement between the Governments of Kenya and Belgium are tax exempt.
3. Whereas the Appellant contends that the services it rendered were exempt from tax pursuant to the bilateral financing agreements, the Respondent, on the other hand, asserts that no valid tax exemption existed in law and that the Appellant’s income and supplies were properly taxable.
Background and Factual Context
4. The Appellant is an Engineering-Procurement-Construction (EPC) services contractor engaged in the provision of safe drinking water projects. In Kenya, the company has an established presence through its Branch called Aspac Intl SPRL Limited Kenya Branch (“Aspac SPRL”). The company also has a fully-fledged subsidiary in Kenya called Aspac International East Africa Limited (“Aspac EA”).
5. During the period 2012 to 2019, (“Aspac SPRL”) won contracts and signed separate Commercial Agreements with two water agencies (Rift Valley Water Services Board & Tanathi Water Services) with for the following works: -
a) Sabor-Iten -Tambach Water Supply Project (Keiyo District) (“Iten 1”) worth 15,000,000 Euros
b) Construction of water pipes around Nakuru Town (“Iten 2”) worth 10,000,000 Euros
c) Recycling and supply of water from Athi River (“Mavoko”) worth 25,000,000 Euros
6. The dispute originates from buyer credit agreements entered into by the Government of the Republic of Kenya (the Borrower) and Belfius Bank SA/NV (the Lender) to finance the development and construction of drinking water supply systems.
7. The projects were financed under a Buyer Credit Agreement (“Loan Agreement”) entered into by the Government of the Republic of Kenya (the Borrower) and Belfius Bank SA/NV, a Belgian Bank (the Lender).
8. The Respondent carried out a tax audit on the operations of the Appellant and noted variances between contract amounts and revenue declared for tax purposes in Kenya. From the investigations, the Respondent established that out of Kshs. 1,393,148,78 7, which the Appellant had earned from the projects, the Appellant only declared a revenue of Kshs. 213,977,50 0, leading to a variance of Kshs. 1,179,171,287/-, being the undeclared revenue.
9. Arising out of the variances, the Respondent vide its letter of 31st March 2021 issued a confirmed tax assessment in the sum of Kshs. 1,948,193,149 inclusive of penalties and interest.
10. Dissatisfied with this decision, the Appellant filed an Appeal at the Tax Appeals Tribunal, which delivered judgment on 29th June 2023, upholding the Respondent’s Objection Decision (‘confirmed tax assessment”) on various grounds, key among them, that the Appellant did not have any tax exemptions against their income derived in Kenya.
The Appeal
11. Aggrieved by the Tribunal’s Judgment, the Appellant lodged the instant appeal, raising some thirteen (13) grounds of appeal, key among them being: -
i. The Tribunal erred in law and fact by finding that the agreements subject to the dispute required the Appellant to seek exemptions.
ii. The Tribunal erred in law and fact in not appreciating that one of the parties to the contract, the Government of Kenya, was represented by the minister of finance who signed the agreement expressly containing the tax waiver clause.
iii. The Tribunal erred in law and fact in finding that the agreement did not create a legitimate expectation in the mind of the Appellant on the question of tax exemption.
iv. The Tribunal erred in law and fact in finding that the Appellant was not exempt from tax when the facts demonstrated the contrary.
v. The Tribunal erred in law and fact by finding that the Appellant was making taxable supplies in Kenya and entitled to registration when the evidence suggested otherwise.
12. In response to the Appeal, the Respondent filed its Statement of Facts dated 8th November 2023. The Respondent supported the finding by the Tribunal and restated that the Appellant failed to demonstrate that it had any tax exemption within the meaning of Section 13 of the Income Tax Act and the other applicable laws.
13. The Respondent maintained that under the various commercial agreements signed between the Appellant and the named water bodies, there were no automatic tax exemptions. The exemptions were only obtainable after application and approval in accordance with the applicable law.
14. The Appeal was canvassed by way of written submissions, which were highlighted in Court on 17th June 2025. The Appellant filed its submissions dated 13th March 2024 and a further submission dated 23rd April 2024. The Respondent’s submissions are dated 4th April 2024.
Appellant’s submissions
15. The Appellant submitted that the Tribunal erred in law and fact by finding that the agreements required the Appellant to seek tax exemptions. According to the Appellant, Clause 10.2 of the Buyer Credit Agreements (e.g., dated 4th October 2013, page 485 of the record of appeal) explicitly provided that it was the “Buyer”, being the various water bodies – and not the Appellant “Supplier” who were to seek exemption for any such taxes, and that if exemption would not be granted, the buyer (and not the supplier) shall be liable to pay such taxes.
16. It was further the Appellant’s argument that the various commercial contract agreements, such as the one dated 21st November 2016 (page 698), placed the duty on the employer (the Water Company) to "give all notices, pay all taxes, duties and fees and obtain all permits, licenses and approvals.”
17. The Appellant maintained that the Tribunal erred by failing to appreciate that the Government of the Republic of Kenya, through the Minister for Finance, was a party to the Buyer Credit Agreements and committed to the tax exemption provisions. The Appellant argued that the representations made by the Government created a legitimate expectation that the transactions were tax-exempt.
18. The Appellant asserted that the Legal Opinion of the Attorney General dated 18th November 2013 confirmed the CS Treasury's full power and authority to enter into the credit agreements and perform its obligations. Additionally, Section 52 of the Public Finance Management Act, 2012, authorizes the Cabinet Secretary to execute loan documents for borrowing by the National Government.
19. According to the Appellant, the conduct of the Government and the Respondent was fraudulent. This was based on the Government being a party to agreements granting exemptions, the completion of contracts, the Ministry of Water acknowledging the buyer's duty to pay taxes, and the Respondent ignoring this and demanding taxes from the Appellant.
20. The Appellant therefore prays that the appeal be allowed and the Judgment by the Tribunal be set aside, with costs in their favour.
Respondent’s submissions
21. The Respondent submitted that the Tribunal was right in its finding that the Appellant enjoyed no tax exemption during the relevant period in respect of the works/services in question.
22. According to the Respondent, while Clause 10.2 of the Buyer Credit Agreement stated the supplier (Appellant) would not be liable for certain taxes and that the Buyer shall seek exemption, the Respondent submitted that this clause required the Appellant to obtain exemptions. The Appellant argued that if any exemptions existed, they were within the framework of the credit agreement, not the commercial contracts.
23. The Respondent submitted that there cannot be any exemption by agreement of the parties. The Respondent maintained that under Article 210(1) of the Constitution of Kenya, no tax may be imposed or waived except as provided under legislation. Furthermore, Furthermore, Section 13 of the Income Tax Act details that income can only be exempt if expressly specified in the First Schedule or if the Minister, by notice in the Gazette, provides for such exemption, which must then be laid before the National Assembly.
24. The Respondent asserted that contractual obligations cannot supersede tax obligations laid out in law. The Appellant sought exemption under contractual obligations entered into without due regard to subsisting tax obligations founded on law
25. On the claim for legitimate expectation, the Respondent submitted that legitimate expectation cannot exist against the law. Citing Communications Commission of Kenya & 5 others v the Royal Media Services Limited & 5 Others [2014], the Respondent reiterated that an expectation must be reasonable, competent, lawful for the decision-maker to make, and cannot be against clear provisions of the law or the Constitution.
26. In this case, the Respondent contended that the Appellant's claim of legitimate expectation was against, among others, Section 13 of the Income Tax Act, which requires exemptions to be made by way of a Gazette Notice.
27. The Respondent submitted that the Appellant had a permanent establishment in Kenya, derived income from projects in Kenya, and was a non-filer of taxes. Therefore, the Respondent was within its rights to assess and demand Income Tax and Withholding Taxes, and VAT. It was the Respondent’s case that the Appellant was under the obligation to prove that they had obtained a tax exemption, which they failed to.
28. The Respondent therefore urged the Court to uphold the Tax Appeals Tribunal judgment, and dismiss the Appeal with costs to the Respondent.
Analysis and Determination:
29. Having carefully considered the pleadings, the submissions of the parties, and the record of appeal, the following issues arise for determination: -
i. Whether the Appellant was exempt from income tax and VAT under the bilateral financing arrangement or the consultancy contracts.
ii. Whether the Appellant had a legitimate expectation that it would not be subjected to taxation in Kenya.
iii. Whether the Respondent lawfully assessed the Appellant to income tax and VAT.
Whether Appellant was exempt from tax under the bilateral financing arrangement or the consultancy contracts
30. The Appellant’s case is anchored on the financing agreement between Kenya and Belgium, and the three commercial agreements executed between the Appellant and the various water bodies, which it asserts required the Kenyan Government to bear any tax liabilities arising from the consultancy services. Appellant also relies on the actions of the Ministry of Finance, as supported by a legal opinion from the Attorney General, which, according to the Appellant, granted it tax exemption.
31. The Respondent, on the other hand, argued that the agreements did not provide the Appellant with an automatic tax exemption, and that any exemption can only be granted in accordance with the provisions of the Constitution and the applicable statutes, such as Section 13 of the Income Tax Act.
32. Of the two arguments, I find the Respondent’s submissions more plausible. While it is evident that the language of the “Buyer Credit Agreements” and the” Commercial Agreements” intended to shift the ultimate financial burden of paying the taxes away from the Appellant, such an arrangement cannot pass the legal test on tax exemption.
33. The principle that a statutory obligation cannot be shifted or avoided by agreement of parties is a well-established rule in statutory interpretation and contract law. It means that where the law imposes a duty or obligation, that duty must be complied with regardless of what the parties may privately agree.
34. Article 210 of the Constitution of Kenya 2010 is clear that Article 210 (1) and (2) of the Constitution provides that “[N]o tax or licensing fee may be imposed, waived or varied except as provided by legislation.” Section 13 of the Income Tax Act is the principal statute that deals with exemption from income tax. it provides as follows: -
“13. Certain income exempt from tax.
(1) Notwithstanding anything in Part II, the income specified in Part I of the First Schedule, which accrued in or was derived from Kenya shall be exempt from tax to the extent so specified.
(2) The Cabinet Secretary may, by notice in the Gazette, provide—
(a) that income or a class of income which accrued in or was derived from Kenya shall be exempt from tax to the extent specified in the notice;
(b) that any exemption under subsection (1) shall cease to have effect either generally or to the extent specified in the notice.
(3) A notice under subsection (2) shall be laid before the National Assembly without unreasonable delay, and if a resolution is passed by the Assembly within twenty days on which it next sits after the notice is so laid that the notice be annulled, it shall thenceforth be void, but without prejudice to the validity of anything previously done thereunder, or to the issuing of a new notice.”
35. Further, Paragraph 1 of the First Schedule to the Income Tax Act recognizes exemptions granted under other statutes in the following terms: -
“[S]o much of the income of a person as is expressly exempted from income tax by or under the provisions of any Act for the time being in force, to the extent provided by that Act.”
36. It follows, therefore, that no statute or legal instrument can validly confer an income tax exemption unless it satisfies the specific requirements set out in the Income Tax Act. For an exemption to be effective, it must not only be provided for in the granting instrument or statute but must also strictly comply with the express provisions of the tax law. Tax statutes are interpreted narrowly, and in cases of conflict between a tax statute and another statute or legal instrument of equal standing—as is the situation in this case—the tax statute must prevail.
37. This Court has had an opportunity to consider a similar argument in the case of Japan Port Consultants Limited – v - The Commissioner of Domestic Taxes (HCCOMMITA/E127/2024), where the Court, in a judgment delivered on 10th July 2025, held as follows: -
“This Court concurs with the Respondent’s reliance on the Indian decision in Universal Petrochemicals Limited v Rajasthan State Electricity Board (2001), where it was held that statutory obligations, including tax liabilities, cannot be evaded or reallocated through private contracts. The duty to withhold and remit taxes, as imposed by law, remains squarely on the Appellant regardless of the contractual arrangements made between it and KPA.
Upon a careful reading of the contract between the Appellant and KPA, it is clear that the parties intended the Appellant not to bear the economic burden of the tax. However, this contractual understanding does not relieve the Appellant of its statutory obligations under the tax laws. Regardless of the contractual allocation of risk or cost, the legal duty to keep proper records, declare income, and account for tax remains with the Appellant. The Appellant is required to make all necessary tax declarations and remittances under its Personal Identification Number (PIN). After fulfilling these obligations, the Appellant may pursue indemnification from KPA, to the extent permitted by their contract.”
38. I adopt the same reasoning in this case as well. The principle is well established in Kenyan tax law that tax exemptions must be expressly conferred by statute or Gazette notice. See the case of Republic v Commissioner of Domestic Taxes ex parte Kenton College Trust [2013] eKLR, cited by the Respondent where it was held that an entity claiming exemption bears the burden of proving that it falls within the exemption provided by law.
39. In the present case, no such Gazette Notice was produced by the Appellant. The consultancy/commercial agreements did not in themselves confer tax exemption; they merely obligated the implementing agency to seek exemption. Clause 10.2 of the Buyer Credit Agreement expressly contemplates the possibility that an exemption may not be obtained, in which case the Kenyan Government was to reimburse the Appellant. That clause does not purport to grant a tax exemption, nor could it override statutory tax obligations.
40. Further, I have perused the Attorney General’s opinion dated 18th November 2013, relied on by the Appellant, and note that the letter was limited in scope. It related to the Buyer Credit Agreement and expressly excluded any interpretation of the underlying commercial contracts. Letters from the National Treasury dated 2014 and 2016, on their face, do not purport to grant tax exemptions and even clarify that such correspondence should not be construed as an exemption under law.
41. As correctly submitted by the Respondent, in the absence of a Gazette Notice or other statutory instrument, the Appellant cannot be said to have been lawfully exempted from tax. This ground, therefore, fails.
Whether there was legitimate expectation created
42. The Appellant submitted that the presentation by the Government regarding tax exemption did indeed create a legitimate expectation that the transactions were tax exempt. The Respondent, on the other hand, argued that a legitimate expectation cannot exist where there is a violation of the law.
43. Both parties cited the Supreme Court decision in the case of Communications Commission of Kenya & 5 others v the Royal Media Services Limited & 5 Others [2014], in support of their respective arguments.
44. While the doctrine of legitimate expectation is available under the Kenyan administrative law, it is an equally established law in Kenya that the doctrine cannot override the express provisions of the law. In Shake Distributors Limited v Kenya Revenue Authority [2020] eKLR,, the Court stated as follows: -
“What is legitimate expectation? According to Harry Woolf, Jeffrey Jowell and Andrew Le Sueur at page 609 of the 6th Edition of DE SMITH’S JUDICIAL REVIEW, “Such an expectation arises where a decision-maker has led someone affected by the decision to believe that he will receive or retain a benefit or advantage (including that a hearing will be held before a decision is taken).” It follows therefore that the cornerstone of legitimate expectation is a promise made to a party by a public body that it will act or not act in a certain manner. For the promise to hold, the same must be made within the confines of the law. A public body cannot make a promise which goes against the express letter of the law.”
45. In the present case, the Court having found that the subject financing and commercial agreements cannot in law create or grant tax exemption contrary to the express provisions of Article 210 of the Constitution as read together with Section 13 of the Income Tax Act and the First Schedule thereto, I find that the Appellant’s claim for legitimate expectation cannot equally hold. The same is therefore accordingly dismissed.
Whether the Respondent lawfully assessed for the taxes
46. The Appellant has not, in this appeal, challenged the merits of the tax assessments issued by the Respondent. It is not in dispute that the Appellant failed to file income tax and VAT returns in Kenya during the period in question. As a result, the Respondent was entitled to apply the best judgment assessment method pursuant to the provisions of the Tax Procedures Act and the VAT Act.
47. It is further not disputed that the Appellant rendered services in Kenya through a registered branch and received payments from government agencies within Kenya. Under Section 3(2)(a) of the Income Tax Act, such income is deemed to have accrued in or to have been derived from Kenya and is therefore subject to income tax. Similarly, under Section 5 of the VAT Act, the supply of services in Kenya is subject to value-added tax.
48. From the record of appeal, it is clear that the Respondent’s assessments were based on the amounts received both by the Appellant and its subcontractors. This methodology was neither challenged at the Tribunal nor impugned in the present appeal. Accordingly, I find no reason to interfere with the Tribunal’s findings in this regard.
49. In the result, I find no merit in the Appeal. The decision of the Tax Appeals Tribunal is sound in fact and in law and is hereby affirmed. Accordingly, I make the following final orders: -
i. The appeal is dismissed in its entirety
ii. The judgment of the Tax Appeals Tribunal dated 29th June 2023 is hereby upheld.
iii. The Appellant shall bear the costs of this appeal.
50. It is so ordered.
SIGNED, DATED, and DELIVERED IN VIRTUAL COURT THIS
31ST DAY OF JULY 2025
ADO MOSES
JUDGE
In the presence of: -
C/A – Moses