Introduction
1. This is an appeal against the judgment of the Tax Appeals Tribunal (“the Tribunal”) delivered on 26th April 2024 in Tax Appeal No. 196 of 2022, in which the Tribunal upheld a tax assessment in the sum of Kshs. 286,289,129.73 raised by the Respondent, the Commissioner of Domestic Taxes ("the Commissioner"), against the Appellant's (Japan Port Consultants Limited) for the period January 2017 to December 2021.
2. The core issue in dispute is whether the income earned by Japanese companies, consultants, and expatriates working on the Mombasa Port Development Project (MPDP), Phase II, was taxable in Kenya during the audit period and whether the Appellant was under an obligation to account for the said taxes, or whether it benefited from an exemption under Legal Notice No. 15 of 2021 and the Exchange Notes between the Governments of Kenya and Japan.
Background and Facts
3. The Appellant is a Japanese engineering company with a branch in Kenya, registered for tax purposes under the Income Tax Act. It undertook consultancy services for the Mombasa Port Development Project (MPDP), a project financed under a loan agreement with the Japan International Cooperation Agency (JICA).
4. In undertaking the project, the Appellant engaged amongst others, Japanese companies and consultants, and also employed Japanese nationals in connection with the project. However, in its tax filings, the Appellant accounted only for taxes related to local employees and excluded income paid to Japanese entities and expatriates.
5. Following an audit, the Commissioner of Domestic Taxes (the Respondent) issued additional tax assessments totaling Kshs. 286,289,129.73 covering PAYE, Income Tax, and Withholding Tax (“WHT”) for various periods between 2017 and 2021.
6. The Appellant Objected to the tax assessment, arguing that the income in question was exempt pursuant to the Exchange Notes between the Governments of Kenya and Japan, and the ensuing Legal Notice No. 15 of 2021, and further, that in any event, the tax liability was contractually allocated to the Kenya Ports Authority (“KPA”).
7. The Appellant’s Objections was rejected by the Commissioner in an Objection Decision dated 27th January 2023 and confirmed the assessment, leading to an appeal before the Tribunal.
8. In its Judgment delivered on 26th April 2024, the Tribunal partially allowed the Appellant’s appeal by setting aside the Withholding Tax (WHT) assessment for the period between January 2017 and 6th November 2019. However, the Tribunal upheld the remainder of the assessment as confirmed in the Appellant’s Objection Decision dated 27th January 2023.
The Appeal
9. Aggrieved by the Tribunal’s decision, the Appellant lodged an appeal before this Court vide its Memorandum of Appeal dated 24th May 2024 raising the following grounds of appeal: -
i. That the Tax Appeals Tribunal erred in law by failing in its duty to properly analyze and re-evaluate the facts and the evidence adduced by the Appellant and drawing its conclusion, leading to an erroneous Judgment.
ii. That the Tax Appeals Tribunal erred in law in misconstruing that the services offered by the Appellant were not exempt from Pay-As-You-Earn and income tax by virtue of being the Japanese companies, employees and consultants involved in the Mombasa Port Development Project (MPDP) Phase Two (2) Loan Number KE-P30.
iii. That the Tax Appeals Tribunal erred in law by failing to recognize the Appellant’s tax exemptions granted by the Government of Kenya following the Exchange Notes signed on January 16, 2015, which explicitly exempted the Japanese company and all its employees and consultants involved in the Mombasa Port Development Project Phase Two from Income Tax and Pay As-You-Earn.
iv. That the Tax Appeals Tribunal erred in law by making a ruling that ignored the Exchange Notes, despite them being part of Kenyan law under Articles 2(5) and (6) of the Constitution.
v. That the Tax Appeals Tribunal erred in law by ignoring the first schedule of the Income Tax Act Part 1, Section 27 and allowing the Respondent to impose tax obligations on the Japanese company, employees, and consultants.
Appellant’s Submissions
10. The Appellant submitted that the Exchange Notes dated 16th January 2015 (MOF/ERD/11/79/38/01) signed between Kenya and Japan constitutes a valid international treaty, binding under Article 2(6) of the Constitution, and conferred tax exemption on Japanese contractors, consultants, and employees involved in MPDP-1 and MPDP-2.
11. The Appellant asserted that Clauses 8 and 8.2 of the Exchange Note exempt Japanese Companies, Employees, and Consultants engaged in the project from PAYE and Income Tax. The Appellant emphasized that the Exchange Notes constitute a binding international treaty under international law, ratified and promulgated by Kenya, and thus form part of the laws of Kenya under Article 2(6) of the Constitution of Kenya, 2010. This provision, they submitted, is in consonance with Section 6A of the Tax Procedures Act and Section 41 of the Income Tax Act.
12. The Appellant further submitted that the Legal Notice No. 15 of 2021 issued by the Cabinet Secretary – Finance, simply confirmed the exemptions which had been recognized under the Exchange Notes. The Appellant, maintained that the gazettement in 2021 of the Legal Notice did not create the exemption but simply affirmed exemption which had already been recognized under the Exchange Notes signed between the two countries.
13. The Appellant maintained that even without Legal Notice No. 15 of 2021, they were tax-exempt under the Exchange Note MOF/ERD/11/79/38/01, which is a legally and constitutionally recognized treaty. They further relied on the First Schedule of the Income Tax Act, Part 1, Section 27, which exempts emoluments payable out of foreign sources for duties performed in Kenya in connection with technical assistance or other developmental agreements, where the agreement provides for such exemption.
14. The Appellant conceded that the High Court in Matindi v CS National Treasury declared Legal Notice No. 15 of 2021 unconstitutional, but asserted that the declaration of unconstitutionality of the Legal Notice could not affect actions which had crystallized. The Appellant cited the case of Otieno & another v Council of Legal Education (Civil Appeal 38 of 2018) [2021] KECA 349 (KLR) (17 December 2021) (Judgment) in support of this argument.
15. It was further the Appellant’s submissions that the Tribunal failed to properly analyze the sufficient facts and evidence they provided. According to the Appellant, the consultancy agreements provided that tax liability rested with the Client (KPA) and not the consultant. It argued that KPA, being the project owner, was responsible for securing exemptions or bearing the tax burden.
16. The Appellant therefore prayed that the Court allow the Appeal in full, set aside the Tribunal’s decision, and declare that no tax was payable by the Appellant for the disputed period.
Respondent’s Submissions
17. The Respondent opposed the Appeal, relying on its Statement of Facts dated 14th November 2024 and Further Record of Appeal dated 22nd June 2023. The Respondent supported the finding by the Tribunal and urged that the appeal be dismissed with costs.
18. The Respondent submitted that the Appellant had the obligation to account for taxes under the contract. Citing Section 3(1) and 3(2)(a) of the Income Tax Act, the Respondent argued that income accrued in or derived from Kenya, whether from business, employment, or services rendered, is subject to tax. They contended that the Appellant engaged Japanese companies and consultants, paid them contractual fees, and engaged Japanese expatriates, but failed to declare income derived by the foreign subsidiary or levy PAYE on Japanese employees.
19. The Respondent further submitted that contractual payments made to non-resident companies are deemed income derived in Kenya under Section 10(1) of the Income Tax Act, and the Appellant had an obligation to withhold taxes under Section 35(1) of the Income Tax Act. That, for income paid to Japanese expatriates, Section 5(1)(b) deems such income as accrued in or derived from Kenya. The Respondent argued that since the Appellant failed to withhold taxes, it is liable for the taxes under Section 39A of the Tax Procedures Act.
20. In response to the Appellant’s argument that the Exchange Notes granted the tax exemption, the Respondent submitted that under Section 13(3) of the Income Tax Act and Section 2 of the Statutory Instruments Act, Legal Notice No. 15 of 2021 could only take effect after it was tabled before the National Assembly, which in this case occurred on 9th March 2021. However, the Legal Notice was declared unconstitutional by the High Court in the case of Matindi v CS National Treasury (supra) when it was found by the court not only to have been unprocedurally enacted, but also discriminatory as it sought to exempt persons instead of income as envisaged under Section 13 of the Income Tax Act.
21. The Respondent maintained that the Legal Notice which has been found to be unconstitutional, become inoperative as if it had never been gazetted, and cannot therefore be the basis of any tax exemption.
22. Regarding the Appellant's argument that the contract between the parties provided that KPA was to bear the burden of tax, the Respondent while acknowledging that under Clause 6.2 of the Contract Agreement, the Client (KPA) would ensure exemption certificates are availed and would bear tax responsibility if not secured, the Respondent argued that a contract cannot override express statutory provisions.
23. The Respondent therefore urged the Court uphold the Tribunal's judgment, confirm that Legal Notice No. 15 of 2021 cannot be applied retrospectively, affirm the Respondent's assessment and objection decision, and dismiss the Appeal with costs of Kes. 350,000.
Analysis and Determination
24. This Court has carefully considered the grounds of appeal, the submissions by both the Appellant and the Respondent, and the relevant legal provisions and precedents. The following issues arise for determination:-
i. Whether the Appellant or its related parties were exempted from taxation for the relevant period under Legal Notice No. 15 of 2021 or the Exchange Notes.
ii. Whether the tax liability could be contractually shifted to Kenya Ports Authority.
iii. Whether the Appellant had an obligation under Kenyan tax law to account for income tax, PAYE and WHT in relation to the Japanese companies, consultants, and expatriates.
Issue 1: Whether Legal Notice No. 15 of 2021 or the Exchange Notes conferred exemption
25. The first and central issue for determination in this appeal is whether the Appellant was entitled to tax exemption on the basis of Legal Notice No. 15 of 2021 or the Exchange Notes referenced as MOF/ERD/11/79/38/01.
26. The Appellant contends that the Exchange Notes constitute a binding international treaty, ratified and promulgated by Kenya, and therefore form part of Kenyan law pursuant to Article 2(6) of the Constitution of Kenya, 2010. According to the Appellant, Clauses 8 and 8.2 of the Exchange Notes expressly exempt Japanese companies, employees, and consultants involved in the Mombasa Port Development Project (MPDP) Phases I and II from PAYE and income tax. The Appellant argues that Legal Notice No. 15 of 2021, issued under Section 13 (2) of the Income Tax Act, merely reaffirmed an exemption that had already been granted under the Exchange Notes.
27. The Respondent on the other hand argued that exemption from income tax can only be validly granted by the Cabinet Secretary through a Gazette Notice issued under Section 13 of the Income Tax Act, and with subsequent parliamentary approval. The Respondent argues that tax exemptions cannot be conferred through correspondence or diplomatic exchanges such as Exchange Notes. The Respondent further points out that Legal Notice No. 15 of 2021 was gazetted on 26th February 2021 and laid before Parliament on 9th March 2021, and that the Legal Notice had no retrospective application.
28. This Court agrees with the Respondent. While treaties and conventions ratified by Kenya form part of the law under Article 2(6) of the Constitution, the Income Tax Act remains the specific legislation governing matters of taxation and tax exemptions. It is trite law that where there is a conflict between a general legal provision and a specific statute, the specific legislation prevails. This principle is embodied in the Latin maxim lex specialis derogat legi generali, which dictates that the more specific statute overrides the more general in instances of conflict.
29. In the case of M J v N K & another (2017) eKLR the Court (Ougo J), stated as follows on the issue:
“The doctrine of lex specialis derogate generali is a Latin doctrine that means that the specific law prevails over general law. In Commercial Tax Officer, Rajasthan V M/S Binani Cement Ltd. & Another the Indian Supreme court held that;-
‘It is well established that when a general law and a special law dealing with some aspect dealt with by the general law are in question, the rule adopted and applied is one of harmonious construction whereby the general law, to the extent dealt with by the special law, is impliedly repealed. This principle finds its origins in the latin maxim of generalia specialibus non derogant, i.e., general law yields to special law…’
30. Again, in the case of Amondi & Co Advocates v County Government of Kisumu [2021] eKLR, the Court, upholding the principle that a more specific law overrides a general law, stated as follows:
“In my considered opinion, when the provisions of the Advocates Act specify how interest may be awarded on the disbursements and costs, whether by scale or otherwise, it must be deemed that the said provisions oust the more general provisions of the Civil Procedure Act. I so hold because it is a cardinal rule of interpretation that when a statute specifies something as being applicable to matters which the statute applies, the said specification ousts other more generalized statutory provisions. I hold that the provisions of the Civil Procedure Act cannot oust the more specific provisions of the Advocates Act which were enacted to address the issues of Advocates’ costs…...”
31. In the context of tax law, this Court in Commissioner of Domestic Taxes v Embu Water and Sanitation Co. Limited (Income Tax Appeal No. E196 OF 2024) stated as follows on the issue: -
“It is, however, important to note the apparent statutory tension between the applicable provisions. While Section 32 of the Tax Appeals Tribunal Act (TATA) and the Tax Appeals Tribunal (Appeals to the High Court) Rules grant the High Court jurisdiction to consider both legal and factual issues on appeal, Section 56(2) of the Tax Procedures Act (TPA)—which also governs appeals from the Tribunal—expressly limits such appeals to matters of law only….
The foregoing reveals a clear inconsistency in the statutory framework governing the scope of appeals from the Tribunal to this Court. In my view, the resolution lies in the application of the legal principle that a specific provision prevails over a general one where both address the same subject matter. This principle is embodied in the maxim lex specialis derogat legi generali, which dictates that the more specific statute overrides the more general in instances of conflict.”
32. 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.
33. Section 13 of the Income Tax Act provides the framework for tax exemptions. The section states:-
“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.” [Emphasis added]
34. 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.”
35. From the above, it is evident that Paragraph 1 of the First Schedule to the Income Tax Act recognizes exemptions granted under other statutes in the following words; “[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.” This is in harmony with the provisions of Article 210 (1) and (2) of the Constitution which provides that “[N]o tax or licensing fee may be imposed, waived or varied except as provided by legislation.”
36. It therefore follows that Section 13(1), read together with Paragraph 1 of the First Schedule to the Income Tax Act, expressly recognizes only those income tax exemptions that are granted by Acts of Parliament. Such exemptions apply automatically by operation of Paragraph 1 and do not require any further action under the Income Tax Act. Conversely, exemptions granted or recognized under any other instrument, whether local or international, including treaties or conventions, as in the present case, do not automatically confer tax exemption under the Income Tax Act unless they are formally incorporated into domestic law through the procedure set out in Section 13(2) and 13(3) of the Act.
37. In light of the foregoing, it is evident that, contrary to the Appellant’s assertions, the exemption signified in the Exchange Notes MOF/ERD/11/79/38/01 between the Governments of Kenya and Japan could only acquire legal effect upon gazettement and subsequent tabling of the gazette notice before the National Assembly, in accordance with the mandatory requirements of Sections 13(2) and 13(3) of the Income Tax Act.
38. In the present case, it is clear from the record that the gazettement was done on under the Legal Notice No. 15 of 2021 on 26th February 2021 and laid before the National Assembly on 9th March 2021.
39. Having established that the Exchange Notes, standing alone, could not legally confer income tax exemption without gazettement under the Income Tax Act, the Court now turns to consider the parties' arguments regarding Legal Notice No. 15 of 2021. The Appellant contended that this Legal Notice, published on 26th February 2021, reaffirmed the tax exemption for Japanese entities participating in the Mombasa Port Development Project (MPDP). According to the Appellant, the Legal Notice crystallized the exemption from the inception of the project in 2007, thereby implying a retrospective application.
40. The Respondent, on the other hand, contended that Legal Notice No. 15 of 2021 could not operate retrospectively, relying on the well-established principle that tax legislation is presumed to apply prospectively unless Parliament expressly provides otherwise. The Respondent asserted that the effective date of the gazette notice is the date of its publication or tabling before the National Assembly, in this case, 9th March 2021.
41. This Court concurs with the position expressed by the Respondent. Tax legislation is to be construed strictly, and tax exemptions are not presumed to apply retrospectively unless such intention is clearly and unequivocally expressed. The assessment period in dispute spans January 2017 to December 2021, most of which predates the issuance and tabling in Parliament of Legal Notice No. 15 of 2021 on 9th March 2021. Accordingly, the Legal Notice cannot serve as the legal basis for exemption for the entire assessment period.
42. As regards the effect of the annulment of Legal Notice No. 15 of 2021, it is common ground that the High Court declared the Legal Notice unconstitutional in Matindi v CS, National Treasury & Planning & 4 Others (supra). However, the parties differ on the legal consequences of that decision. The Appellant argues that the annulment does not affect rights or actions that had already crystallized while the impugned Legal Notice was still in force. The Respondent, on the other hand, maintains that the High Court’s decision rendered the Legal Notice void ab initio, meaning it had no legal effect from the outset.
43. From the record of appeal and submissions filed, it is apparent that the Appellant’s principal argument on this issue was that, prior to the annulment of the Notice No. 15 of 2021, certain tax exemption rights had crystallized in its favour from the date of the Exchange Notes. However, since this Court has already found that the Exchange Notes, by themselves, could not confer any income tax exemption, the Appellant’s argument on this point is rendered otiose.
Issue 2: Whether contractual provisions could shift tax liability to KPA
44. The second issue for determination is whether the contractual arrangement between the Appellant and the Kenya Ports Authority (KPA) could lawfully shift the tax liability from the Appellant to KPA. The Appellant contends that, under the terms of their contract, the responsibility for bearing the tax burden was contractually assigned to KPA.
45. The Respondent, however, correctly argues that private agreements between parties cannot override statutory tax obligations imposed by law. The principle that “an act of the parties cannot defeat the intention of the legislature” is firmly entrenched in tax jurisprudence.
46. 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.
47. 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.
Issue 3: Whether the Appellant was obligated to withhold and remit taxes
48. The Respondent’s audit, assessment and Objection Decision were based on undisputed facts of payments made to non-resident entities and expatriates for services rendered in Kenya. The Appellant did not contest the factual findings but only disputed the legal interpretation.
49. Section 3(1) of the Income Tax Act imposes a charge to income tax on income that accrues in or is derived from Kenya. This provision applies regardless of the tax residency of the recipient.
50. Section 3(2)(a)(i) and (ii) specifically identifies income from business and services rendered as chargeable, and Section 5(1)(b) extends this to remuneration paid to non-residents for services rendered in Kenya.
51. The Appellant admitted to engaging Japanese companies and expatriates for services physically performed in Kenya. These services clearly fall within the scope of taxable income under the Act.
52. Sections 10 and 35 of the Act further require that any person making payments to non-residents in respect of contractual or consultancy services is obligated to withhold and remit tax to the Respondent. A failure to withhold triggers liability under Section 39A of the Tax Procedures Act, which deems such tax due from the paying party.
53. It is therefore clear, and I so find, that the Appellant was under a statutory obligation to withhold and remit taxes on payments made to the Japanese entities and personnel, as well as to account for income earned by its subsidiary attributable to Kenya.
54. In the circumstances, I find no basis to interfere with the Tribunal’s judgment. Consequently, I make the following orders:
i. The Appeal is hereby dismissed in its entirety.
ii. The judgment of the Tax Appeals Tribunal dated 26th April 2024 is upheld.
iii. Each party to bear their own costs.
55. It is so ordered.
SIGNED, DATED, and DELIVERED IN VIRTUAL COURT THIS
10TH DAY OF JULY 2025
ADO MOSES
JUDGE
In the presence of: -
C/A – Moses
Odeny………………………..for the Appellant
Ochieng……………….…..... for the Respondent
1. This is an appeal against the judgment of the Tax Appeals Tribunal (“the Tribunal”) delivered on 26th April 2024 in Tax Appeal No. 196 of 2022, in which the Tribunal upheld a tax assessment in the sum of Kshs. 286,289,129.73 raised by the Respondent, the Commissioner of Domestic Taxes ("the Commissioner"), against the Appellant's (Japan Port Consultants Limited) for the period January 2017 to December 2021.
2. The core issue in dispute is whether the income earned by Japanese companies, consultants, and expatriates working on the Mombasa Port Development Project (MPDP), Phase II, was taxable in Kenya during the audit period and whether the Appellant was under an obligation to account for the said taxes, or whether it benefited from an exemption under Legal Notice No. 15 of 2021 and the Exchange Notes between the Governments of Kenya and Japan.
Background and Facts
3. The Appellant is a Japanese engineering company with a branch in Kenya, registered for tax purposes under the Income Tax Act. It undertook consultancy services for the Mombasa Port Development Project (MPDP), a project financed under a loan agreement with the Japan International Cooperation Agency (JICA).
4. In undertaking the project, the Appellant engaged amongst others, Japanese companies and consultants, and also employed Japanese nationals in connection with the project. However, in its tax filings, the Appellant accounted only for taxes related to local employees and excluded income paid to Japanese entities and expatriates.
5. Following an audit, the Commissioner of Domestic Taxes (the Respondent) issued additional tax assessments totaling Kshs. 286,289,129.73 covering PAYE, Income Tax, and Withholding Tax (“WHT”) for various periods between 2017 and 2021.
6. The Appellant Objected to the tax assessment, arguing that the income in question was exempt pursuant to the Exchange Notes between the Governments of Kenya and Japan, and the ensuing Legal Notice No. 15 of 2021, and further, that in any event, the tax liability was contractually allocated to the Kenya Ports Authority (“KPA”).
7. The Appellant’s Objections was rejected by the Commissioner in an Objection Decision dated 27th January 2023 and confirmed the assessment, leading to an appeal before the Tribunal.
8. In its Judgment delivered on 26th April 2024, the Tribunal partially allowed the Appellant’s appeal by setting aside the Withholding Tax (WHT) assessment for the period between January 2017 and 6th November 2019. However, the Tribunal upheld the remainder of the assessment as confirmed in the Appellant’s Objection Decision dated 27th January 2023.
The Appeal
9. Aggrieved by the Tribunal’s decision, the Appellant lodged an appeal before this Court vide its Memorandum of Appeal dated 24th May 2024 raising the following grounds of appeal: -
i. That the Tax Appeals Tribunal erred in law by failing in its duty to properly analyze and re-evaluate the facts and the evidence adduced by the Appellant and drawing its conclusion, leading to an erroneous Judgment.
ii. That the Tax Appeals Tribunal erred in law in misconstruing that the services offered by the Appellant were not exempt from Pay-As-You-Earn and income tax by virtue of being the Japanese companies, employees and consultants involved in the Mombasa Port Development Project (MPDP) Phase Two (2) Loan Number KE-P30.
iii. That the Tax Appeals Tribunal erred in law by failing to recognize the Appellant’s tax exemptions granted by the Government of Kenya following the Exchange Notes signed on January 16, 2015, which explicitly exempted the Japanese company and all its employees and consultants involved in the Mombasa Port Development Project Phase Two from Income Tax and Pay As-You-Earn.
iv. That the Tax Appeals Tribunal erred in law by making a ruling that ignored the Exchange Notes, despite them being part of Kenyan law under Articles 2(5) and (6) of the Constitution.
v. That the Tax Appeals Tribunal erred in law by ignoring the first schedule of the Income Tax Act Part 1, Section 27 and allowing the Respondent to impose tax obligations on the Japanese company, employees, and consultants.
Appellant’s Submissions
10. The Appellant submitted that the Exchange Notes dated 16th January 2015 (MOF/ERD/11/79/38/01) signed between Kenya and Japan constitutes a valid international treaty, binding under Article 2(6) of the Constitution, and conferred tax exemption on Japanese contractors, consultants, and employees involved in MPDP-1 and MPDP-2.
11. The Appellant asserted that Clauses 8 and 8.2 of the Exchange Note exempt Japanese Companies, Employees, and Consultants engaged in the project from PAYE and Income Tax. The Appellant emphasized that the Exchange Notes constitute a binding international treaty under international law, ratified and promulgated by Kenya, and thus form part of the laws of Kenya under Article 2(6) of the Constitution of Kenya, 2010. This provision, they submitted, is in consonance with Section 6A of the Tax Procedures Act and Section 41 of the Income Tax Act.
12. The Appellant further submitted that the Legal Notice No. 15 of 2021 issued by the Cabinet Secretary – Finance, simply confirmed the exemptions which had been recognized under the Exchange Notes. The Appellant, maintained that the gazettement in 2021 of the Legal Notice did not create the exemption but simply affirmed exemption which had already been recognized under the Exchange Notes signed between the two countries.
13. The Appellant maintained that even without Legal Notice No. 15 of 2021, they were tax-exempt under the Exchange Note MOF/ERD/11/79/38/01, which is a legally and constitutionally recognized treaty. They further relied on the First Schedule of the Income Tax Act, Part 1, Section 27, which exempts emoluments payable out of foreign sources for duties performed in Kenya in connection with technical assistance or other developmental agreements, where the agreement provides for such exemption.
14. The Appellant conceded that the High Court in Matindi v CS National Treasury declared Legal Notice No. 15 of 2021 unconstitutional, but asserted that the declaration of unconstitutionality of the Legal Notice could not affect actions which had crystallized. The Appellant cited the case of Otieno & another v Council of Legal Education (Civil Appeal 38 of 2018) [2021] KECA 349 (KLR) (17 December 2021) (Judgment) in support of this argument.
15. It was further the Appellant’s submissions that the Tribunal failed to properly analyze the sufficient facts and evidence they provided. According to the Appellant, the consultancy agreements provided that tax liability rested with the Client (KPA) and not the consultant. It argued that KPA, being the project owner, was responsible for securing exemptions or bearing the tax burden.
16. The Appellant therefore prayed that the Court allow the Appeal in full, set aside the Tribunal’s decision, and declare that no tax was payable by the Appellant for the disputed period.
Respondent’s Submissions
17. The Respondent opposed the Appeal, relying on its Statement of Facts dated 14th November 2024 and Further Record of Appeal dated 22nd June 2023. The Respondent supported the finding by the Tribunal and urged that the appeal be dismissed with costs.
18. The Respondent submitted that the Appellant had the obligation to account for taxes under the contract. Citing Section 3(1) and 3(2)(a) of the Income Tax Act, the Respondent argued that income accrued in or derived from Kenya, whether from business, employment, or services rendered, is subject to tax. They contended that the Appellant engaged Japanese companies and consultants, paid them contractual fees, and engaged Japanese expatriates, but failed to declare income derived by the foreign subsidiary or levy PAYE on Japanese employees.
19. The Respondent further submitted that contractual payments made to non-resident companies are deemed income derived in Kenya under Section 10(1) of the Income Tax Act, and the Appellant had an obligation to withhold taxes under Section 35(1) of the Income Tax Act. That, for income paid to Japanese expatriates, Section 5(1)(b) deems such income as accrued in or derived from Kenya. The Respondent argued that since the Appellant failed to withhold taxes, it is liable for the taxes under Section 39A of the Tax Procedures Act.
20. In response to the Appellant’s argument that the Exchange Notes granted the tax exemption, the Respondent submitted that under Section 13(3) of the Income Tax Act and Section 2 of the Statutory Instruments Act, Legal Notice No. 15 of 2021 could only take effect after it was tabled before the National Assembly, which in this case occurred on 9th March 2021. However, the Legal Notice was declared unconstitutional by the High Court in the case of Matindi v CS National Treasury (supra) when it was found by the court not only to have been unprocedurally enacted, but also discriminatory as it sought to exempt persons instead of income as envisaged under Section 13 of the Income Tax Act.
21. The Respondent maintained that the Legal Notice which has been found to be unconstitutional, become inoperative as if it had never been gazetted, and cannot therefore be the basis of any tax exemption.
22. Regarding the Appellant's argument that the contract between the parties provided that KPA was to bear the burden of tax, the Respondent while acknowledging that under Clause 6.2 of the Contract Agreement, the Client (KPA) would ensure exemption certificates are availed and would bear tax responsibility if not secured, the Respondent argued that a contract cannot override express statutory provisions.
23. The Respondent therefore urged the Court uphold the Tribunal's judgment, confirm that Legal Notice No. 15 of 2021 cannot be applied retrospectively, affirm the Respondent's assessment and objection decision, and dismiss the Appeal with costs of Kes. 350,000.
Analysis and Determination
24. This Court has carefully considered the grounds of appeal, the submissions by both the Appellant and the Respondent, and the relevant legal provisions and precedents. The following issues arise for determination:-
i. Whether the Appellant or its related parties were exempted from taxation for the relevant period under Legal Notice No. 15 of 2021 or the Exchange Notes.
ii. Whether the tax liability could be contractually shifted to Kenya Ports Authority.
iii. Whether the Appellant had an obligation under Kenyan tax law to account for income tax, PAYE and WHT in relation to the Japanese companies, consultants, and expatriates.
Issue 1: Whether Legal Notice No. 15 of 2021 or the Exchange Notes conferred exemption
25. The first and central issue for determination in this appeal is whether the Appellant was entitled to tax exemption on the basis of Legal Notice No. 15 of 2021 or the Exchange Notes referenced as MOF/ERD/11/79/38/01.
26. The Appellant contends that the Exchange Notes constitute a binding international treaty, ratified and promulgated by Kenya, and therefore form part of Kenyan law pursuant to Article 2(6) of the Constitution of Kenya, 2010. According to the Appellant, Clauses 8 and 8.2 of the Exchange Notes expressly exempt Japanese companies, employees, and consultants involved in the Mombasa Port Development Project (MPDP) Phases I and II from PAYE and income tax. The Appellant argues that Legal Notice No. 15 of 2021, issued under Section 13 (2) of the Income Tax Act, merely reaffirmed an exemption that had already been granted under the Exchange Notes.
27. The Respondent on the other hand argued that exemption from income tax can only be validly granted by the Cabinet Secretary through a Gazette Notice issued under Section 13 of the Income Tax Act, and with subsequent parliamentary approval. The Respondent argues that tax exemptions cannot be conferred through correspondence or diplomatic exchanges such as Exchange Notes. The Respondent further points out that Legal Notice No. 15 of 2021 was gazetted on 26th February 2021 and laid before Parliament on 9th March 2021, and that the Legal Notice had no retrospective application.
28. This Court agrees with the Respondent. While treaties and conventions ratified by Kenya form part of the law under Article 2(6) of the Constitution, the Income Tax Act remains the specific legislation governing matters of taxation and tax exemptions. It is trite law that where there is a conflict between a general legal provision and a specific statute, the specific legislation prevails. This principle is embodied in the Latin maxim lex specialis derogat legi generali, which dictates that the more specific statute overrides the more general in instances of conflict.
29. In the case of M J v N K & another (2017) eKLR the Court (Ougo J), stated as follows on the issue:
“The doctrine of lex specialis derogate generali is a Latin doctrine that means that the specific law prevails over general law. In Commercial Tax Officer, Rajasthan V M/S Binani Cement Ltd. & Another the Indian Supreme court held that;-
‘It is well established that when a general law and a special law dealing with some aspect dealt with by the general law are in question, the rule adopted and applied is one of harmonious construction whereby the general law, to the extent dealt with by the special law, is impliedly repealed. This principle finds its origins in the latin maxim of generalia specialibus non derogant, i.e., general law yields to special law…’
30. Again, in the case of Amondi & Co Advocates v County Government of Kisumu [2021] eKLR, the Court, upholding the principle that a more specific law overrides a general law, stated as follows:
“In my considered opinion, when the provisions of the Advocates Act specify how interest may be awarded on the disbursements and costs, whether by scale or otherwise, it must be deemed that the said provisions oust the more general provisions of the Civil Procedure Act. I so hold because it is a cardinal rule of interpretation that when a statute specifies something as being applicable to matters which the statute applies, the said specification ousts other more generalized statutory provisions. I hold that the provisions of the Civil Procedure Act cannot oust the more specific provisions of the Advocates Act which were enacted to address the issues of Advocates’ costs…...”
31. In the context of tax law, this Court in Commissioner of Domestic Taxes v Embu Water and Sanitation Co. Limited (Income Tax Appeal No. E196 OF 2024) stated as follows on the issue: -
“It is, however, important to note the apparent statutory tension between the applicable provisions. While Section 32 of the Tax Appeals Tribunal Act (TATA) and the Tax Appeals Tribunal (Appeals to the High Court) Rules grant the High Court jurisdiction to consider both legal and factual issues on appeal, Section 56(2) of the Tax Procedures Act (TPA)—which also governs appeals from the Tribunal—expressly limits such appeals to matters of law only….
The foregoing reveals a clear inconsistency in the statutory framework governing the scope of appeals from the Tribunal to this Court. In my view, the resolution lies in the application of the legal principle that a specific provision prevails over a general one where both address the same subject matter. This principle is embodied in the maxim lex specialis derogat legi generali, which dictates that the more specific statute overrides the more general in instances of conflict.”
32. 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.
33. Section 13 of the Income Tax Act provides the framework for tax exemptions. The section states:-
“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.” [Emphasis added]
34. 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.”
35. From the above, it is evident that Paragraph 1 of the First Schedule to the Income Tax Act recognizes exemptions granted under other statutes in the following words; “[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.” This is in harmony with the provisions of Article 210 (1) and (2) of the Constitution which provides that “[N]o tax or licensing fee may be imposed, waived or varied except as provided by legislation.”
36. It therefore follows that Section 13(1), read together with Paragraph 1 of the First Schedule to the Income Tax Act, expressly recognizes only those income tax exemptions that are granted by Acts of Parliament. Such exemptions apply automatically by operation of Paragraph 1 and do not require any further action under the Income Tax Act. Conversely, exemptions granted or recognized under any other instrument, whether local or international, including treaties or conventions, as in the present case, do not automatically confer tax exemption under the Income Tax Act unless they are formally incorporated into domestic law through the procedure set out in Section 13(2) and 13(3) of the Act.
37. In light of the foregoing, it is evident that, contrary to the Appellant’s assertions, the exemption signified in the Exchange Notes MOF/ERD/11/79/38/01 between the Governments of Kenya and Japan could only acquire legal effect upon gazettement and subsequent tabling of the gazette notice before the National Assembly, in accordance with the mandatory requirements of Sections 13(2) and 13(3) of the Income Tax Act.
38. In the present case, it is clear from the record that the gazettement was done on under the Legal Notice No. 15 of 2021 on 26th February 2021 and laid before the National Assembly on 9th March 2021.
39. Having established that the Exchange Notes, standing alone, could not legally confer income tax exemption without gazettement under the Income Tax Act, the Court now turns to consider the parties' arguments regarding Legal Notice No. 15 of 2021. The Appellant contended that this Legal Notice, published on 26th February 2021, reaffirmed the tax exemption for Japanese entities participating in the Mombasa Port Development Project (MPDP). According to the Appellant, the Legal Notice crystallized the exemption from the inception of the project in 2007, thereby implying a retrospective application.
40. The Respondent, on the other hand, contended that Legal Notice No. 15 of 2021 could not operate retrospectively, relying on the well-established principle that tax legislation is presumed to apply prospectively unless Parliament expressly provides otherwise. The Respondent asserted that the effective date of the gazette notice is the date of its publication or tabling before the National Assembly, in this case, 9th March 2021.
41. This Court concurs with the position expressed by the Respondent. Tax legislation is to be construed strictly, and tax exemptions are not presumed to apply retrospectively unless such intention is clearly and unequivocally expressed. The assessment period in dispute spans January 2017 to December 2021, most of which predates the issuance and tabling in Parliament of Legal Notice No. 15 of 2021 on 9th March 2021. Accordingly, the Legal Notice cannot serve as the legal basis for exemption for the entire assessment period.
42. As regards the effect of the annulment of Legal Notice No. 15 of 2021, it is common ground that the High Court declared the Legal Notice unconstitutional in Matindi v CS, National Treasury & Planning & 4 Others (supra). However, the parties differ on the legal consequences of that decision. The Appellant argues that the annulment does not affect rights or actions that had already crystallized while the impugned Legal Notice was still in force. The Respondent, on the other hand, maintains that the High Court’s decision rendered the Legal Notice void ab initio, meaning it had no legal effect from the outset.
43. From the record of appeal and submissions filed, it is apparent that the Appellant’s principal argument on this issue was that, prior to the annulment of the Notice No. 15 of 2021, certain tax exemption rights had crystallized in its favour from the date of the Exchange Notes. However, since this Court has already found that the Exchange Notes, by themselves, could not confer any income tax exemption, the Appellant’s argument on this point is rendered otiose.
Issue 2: Whether contractual provisions could shift tax liability to KPA
44. The second issue for determination is whether the contractual arrangement between the Appellant and the Kenya Ports Authority (KPA) could lawfully shift the tax liability from the Appellant to KPA. The Appellant contends that, under the terms of their contract, the responsibility for bearing the tax burden was contractually assigned to KPA.
45. The Respondent, however, correctly argues that private agreements between parties cannot override statutory tax obligations imposed by law. The principle that “an act of the parties cannot defeat the intention of the legislature” is firmly entrenched in tax jurisprudence.
46. 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.
47. 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.
Issue 3: Whether the Appellant was obligated to withhold and remit taxes
48. The Respondent’s audit, assessment and Objection Decision were based on undisputed facts of payments made to non-resident entities and expatriates for services rendered in Kenya. The Appellant did not contest the factual findings but only disputed the legal interpretation.
49. Section 3(1) of the Income Tax Act imposes a charge to income tax on income that accrues in or is derived from Kenya. This provision applies regardless of the tax residency of the recipient.
50. Section 3(2)(a)(i) and (ii) specifically identifies income from business and services rendered as chargeable, and Section 5(1)(b) extends this to remuneration paid to non-residents for services rendered in Kenya.
51. The Appellant admitted to engaging Japanese companies and expatriates for services physically performed in Kenya. These services clearly fall within the scope of taxable income under the Act.
52. Sections 10 and 35 of the Act further require that any person making payments to non-residents in respect of contractual or consultancy services is obligated to withhold and remit tax to the Respondent. A failure to withhold triggers liability under Section 39A of the Tax Procedures Act, which deems such tax due from the paying party.
53. It is therefore clear, and I so find, that the Appellant was under a statutory obligation to withhold and remit taxes on payments made to the Japanese entities and personnel, as well as to account for income earned by its subsidiary attributable to Kenya.
54. In the circumstances, I find no basis to interfere with the Tribunal’s judgment. Consequently, I make the following orders:
i. The Appeal is hereby dismissed in its entirety.
ii. The judgment of the Tax Appeals Tribunal dated 26th April 2024 is upheld.
iii. Each party to bear their own costs.
55. It is so ordered.
SIGNED, DATED, and DELIVERED IN VIRTUAL COURT THIS
10TH DAY OF JULY 2025
ADO MOSES
JUDGE
In the presence of: -
C/A – Moses
Odeny………………………..for the Appellant
Ochieng……………….…..... for the Respondent