This February monthly alert brings you a curated summary of recent tax decisions issued by the Tax Appeals Tribunal (Tribunal) and the appellate courts. In addition, we have summarised the latest Kenya Revenue Authority (KRA) notices issued during the month. The key issues determined in various court decisions addressed several critical tax issues in Kenya:
- Tax losses accumulated prior to the enactment of the Finance Act, 2025, can be carried forward and utilised in subsequent years and are not subject to the newly introduced five-year limitation (Patel v Commissioner for Legal Services & Board Co-ordination Services);
- Applications for refund of overpaid tax are automatically approved by operation of law where the KRA fails to issue a decision within the mandatory statutory period under section 47(3) of the Tax Procedures Act (Cargill Kenya Ltd vs. Commissioner of Domestic Taxes);
- KRA cannot rely on deficient banking deposit analysis and variance methods to assess taxes and arbitrarily disallow expenses (Axankosi Limited (formerly Accenture East Africa Limited) vs. Commissioner of Domestic Taxes); and
- Section 42A of the Tax Procedures Act does not exempt taxpayers from accounting for withholding VAT merely because payments are made to non-VAT registered persons (County Government of Kisii v Commissioner of Domestic Taxes Tax Appeal E096 of 2025) [2025] KETAT 418 (KLR)).
Summary of the decisions
The appeal concerned additional income tax assessments of KES 67.9 million for the years 2019 to 2022. The issues in determination were whether the Commissioner was entitled to assess periods beyond five years and whether tax losses accumulated prior to the enactment of the Finance Act, 2025, are eligible for utilisation. The Tribunal held that the 2014 to 2018 years of income were statutorily time-barred.
Further, the Tribunal held that tax losses accumulated before the Finance Act, 2025, came into effect and retain their validity. In the absence of an explicit transition provisions under the Finance Act, 2025, amendment that introduced the five-year limit, legislative amendments cannot eliminate rights that were already acquired and vested prior to the enactment of the new law. Therefore, the newly reintroduced five-year limitation on carrying forward tax losses should operate prospectively.
The case involved an appeal by Cargill Kenya Ltd after the Commissioner rejected Cargill’s income tax refund claim of KES 26.4 million for the period 2018 to 2022, citing incomplete documentation. Cargill argued the refund had been deemed approved by operation of law under section 47(4) of the Tax Procedures Act because the Commissioner failed to issue a decision within the statutory 90-day period.
The Tribunal allowed the appeal and held that the refund application was automatically approved by operation of law because the KRA failed to issue a decision within the mandatory 90-day period required under section 47(3) of the Tax Procedures Act.
Prior to amendments made by the Finance Act 2025, section 47(3) of the Tax Procedures Act stipulated that where the Commissioner fails to ascertain and determine an application within 90 days, the application shall be deemed ascertained and approved by operation of law. The Finance Act, 2025 amended this provision to extend the decision timeline to 120 days.
The appeal concerned assessments issued to Axankosi Limited for corporate income tax, Value Added Tax (VAT) and withholding tax, derived from a banking deposit analysis and variances between declared income for corporate income tax purposes and sales declared for VAT purposes. Axankosi contended the assessments were arbitrary and ignored evidence produced. The Commissioner defended the assessments and methodology, asserting that there was inadequate documentation under sections 15 and 16 of the Income Tax Act, and raised a preliminary objection that the appeal was out of time.
The Tribunal held that the appeal was validly filed, applying the amended section 77 of the Tax Procedures Act to exclude weekends and public holidays when computing deadlines.
On the merits of the case, it was found that Axankosi had provided sufficient documentation that the Commissioner neither engaged with nor showed to be irrelevant or inadequate. The Tribunal concluded that the 60% expense disallowance and the rejection of withholding tax reconciliation items were arbitrary and unsupported by law and therefore allowed the appeal.
The appeal concerned assessments against the County Government of Kisii for the periods of 2022 and 2023 totalling KES 35.5 million in principal tax for Pay As You Earn (PAYE),Withholding Value Added Tax, and withholding tax. The County argued, among other points, that Daily Subsistence Allowances (DSA) paid to officers on official duty were exempt from PAYE under the amended section 5 of the Income Tax Act and that withholding VAT is not chargeable on payments to non-VAT-registered suppliers.
The Tribunal dismissed the Appellant’s appeal, and held that section 42A of the Tax Procedures Act does not exempt payments made to non-VAT-registered persons from withholding VAT. Therefore, it held that the Appellant ought to have withheld VAT on payments made to all payees including persons not registered for VAT. The Tribunal also held that the taxpayer had not produced sufficient, relevant documentation to prove the DSA payments qualified for exemption or that the impugned withholding tax entries related to monthly amounts below KES 24 000.
KRA notices
The KRA has released the applicable interest rates in relation to Fringe Benefit Tax, deemed interest and low interest benefit for quarter one of 2026 (January to March) pursuant to the Income Tax Act as follows:
- 8% for Fringe Benefit Tax;
- 8% for deemed interest; and
- 8% for low interest benefit.
