Japanese companies, consultants and employees working on development projects financed by Japan will continue enjoying tax exemptions in Kenya after the Supreme Court dismissed a petition challenging the tax reliefs.
In a landmark ruling delivered by a five-judge bench, the country’s highest court found that the tax exemptions were lawfully implemented and complied with the legal framework that existed when Kenya and Japan signed the financing agreements between 2007 and 2020.
The judges ruled that income earned by foreign personnel providing technical assistance under development agreements can legally be exempted from tax.
“Emoluments payable from foreign sources in respect of duties performed in Kenya under a technical assistance or other development services agreement are a tax that can be exempted; the appellant, on this issue, did not prove his case on the balance of probabilities,” the court ruled.
Moreover, the court determined that the agreements were negotiated under the previous Constitution, where the requirement for approval of Parliament in respect to the legal notice concerning tax exemptions did not apply.
In the view of the judges, the President was endowed with constitutional power at that time to negotiate bilateral agreements, whereas Parliament’s role was confined to passing laws required to ensure implementation of international agreements.
The case was based on a petition against Legal Notice No. 15 of 2021 that provided the mechanism for implementation of tax exemptions to companies and employees involved in projects financed with the Japanese money.
It was argued that tax exemptions were unconstitutional because they were in contradiction with Article 210 of the Constitution that requires that taxes may only be imposed, modified or waived through the process of passing an Act by Parliament.
Further, the petitioner said that the National Assembly exceeded its powers under the Constitution, the Statutory Instruments Act, and the Income Tax Act by allowing tax exemptions via legal notice instead of passing an Act of Parliament.
Nevertheless, the Supreme Court concluded that the petitioner was unable to prove unconstitutionality or unlawfulness of tax exemptions.
The judges also dismissed claims that the tax waivers unfairly discriminated in favour of Japanese investors, saying there was insufficient evidence to support that argument.
The tax exemptions form part of Japan’s long-standing development financing policy, under which Japanese firms and experts involved in overseas aid projects are granted tax relief in recipient countries. Kenya has incorporated the provision into all financing agreements signed with Japan over the years.
The exemptions apply to income earned by Japanese companies, consultants and employees involved in several major infrastructure and energy projects across Kenya. These include the Dongo Kundu Special Economic Zone, the Olkaria I Unit 4 Geothermal Power Project, the Mwea Irrigation Development Project, as well as electricity distribution improvement projects in Nakuru and Mombasa.
The issue previously sparked debate in Parliament, where some lawmakers questioned why Japanese firms were being exempted from taxes while Kenyan companies remained fully taxable. Others argued that Kenyan businesses operating in Japan do not enjoy similar incentives.
In response, the government maintained that the exemptions were negotiated as part of Japan’s financing terms and that the long-term economic gains would outweigh the tax revenue forgone.
The Cabinet Secretary had defended the arrangement, arguing that the projects would create jobs, stimulate local businesses and generate wider economic activity, ultimately delivering greater benefits to the country than the taxes waived.