Kenya High Court clarifies use of an asset definition for purposes of claiming of investment allowance

• The High Court of Kenya upheld a Tax Appeals Tribunal ruling that the Kenyan Income Tax Act did not provide the definition of the word “use” and therefore relied on the literal meaning provided in the Cambridge Dictionary, which defined the word as “to put something to a particular purpose.”
• In this case, the taxpayer averred that its manufacturing plant was put into use in June 2019, following the production of its first and second batches of products for sale. But, the Kenya Revenue Authority averred that the manufacturing plant was put into use in August 2019, when the project architect issued a certificate of completion.
• The High Court ruled for the taxpayer, stating that absent an explicit definition for the term “use,” production of the first and second batches of the taxpayer’s products fell within the dictionary definition of “use.”
• The ruling reflects the importance of clarity and interpretation of tax statutes and reiterates the maxim that taxation laws should be clear and leave no room for ambiguity.

Executive summary

The High Court of Kenya, on 12 May 2023, upheld a Tax Appeals Tribunal (or "the Tribunal") ruling that in the absence of an express definition of the term "use" for purposes of claiming investment allowance,1 the dictionary definition of "use" applied. The Kenya Revenue Authority (KRA) had appealed a 4 March 2020 decision of the Tribunal, which had ruled in favor of the taxpayer.

In this case, the taxpayer (Respondent) averred that its manufacturing plant was put into use in June 2019, following the production of the first and second batches of its products. In contrast, the KRA (Appellant) averred that the manufacturing plant was put into use in August 2019, when the project architect issued a certificate of completion. The KRA further asserted that the production of the first and second batches of the taxpayer's products were just test runs and the actual use of the manufacturing plant did not commence until the completion certificate for installation of the machinery for production was issued.

The parties' different interpretations of the term "use" directly affected the rate of investment allowance, with the period of use as averred by the taxpayer qualifying for a 150% investment allowance and the period of use as averred by the KRA qualifying for a 100% investment allowance.

In its ruling dated 12 May 2023, the High Court found no reason to interfere with the Tribunal ruling and dismissed the application.

Detailed discussion

Background

The Respondent is a private limited company registered in Kenya that manufactures animal feeds. In the financial year ending June 2019, the Respondent constructed an animal feeds supplement manufacturing plant at a cost KES2 277,271,427. The manufacturing plant was constructed within a large privately controlled development site located in Kiambu County. The manufacturing plant was required to meet certain compliance standards set by the promoters of the controlled development site. In this regard, the promoters of the controlled development site issued a certificate of building compliance to the Respondent on 17 June 2019.

The respondent claimed an investment allowance at the rate of 150% on the building cost for the year ending June 2019. On 4 November 2020, the Appellant audited the Respondent's investment allowance costs and disallowed the claimed investment allowance of KES 423,033,494 for the financial year ending June 2019, stating that the allowance ought to be claimed in the subsequent year at the lower 100% rate. The relevant provision of the law that provided the rate of investment allowance had been amended and reduced to 100% for 2020.

On 29 January 2021, the Appellant issued an audit report disallowing the investment and demanded corporation tax based on the disallowance of the investment allowance. The Respondent objected the assessment via a letter dated 25 February 2021. The Appellant issued its objection decision on 30 April 2021, confirming its earlier position that the investment allowance ought to be claimed in the financial year ending June 2020 at the 100% rate. The Respondent filed an appeal with the Tribunal, which set aside the objection decision.

The Appellant then appealed the Tribunal's decision to the High Court on 9 May 2022.

Appellant's position

The Appellant averred that:

• The use of the manufacturing plant commenced when the project architect issued the certificate of completion on 5 August 2019.
• August 2019 fell within the financial year ending June 2020, for which the income tax law had been amended to apply a 100% investment allowance.
• For one to claim an investment allowance in the first year of use, one had to prove usage of the investment. Additionally, since the certificate of completion was issued on 5 August 2019, the Respondent could not allege that manufacturing had begun before that date.
• The production of the first and second batches of the taxpayer's products were just test runs.
• The certificate of building compliance that the promoters of the controlled development site issued on 17 June 2019 should have been issued by the County Government of Kiambu. Therefore, the certificate of building compliance issued by the nongovernmental party could not be relied on as proof of completion of the manufacturing plant.

Respondent's position

On the other hand, the Respondent averred that:

• The construction of the building was completed in January 2019, though electrical installation, generator, fire equipment and machinery were completed in June 2019.
• The production of the first and second batches of the Respondent's products for subsequent sale to its customers occurred in June 2019.
• The building was utilized for manufacturing activities within the month of June 2019 and the law did not provide a restriction as to the volume of units that would have to be produced for a taxpayer to be considered to having manufactured a product.
• In this regard, the claim for investment allowance was premised on the repealed sections of paragraph 24(1)(f) as read with paragraph 24(2)(c) of the Second Schedule of the Kenyan Income Tax Act, which provided for a 150% investment allowance in the first year of use. In the Respondent's case, the first year of use was the year ending June 2019, during which the investment allowance for the first year of use was 150%.
• The Kenyan Income Tax Act did not define the word "use" and the Tribunal had ruled that the literal meaning provided in the Cambridge Dictionary, which defined the word as "to put something to a particular purpose," applied.
• Further, the Respondent had received a certificate of building compliance from the promoters of the controlled development site on 17 June 2019.

Analysis and determination

The key issue for determination was whether the Tribunal erred in law and fact in finding that the Respondent's machinery was first used in June 2019 and qualified for a 150% investment allowance.

The High Court upheld that the Tribunal's ruling that that the Kenyan Income Tax Act did not expressly define the word "use" and therefore relied on the literal meaning provided in the Cambridge Dictionary, which defined "use" to mean "to put something such as a tool, skill or building to a particular purpose."

The High Court premised its ruling on the following:

• The maxim of interpretation of tax statutes is that one must look at what is clearly said. Taxation laws and provisions must be express with no room for ambiguity. The Court noted that if ambiguity exists, the law must be read in favor of taxpayer and not the revenue authority responsible for their implementation.
• The Respondent was entitled to claim the investment allowance, an incentive granted to supplement cost of building and machinery to encourage investment. The only issue in dispute is when the incentive ought to have been claimed.
• Absent a definition of the term "use" in the law, the production for sale of the first and second batch of the Respondent's products qualified as "use" because it fell within the literal meaning as provided in the Cambridge Dictionary.

Based on the foregoing, the High Court dismissed the appeal having found no fault in the decision of the Tribunal.

Implications

The High Court's ruling emphasizes the importance of clarity in tax statutes. The law should be express with no room for ambiguity. Moving forward, taxpayers ought to ensure that they seek clarity on interpretation of tax statutes to ensure tax compliance and mitigate tax disputes with the revenue authority.

The contacts listed below can help taxpayers who need assistance in interpreting of tax statutes, as well assistance with claiming and verifying available investment allowances.

For additional information with respect to this Alert, please contact the following:

Ernst & Young (Kenya), Nairobi

• Francis Kamau
• Christopher Kirathe 
• Hadijah Nannyomo 
• Robert Maina 
• Brian Waruru 
• Dennis Mutunga 

Published by NTD's Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.

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