LEGITIMATE EXPECTATION ON TAX DISPUTE IN KENYA

The Supreme Court of Kenya in Petition No. 20 of 2020 (E021 of 2020) Kenya Revenue Authority versus Export Trading Company Limited, upheld the findings of the Court of Appeal and the High Court that the Kenya Revenue Authority acted unfairly in demanding additional taxes from a taxpayer and that the demand for payment of additional customs duties was irrational and contravened the taxpayer’s right to fair administrative action.

The case involved a taxpayer who cleared imported rice through the Tradex Simba system, which calculated the customs duties payable at the rate of 35%. Prior to paying the taxes, the taxpayer wrote to the Kenya Revenue Authority seeking confirmation that the customs duties as calculated by the Tradex Simba system were correct, but they did not receive any response. The taxpayer then proceeded to pay the customs duties at the rate of 35%. Four years later, the Kenya Revenue Authority demanded additional customs duties from the taxpayer as there had been a technical error on the Tradex Simba system and the customs duties payable should have been calculated at the rate of 75%.  This technical error resulted in a shortfall in the taxes paid.

In its decision, the Supreme Court found that Kenya Revenue Authority’s decision to demand additional customs duties on imported rice at the rate of 75% as opposed to the 35% charged incorrectly through the Tradex Simba System (owing to a technical error on the system) created a legitimate expectation in favor of the taxpayer. The legitimate expectation arose since the Kenya Revenue Authority failed to collect duty at the correct rate despite having exclusive and full control of the Tradex Simba system. The Kenya Revenue Authority should have ensured that the rate of duty on the Tradex Simba system was correct and it was therefore not appropriate for the taxpayer to suffer the consequences of its failure to do so.

The Court also found that Kenya Revenue Authority’s failure to respond to the taxpayer’s letter seeking clarification of the customs duties assessed by Tradex Simba system prior to paying the taxes created the legitimate expectation that the taxes had been correctly assessed and, as a result, the taxpayer paid the correct amount of customs duties.  

Thus, the Supreme Court concluded that Kenya Revenue Authority had acted unfairly and contrary to the taxpayer’s right to fair administrative action in demanding short-levied duties almost four years after payment of duties.

This decision cements the place of legitimate expectation in tax issues in the sense that Kenya Revenue Authority is always bound by the promises it makes to taxpayers, whether these are made expressly or by way of conduct in the discharge of its functions. The decision will help rein in a revenue authority that has a penchant for going back on its word. Furthermore, the decision echoes the fact that Kenya Revenue Authority should not disregard taxpayers’ constitutional rights in its increasingly forceful approach to collecting taxes.

Furthermore, in instances where the Kenya Revenue Authority fails to respond to an application for review within 30 days, as required under section 229 of the East African Community Customs Management Act, 2004, a taxpayer is entitled to rely on and deem correct the positions expressed in the application for review.

At A.O.WANGA ADVOCATES we are happy to assist you in all your tax related issues.

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