From recent media reports, Kenya Revenue Authority (KRA) is pursuing the payment of tax previously waived/exempted in favour of Kenya Breweries Limited (KBL) and the NCBA bank. It raises the question whether a taxpayer has a legitimate expectation concerning tax decisions made by KRA especially in the context of waivers and exemptions.
A legitimate expectation is a clear, unambiguous and unqualified assurance, understood by those to whom it is given, that a particular course of action will be taken or a particular procedure will be followed. Legitimate expectation allows the taxpayer to plan their life with certainty and reasonable belief that the tax gatherer can be held to its promises and previous actions.[1] The legitimate expectation is based on the public interest and responsible public administration. It is breach of legitimate expectation for the tax gatherer to make differing demands on the amount of tax due. The taxpayer expects the taxing authority to state the amount of tax due with clarity and unambiguity.[2]
Legitimate expectation, however, cannot arise in ambiguous situations.[3] In R (Bibi) v Newham London Borough Council,[4] the court gave a set of three practical considerations to determine the existence of legitimate expectation: (1) whether the public authority, by practice or by promise has committed itself to a specific course of action; (2) whether the public authority has acted or proposed to act unlawfully in relation to its commitment; and (3) what the court should do in light of the other two considerations. In CFC Stanbic Bank Ltd vKenya Revenue Authority & another, there was legal ambiguity on the question of assessment of capital deductions on computer software. Various taxpayers treated computer software differently by assigning different rates of deduction. At the time, the law did not specify an applicable rate specific to computer software. The Petitioner during the 2008/2009 period of assessment claimed diminution on software at the rate of 33.3%. The tax gatherer was not in agreement with that interpretation and referred the matter to the Income Tax Local Committee and the case eventually made its way to the courts. The Petitioner claimed legitimate expectation but the court ruled that legitimate expectation does not arise in ambiguous situations. Different taxpayers treated the issue differently and the tax gatherer treated the issue differently. It appeared that the tax gatherer and the taxpayer always reached a consensus depending on the respective circumstances. As such, there was no general set practice that the Petitioner could use to claim legitimate expectation.[5]
When the taxing authority makes a mistake of law in the assessment of payable tax, there is no legitimate expectation that the mistake must remain uncorrected to the benefit of the taxpayer. The tax gatherer is entitled to correct the error as soon as they realise it but this must be within a reasonable time. In Commissioner Customs and others v Amit Ashok Doshi & 2 others, the Commissioner initially made a mistake by declaring the goods as not dutiable. This was negligent but he was bound to correct the error. There is no estoppel against a statute. The error was in breach of the East African Customs Management Act and errors of law cannot be sanctified as principle.
The taxpayer cannot claim legitimate expectation to escape payment of taxes where the inability by the taxing authority to discover actual taxes payable is as a result of concealment by the taxpayer. The taxpayer cannot devised methods of avoiding tax and then claim that it is exempted from taxation.[6] However, where the taxing authority goes to sleep and as a result lulls the taxpayer into a false sense of security that the taxes in question would not be demanded, as a result of which the taxpayer loses recourse which would have been legally available to it had the tax been demanded promptly, it is unfair and unjust if the tax gatherer demands the tax.[7]
In Commissioner of Domestic Taxes v Lewa Wildlife Conservancy Limited,[8] the tax gatherer gave the Respondent a clear and unambiguous promise that the gate entry fees were not subject to value added tax. The tax gatherer wrote a letter to the Respondent showing an interpretation of the applicable laws and this was held to be a lawful promise from which the tax gatherer could not wiggle out of. Having created the expectation through an express act, it was not permissible to give a contrary interpretation of the law. A legitimate expectation may arise either from an express promise given on behalf of a public authority or from the existence of a regular practice which the claimant can reasonably expect to continue.[9] The waiver was expressly given on behalf of the Kenya Revenue Authority. The legitimate expectation was backed by a written express waiver and passive conduct in relation to the transaction. In a different light, the legitimate expectation can be so established that it becomes an economic right.[10]
Notes
[1]Keroche Industries Limited v Kenya Revenue Authority & 5 others (2007) KLR 240. [2]Republic v Commissioner General, Kenya Revenue Authority Ex-Parte Martin M. Mugi Judicial Review Application 445 of 2012 [2018] eKLR.
[3]CFC Stanbic Bank Ltd vKenya Revenue Authority & another Petition 566 of 2012 [2014] eKLR.
[4] [1986] AC 1.
[5] Petition 566 of 2012 [2014] eKLR.
[6]Pharmaceutical Manufacturing (K) Co Ltd & 3 others v Commissioner General of the Kenya Revenue Authority & 2 others Petition 589 of 2013 [2014] eKLR.
[7]Republic v Kenya Revenue Authority Ex-Parte Cosmos Limited Judicial Review Miscellaneous Civil Application 478 of 2014 [2016] eKLR.
[8] Income Tax Appeal 17 of 2017 [2019] eKLR.
[9]Council of Civil Services Unions v Minister for Civil Service [1985] AC 374.
[10]Ecobank Kenya Limited v Commissioner of Domestic Taxes [2012] eKLR.