The judgement by Justice John Chigiti overturning the Income Tax (Financial Derivatives) Regulations was a win for Kenyan and foreign traders in the money market, who argued that it amounted to double taxation for classifying gains from a financial derivative as a separate income.
“The Regulations are null, void and incapable of being implemented. In the absence of a deeming provision under the Income Tax Act (ITA), the entire premise of the Regulations fails as the gains from financial derivatives cannot be deemed to be income which accrued for tax purposes,” the judge ruled.
The regulations were passed by the government through the National Treasury on the basis that taxation of financial derivatives was expected to widen the tax base by taxing gains accrued from Kenya by non-resident persons.
According to the government, the proposed tax was a positive development for Kenya – as is seen in some other countries – since it ensures equity in taxation for residents and non-residents trading in financial derivatives.
However, the Kenya Bankers Association (KBA) challenged the regulations asserting that they imposed an unfair tax burden on the resident person by characterising the gains from a financial derivative as a separate income.
The association told the court that the 15% tax was an unreasonable and oppressive burden as it assumes that derivative transactions equate to gains and that, since the regulations do not stipulate how gains will be computed, it would be practically impossible to calculate the amounts.
Justice Chigiti declared that failure by the National Treasury to ensure that the proposed tax on financial derivatives was in conformity with the Income Tax Act violated KBA and its members’ rights to fair administrative action and to a fair taxation burden.
“An order of prohibition is issued restraining the Kenya Revenue Authority (KRA) from taking any steps, actions, or measures to impose or collect any taxes from members of the Kenya Bankers Association engaged in transactions involving financial derivatives,” ruled Chigiti.
The judge stated that the regulations are illegal, unreasonable, impracticable and unclear, create uncertainty and are oppressive in that they require a resident person to assume that their loss on a derivative transaction equates to gain for the non-resident person.
He added that the regulations do not provide at all for the way in which gains would be computed for non-residents, and that it is practically impossible for a resident person to calculate the gains of a non-resident person they trade with through financial derivatives.
“Certainty in laws that impose taxes is essential for business planning and the bankers’ association and its members will be greatly prejudiced by the imposition and the implementation of uncertain regulations. The regulations are illegal and breach the rule of law contrary to the constitution,” the judge ruled.
Chigiti noted that any income tax is supposed to be predicated and driven by the rationale that a person is taxed on their own income, as ascertained by reference to their own circumstances.
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