Introduction
“If it hits your account, prove it or lose it.”
On 22nd August 2025, the Tax Appeals Tribunal delivered a landmark decision in Kirin Pipes Limited v Commissioner, Intelligence Strategic Operations Investigations and Enforcement [2025] KETAT 259.
Its position was clear and unyielding: every deposit into a taxpayer’s bank account is presumed to be taxable income unless proven otherwise.
This ruling strikes at the heart of corporate finance and governance. Kenyan tax law is designed to tax gains or profits—not mere deposits. Yet, the Tribunal placed the evidentiary burden squarely on taxpayers. For Kirin Pipes, this interpretation swept millions of shillings, claimed as capital injections, loans, and advance payments, into the tax net.
The Tribunal was unconvinced by explanations, documents, or claims of double taxation. The taxpayer ultimately lost.
The Digest
The Power and Peril of Banking Analysis
Banking analysis has long been part of KRA’s investigative arsenal, reflecting global practice. By reconciling deposits against declared turnover, assessing officers can identify variances and raise assessments.
In Kirin, deposits exceeding Kshs. 150 million were deemed taxable income. Explanations citing shareholder funding, loans, and advance payments collapsed under scrutiny, as the Tribunal found the evidence neither credible nor complete.
The Tribunal held that Kirin failed to meet its burden of proof, noting that:
- Explanations were unsupported by certified, verifiable documents.
- Bank statements were uncertified.
- Shareholder capital injections lacked resolutions or capital structure updates.
- The loan agreement lacked commercial substance.
- Customer advances were unsupported by invoices or VAT declarations.
As a result, the deposits were reclassified as taxable income.
Capital Contributions: Substance Without Form
Kenyan tax law is unambiguous: capital injections are not taxable income. The Court of Appeal in Pili Management Consultants v Commissioner of Income Tax [2010] eKLR confirmed this principle.
However, Kirin was unable to tie the disputed deposits to shareholder decisions or adjustments in its capital structure. In the absence of persuasive corporate evidence, the amounts were taxed.
Lesson for Kenyan businesses: In governance, substance is not enough—form matters equally.
Loans Without Commercial Substance
Kirin cited a loan of Kshs. 31 million. However, the Tribunal found the agreement lacked the hallmarks of a genuine commercial loan. Without clear terms, repayment structures, or supporting evidence, the amount was treated as taxable income.
Advance Payments and the Double Taxation Trap
Kirin further argued that some deposits represented customer advances, later invoiced and taxed. This should, in principle, raise a double taxation concern.
Yet, the Tribunal found no invoices, no VAT returns, and no certified supporting schedules. While the principle against double taxation is well established, a strong legal argument collapses without evidence.
A Constitutional Undercurrent
The taxpayer invoked Articles 47 and 201 of the Constitution, contending that the Commissioner’s actions were arbitrary and inequitable. The Tribunal dismissed this, holding that the statutory burden of proof rested with the taxpayer. Constitutional protections could not shield weak documentation.
Conclusion
Kirin may have lost the appeal, but the lessons for CEOs, CFOs, Boards, and Senior Management are unmistakable:
- Tax risks now sit at the boardroom table. Taking shareholder funds without proper documentation risks reclassification as taxable income, eroding both shareholder value and company capital.
- Governance and compliance are inseparable. Funding, lending, and trading arrangements must withstand scrutiny—not just in substance, but also in form.
- Documentation is the silent defender. Without clear structures and paper trails, even the most reasonable explanation will fail.
Authors:
Waithira Mugo (Tax Lawyer) & Mike Ogutu (Commercial Lawyer)
📩 Contact: info@ithera.africa
Disclaimer: This article is intended for general guidance only and does not substitute professional advice. While due diligence has been exercised to ensure accuracy, Ithera Africa accepts no liability for actions or omissions arising from reliance on this content.
