The Lower Eastern Times Opening The Third Eye
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The Kenya Electricity Generating Company, KenGen, has suffered a setback after the Tax Appeals Tribunal upheld a Sh2.36 billion compensating tax assessment issued by the Kenya Revenue Authority.
The ruling stems from a long-running dispute over dividend payments made by KenGen between 2020 and 2023. The Tribunal found that the power producer failed to demonstrate that the dividends distributed to shareholders were sourced from profits that had already been subjected to tax.
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The dispute emerged following a review of KenGen’s tax records by KRA covering the period between 2019 and 2024. The tax authority initially assessed additional taxes totaling Sh2.95 billion, comprising Sh2.36 billion in compensating tax and Sh586.2 million in withholding tax.
While the withholding tax issue was resolved through an Alternative Dispute Resolution process, the compensating tax claim remained before the Tribunal.
At the centre of the case was whether the dividends paid by KenGen originated from previously taxed earnings or from profits that had not attracted tax, which would trigger compensating tax under the Income Tax Act.
KenGen argued that it was operating under significant tax losses during the period in question and therefore had no untaxed gains or profits that could attract compensating tax. The company maintained that the dividends were paid from accumulated retained earnings rather than current profits.
However, the Tribunal disagreed, stating that being in a tax loss position does not necessarily mean a company lacks gains or profits. It noted that KenGen generated substantial revenue from electricity sales, but its tax liability was significantly reduced through capital allowances and other deductions.
According to the Tribunal, the company benefited from capital allowances amounting to about Sh66.6 billion, which reduced corporation tax obligations but did not erase the existence of underlying business gains.
KRA argued that KenGen distributed approximately Sh6.92 billion in dividends during a period when it paid no corporation tax on its core electricity generation business, raising concerns about the source of the funds used for the payouts.
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The Tribunal further held that KenGen failed to provide sufficient evidence linking its retained earnings to income that had already been taxed. Although the company cited reserves ranging from Sh86.6 billion to Sh113.2 billion, it did not provide a detailed breakdown showing which portions represented taxed income.
The judges also rejected KenGen’s challenge to KRA’s method of calculating the compensating tax, ruling that the authority was justified in reconstructing the tax position after the company failed to provide adequate records tracing the source of the dividend payments.
In addition, the Tribunal dismissed KenGen’s argument that taxes paid in previous years should have reduced the compensating tax liability, finding that the company had not established a clear connection between those tax payments and the earnings used to finance the dividend distributions.
