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September 28, 2021

Kenya Revenue Authority issues public ruling to withdraw guidance note issued on treatment of tax losses

Executive summary

On 22 September 2021, the Kenya Revenue Authority (KRA) issued a public ruling withdrawing a guidance note that exempted certain organizations from the requirement to maintain separate accounts and separate tax computations in respect of each specified source of income.

With effect from 1 October 2021, all taxpayers will be required to prepare a separate account in respect of each specified source of income. The now withdrawn waiver had been granted by the KRA in its letter dated 7 February 1979 to the Institute of Certified Public Accountants of Kenya (ICPAK).

Detailed discussion


Prior to 1979, taxpayers could offset tax losses generated from one specified source of income against taxable profit generated from another specified source of income in the same year of income and in subsequent years of income until the tax loss is fully utilized by the organization.

Section 15 (7) of the Income Tax Act (ITA) was introduced by the Finance Act,1978. This section requires taxpayers with more than one specified source of income to compute gains or profits derived from each specified source separately. Where the computation of gains or profits results in a loss, that loss may only be deducted from gains or profits from the same specified source in the subsequent years of income. The specified sources of income as identified by the ITA include rent, employment, agricultural and business income, among others.

In its letter dated 7 February 1979, the KRA explained the legislative intent of Section 15(7) of the ITA and waived the “separate sub-accounts requirement” in the case of larger companies including financial institutions, insurance companies, oil companies, banks, large manufacturing companies and all companies listed on the Nairobi Securities Exchange. The waiver was, however, not applicable to any company whose business activities included agriculture.

Reliance on the waiver granted to larger companies has been litigated by various tax tribunals as well as the High Court in the past. In Ecobank Kenya Limited v Commissioner of Domestic Taxes [2012], the High Court found that there was a legitimate expectation on the Appellant’s part as a result of the waiver set out in the letter dated 7 February 1979.

While the legality of the explanatory note issued by the KRA may have been put into question since it amounted to legislation which is outside the mandate of the KRA, taxpayers asserted that it created a legitimate expectation.

Next Steps

The Tax Procedures Act, 2015 empowers the KRA to issue a public ruling on a particular tax matter by setting out the Commissioner’s interpretation of a tax law which is binding on the Commissioner until the ruling is withdrawn by the Commissioner.

While most taxpayers have historically prepared separate accounts for each specified source of income, reliance on this note by some taxpayers created a legal challenge which the KRA is now seeking to eliminate.

Taxpayers should therefore ensure that they maintain separate accounts for each specified source of income and only offset tax losses arising from a certain specified source of income against taxable profit from the same specified source of income.


For additional information with respect to this Alert, please contact the following:

 Ernst & Young (Kenya), Nairobi

Ernst & Young Société d’Avocats, Pan African Tax – Transfer Pricing Desk, Paris

Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London

Ernst & Young LLP (United States), Pan African Tax Desk, New York


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