An Analysis of Section 41 of the Income Tax Act, Cap 470, Laws of Kenya

Abstract

The purpose of this dissertation is to analyze section 41 of the Income Tax Act (ITA), Chapter 470, Laws of Kenya with a special focus on the available reliefs’ i.e., exemption, exclusion, reduction and any other methods of relief, like deduction and credit methods. It thus aims at presenting a simplified text for understanding double taxation and the reliefs used to cure instances of double taxation under the current act; even to non-tax persons. It argues that although the ITA provides for available reliefs under section 41, nevertheless instances of double taxation continue to occur and this affects taxpayers, investors and Foreign Direct Investment (FDI) in the country. To further unpack double taxation, reference must be given to growth of trade cross border and growth of Multinational Corporations (MNCs), in that, as more and more activities expanded and began operating cross-border, questions regarding the application of sovereign taxing powers of several countries on the same income developed; who had taxing rights in instances where a resident of another country (resident country) sourced income from another country (source country)? These questions led countries and international organizations to forge a way and come up with solutions to tackle double taxation. The current system of double taxation is thus based on bilateral tax treaties and Advance Pricing Agreements (APAs); mainly found in international conventions and double taxation agreements including domestic law. The study uses two traditional schools of thought: that is, Hart’s Soft Positivism and Sociological Jurisprudence as advanced by Roscoe Pound; which are all not fiscal theories but the arguments advanced in them give meaning to this study as they analyze the interactions between the law, institutions and the masses. The economic analysis of law was used to supplement the traditional theories and since it is used to analyze fiscal law it was relevant. This study is thus inevitable and

the recommendations made are based on the loopholes found in the existing section which can be geared towards having a better and comprehensive law and having a better understanding of double taxation. Further, since the area under study has not been explored in Kenya and what is available are commentaries and power presentations majorly on DTAs, this is a starting point; which are positive and a solid indicator of the situation, thus a call for further research in this area.