Kenya-Mauritius Double Tax Avoidance Treaty

Posted on March 19th, 2019

By Walter Amoko | Lena Onchwari

Introduction

Kenya, as is the case with other countries, has entered into a number of Double Tax Avoidance Treaties (DTAs) with an aim of avoiding or mitigating double taxation of persons (both legal and natural) residing in the contracting states but more importantly as a way of encouraging Foreign Direct Investments.

Kenya signed a DTA with Mauritius (a country that has a vast treaty network and favorable tax framework) which was subsequently gazetted by the Cabinet Secretary of Finance via Legal Notice Number 59 of 2014 issued under the Income Tax Act. The Tax Justice Network Africa challenged both the constitutionality of the DTA and Legal Notice before the High Court on multiple grounds including opacity of the process, the need for public participation in the exercise, that it was not for the benefit of Kenya and lack of Parliamentary scrutiny.

The High Court has now given its Judgment. The constitutional challenge to the DTA failed. The High Court found that the DTA had some form of ratification as required since both states agreed to be bound by it and that the process of its formulation was open and transparent. Further the court found there was no basis for faulting want of public participation. However, the Legal Notice that was intended to domesticate it was void because it was not tabled before Parliament within the time required by the Statutory Instruments Act.

Impact

The High court’s decision did not invalidate the Double Tax Avoidance Treaty by declaring it unconstitutional nor did it affect the propriety of anything done under it prior to the invalidation of the Legal Notice. It merely declared the Legal Notice as void for lack of parliamentary scrutiny. The impact of this is that though the DTA is still valid, it does not have legal effect in Kenya.

It is open to the Cabinet Secretary to issue a new Legal Notice in respect of this (and any other similar Legal Notices on any DTAs entered after 2013) and ensure full compliance with the Statutory Instruments Act including presenting it ; with all the required information, on time to Parliament.


Should you require further information on the DTA, please contact Walter Amoko (Partner) or Lena Onchwari (Partner):

The Finance Act, 2018

Posted on October 5th, 2018

By Walter Amoko | Lena Onchwari

Amidst controversy and recriminations across board, the Finance Bill, 2018 (the Bill), was eventually passed on a special sitting of the National Assembly on 20th September, 2018 and the President assented to it on the 21st September, 2018.

While the political branches were considering the Bill, a Constitutional Petition challenging its propriety on multiple grounds including whether or not it had been presented to Parliament in time, as well as the constitutionality of bringing some of its provisions into force before its enactment, was being litigated before the Courts. A day before the Finance Act, 2018 (the Finance Act) was passed, the High Court delivered its decision, upholding two of the grounds the redoubtable Mr. Omtatah had pressed. One was the headline grabbing invalidation of the Provisional Collection of Taxes Act which allowed the Cabinet Secretary (CS) Finance, to enforce provisions of the Finance Act before it was enacted. Lady Justice Okwany held that under Article 94 of the Constitution, only Parliament could pass legislation, and it had to be done within the stipulated process which included such fundamental issues such as effective public participation in law-making. By allowing prior enforcement of provisions of a bill by way of orders issued by a Minister, however temporarily, not only does the Executive unlawfully usurp the exclusive non-delegable powers of Parliament but also undermined the salutary inclusive law-making process.

Click here to read an in depth summary of the key changes introduced by the Finance Act.

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Walking a Tight Rope: Thin Line Between Tax Planning and Tax Abuse

Posted on September 14th, 2018

By Walter Amoko | Lena Onchwari

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Globalization has had its bright side. Liberalization of domestic markets as well as the feeble returns in most Western markets has resulted in dramatic growth in foreign direct investment by multinational companies especially across the globe with developing countries receiving a substantial share. This has been of great benefit to developing countries spurring economic growth. Their tax authorities should also be smiling as growth results in more tax revenue. However, this is not guaranteed as tax efficient multi-nationals are astute at avoiding taxes. Consequently, developing countries have seen the need to drastically amend and enact tax laws that will give them a wider tax base, curb tax evasion and mitigate against tax avoidance.

It is noteworthy that despite the statutory obligation to pay taxes, a taxpayer is allowed under law to so arrange its affairs to mitigate its tax liability. This is encapsulated in the statement of Lord Clyde, in the case of Ayrshire Pullman Motor Services & Ritchie v Inland Revenue Commissioners where he stated that; “….No man…. is under the smallest obligation, moral or other, so to arrange his legal relations to his business or to his property as to enable the Revenue [authority] to put the largest possible shovel in to his stores. The Revenue [authority] is not slow – and quite rightly – to take every advantage which is open to it under the taxing  statutes for  depleting the taxpayer’s pocket. And the taxpayer is, in like manner, entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Revenue [authority]….” This passage recognizes the inevitable game of cat and mouse where the tax authorities seek to legally maximize tax collection while the tax payer seeks to legally reduce his/her tax obligations, with the Courts determining the legality of the transaction or structure when confronted with such matters.

The increased sophistication of financial arrangements to minimize tax obligations and the advancement of tax law to address this has occasioned numerous court decisions on tax planning. The Courts have become more sagacious and have moved away from solely looking at the legality of the transactions on the face of it as they have deemed that approach insufficient, the Courts now also examine the underlying commercial rationale of a scheme to determine whether it amounts to an abuse of law.

In the landmark case of Halifax plc v C & E Commrs (and related appeals), the Court  stated  that ‘…the   application of Community legislation cannot be extended to cover abusive  practices by  economic  operators,  that  is  to say  transactions  carried  out  not   in the context of normal commercial operations, but solely for the purpose of wrongfully obtaining advantages provided  for  by   Community   law. That principle of prohibiting abusive practices also applies to the sphere of VAT….’ The judgment of the court in this case could not be more discerning. The Court opined that  despite  the  legality of a tax planning scheme, the tax payer cannot employ the same without an accompanying commercial purpose as that would be tantamount to an abusive practice. It is therefore pertinent  for the tax payer when formulating a tax planning structure, to take cognizance of the developments in both statutory and juridical law to ensure that the structure will not be deemed to be an abuse of law.

That said, tax planning can be approached from three different angles namely legal, financial and operational.

Legal Structure

A company’s legal structure relates to its ownership or share holding. This is especially important when it comes to withholding taxes on dividends  and most importantly in the  eventuality  of an exit from a country. In the Chinese Chongqing case (State Tax Bureau, 27 November 2008) a Singapore parent company sold to a Chinese buyer its Singapore subsidiary, which was a SPV(special purpose vehicle) that held a subsidiary in China. The Chongqing tax bureau disregarded the Singapore subsidiary and treated the  transaction as a sale by the Singapore parent of the Chinese subsidiary. Consequently, the Singapore parent  company  had to pay income tax in China at a 10% rate on the capital gain from the sale, as if it had sold the Chinese subsidiary directly. The tax bureau was of the view that the Singapore subsidiary had a very small amount of capital and also did not carry on any business activity other than owning the shares of the China subsidiary. Hence, the Singapore subsidiary lacked economic substance.

Financing Structure

Companies finance their operations in two major ways,  intercompany  loans or loans from third party financial institutions. However the  deductibility of the relevant interest expense is governed by certain specific and general anti-avoidance rules.

As already stated above, the Courts expect financing arrangements between companies to be driven by an economic goal. This was reflected in the recent judgment of the Supreme Court of Netherlands dated 5th June 2015  in a case that involved a listed parent company of a South African media group. The parent company issued shares of which approximately 60% of the proceeds were  directly  wired  to its Dutch third-tier subsidiary. From a legal perspective, the proceeds were contributed as capital to a second-tier Mauritian company, which in turn granted an interest free loan to its 100% owned Mauritian subsidiary, the group’s internal financing (low-substance) company. This company lent the proceeds to the Dutch holding company through an interest bearing loan. The Dutch holding company used the proceeds to acquire other companies and claimed interest deduction on the Mauritian Debt. The Supreme Court denied the claim for interest deduction and consequently referred the matter back to a lower Court to determine whether commercial reasons had duly motivated the funding provided by the holding company.

Operational Structure

It is common practice for companies in a group to offer other sister companies services at a cost. These services include management and professional services, marketing services, intellectual property leasing   among   others.   Payments for such services will be allowable deductions in one company  and  may be subject to  taxation  in  another.  It is however prudent to note that the transfer pricing guidelines will apply in such transactions.

The  spaghetti  plate  of  divergent views on  tax  planning  is  not  only  of a legal nature, but also of a moral, economic and political nature. As already discussed above, tax planning or avoidance is not illegal but it may be deemed by the Courts and the revenue authorities to be an abuse of law, in which case the tax payer may be denied the tax advantage they sought to enjoy.

There are proponents, especially the civil society, who consider tax planning to be outright immoral. Such a stance may adversely affect a company’s reputation, especially in cases where there is public outcry. However, such reputational risks can be allayed by putting in place certain measures which among others include intense lobbying and engagement with the government and tax authorities.

Flowing from the above, it is noteworthy that the Courts look at a number of factors in  order  to  determine  whether a company’s tax planning activities amount to an abuse of law. It was the trend that Courts mainly considered whether the structure was highly motivated by a commercial or economic benefit to the company. However a recent judgment of the UK Supreme Court in the case of HMRC V Pedragon plc & 5 others (2015) UKSC added a new twist to this. In the case the court held that it is not sufficient that a transaction has a commercial benefit, this will be open to challenge if the  accrual  of  a tax advantage is established to be the principal aim of the transaction.

In essence, while determining whether a tax planning structure amounts to an abuse of law or not, the Court will now consider two key factors; whether a company wished to obtain a tax advantage and whether the tax planning structure was driven by a commercial benefit. This decision of the Court is mirrored in the recent development of tax legislation in developing countries. For instance the Tax Procedures Bill in Kenya intends to look beyond the legality of the structure or transaction; it seeks to determine the commercial purpose of the same. It essentially lays the burden upon the tax payer to demonstrate the commercial purpose of certain transactions, failure of which the tax payer may be subjected to paying double the tax avoided as a penalty.

Therefore a tax payer should ensure that they structure their affairs in such a way that on one hand they are able to achieve their commercial or economic goals and on the other hand they get to optimally benefit from tax advantages brought about by the structure, without abusing the law.

On Matters Energy: A Review of Some Key Developments in Kenya’s Energy Sector (Q2-2016)

Posted on September 12th, 2018

By Walter Amoko | Cindy Oraro

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As is now well-known, Kenya has signed on to the multi-lateral framework for the sharing of financial information that enables tax authorities detect those seeking to use international borders to avoid paying tax. The Multilateral Convention on Mutual Administrative Assistance in Tax Matters established the Common Reporting Standards (CRS) that were approved by the Organisation for Economic Co-operation and Development (OECD) in July 2014, and which have made it possible for tax authorities of participating countries to access financial information of their tax residents.

While it has been a great international success story, CRS’s full potential is still being undermined by tax-payers who, with assistance of their advisers, are still able to hide their assets and income under various cross-border devices, taking advantage of gaps within CRS to avoid detection. For example, CRS is limited to financial institutions that are located in participating jurisdictions. It is therefore easy to avoid its ambit by restricting one’s dealings to financial institutions located in nonparticipating countries which are not required to report any financial information in regards to a reportable person – a boon to aggressive tax planners hatching tax avoidance schemes.

The Model Rules

In line with their continuing programme of improving mutual disclosure requirements which are uniform but sensitive to local needs, on 9th March 2018, the OECD published the Model Mandatory Disclosure Rules for Common Reporting Standard Avoidance Arrangements and Opaque Offshore Structures (the Model Rules) which specifically target all categories (compendiously referred to as intermediaries) tax advisers. The OECD recognises detecting and deterring offshore tax avoidance schemes “is key both for the integrity of the CRS and for making sure that taxpayers that can afford to pay advisors and to put in place complex offshore structures do not get a free ride.”

As with other rules by the OECD on collection and access of relevant financial information for tax purposes, the Model Rules were developed so as to give a shared model for countries on the contents and structure of their own local regulatory framework in respect to professional service providers such as accountants, tax and financial advisors, banks, lawyers “to inform tax authorities of any schemes they put in place for their clients to avoid reporting under the OECD/G20 Common Reporting Standard (CRS) or prevent the identification of the beneficial owners of entities or trusts.”

The Model Rules are targeted at CRS Avoidance Arrangements or Opaque Offshore Structures. The former is ‘...any arrangement where it is reasonable to conclude that it has been designed to circumvent, or has been marketed as or has the effect of circumventing CRS legislation...” while the latter “…a passive offshore vehicle that is held through an opaque structure” and passive vehicle defined as “legal person or legal arrangement that does not carry on a substantive economic activity supported by adequate staff, equipment, assets and premises in the jurisdiction where it is established or is tax resident.” Whilst not exactly crystal clear from the various examples provided, it is possible to get a sense of what activities and/or structures the Model Rules have in mind. CRS avoidance relates to efforts to exploit gaps within the relevant legislative or administrative framework to avoid disclosure of the information required under CRS.

An opaque structure may also be described as the application of the well known commercial purpose test of an entity to CRS. The idea here is to isolate genuine financial arrangements serving an identifiable commercial purpose from those designed for concealing income and assets and thus avoid disclosure under the CRS regime.

Inquiry is directed at whether the structure has the effect of not allowing the accurate identification of the beneficial owners and specifically identifies well recognised tax planning techniques that can be used to achieve this outcome, such as the use of nominee shareholders, indirect control arrangements or arrangements that provide a person with access to assets held by, or income derived from, the offshore vehicle without being identified as the beneficial owner.

Intermediary’s Role

The Model Rules define “intermediaries” as those persons responsible for the design or marketing of CRS Avoidance Arrangements and Opaque Offshore Structures “promoters” as well as those persons that provide assistance or advice with respect to the design, marketing, implementation or organisation of that Arrangement or Structure “service providers”.

The knowledge and actions of an intermediary include those of their employees acting in the course of their employment, as well as contractors working for an employer, and the disclosure obligation and the penalties for a failure to disclose are imposed on that employer.

To be subject to the obligations imposed by the Model Rules, intermediaries must have a connection – “sufficient nexus” – with the reporting jurisdiction which extends to intermediaries operating through a branch located in that jurisdiction as well as one who is resident in, managed or controlled, incorporated or established under the laws of that jurisdiction.

An intermediary is required to file disclosure in respect of a CRS Avoidance Arrangements or Opaque Offshore Structures at the time the Arrangement is first made available for implementation, or whenever an Intermediary provides services in respect of the Arrangement or Structure. This ensures that the tax administration is provided with early warning about potential compliance risks or the need for policy changes as well as ensuring that it has current information on the actual users of the scheme at the time it is implemented.

Disclosure Obligations

There may be certain instances where the user of a CRS Avoidance Arrangement or Opaque Offshore Structure may have disclosure obligations under the Model Rules. More specifically, in instances where the intermediary is not subject to disclosure obligations as well as those cases where the intermediary is unable to comply with its disclosure obligations under the Model Rules either because it has no nexus with that jurisdiction or because it is relying on an exemption from disclosure such as professional secrecy.

The information required to be disclosed includes the details of the Arrangements or Structures, as well as the clients and actual users of those Arrangements or Structures, and any other intermediaries involved in the supply of the Arrangements or Structures. The requirements under the Model Rules are designed to capture the information that is likely to be most relevant from a risk-assessment perspective and to make it relatively straight forward for a tax administration to determine the jurisdictions with which such information should be exchanged.

The Model Rules do not require an attorney, solicitor or other recognised legal representative to disclose any information that is protected by legal professional privilege or equivalent professional secrecy obligations but only in respect to the scope of such protected information.

All relevant non-privileged Arrangements or Structures that are within the legal representative’s knowledge, possession or control should still be provided. While understandable and correct for legal professional privilege is now accepted as a component of the fundamental right to privacy, this might limit the Model Rules’ efficacy as more and more reliance is placed on practitioners in respect to whom such privilege attaches i.e. lawyers. Efforts by accountants to have legal professional privilege extended to them while giving legal advice, have thus far failed.

Striking a Balance

The information requirements of the model rules seek to strike a balance between the compliance burden on intermediaries to a minimum and still capturing the information that is likely to be most relevant. The requirement to separately identify the jurisdictions where the scheme has been made available for implementation and to specify the tax details of all the intermediaries, clients and reportable taxpayers in connection with that arrangement is intended to make it relatively straightforward for a tax administration to determine the jurisdictions for whom the disclosed information will be relevant for information exchange purposes.

Enforcement

The rules have put in place punitive measures for non-disclosure in the form of penalties. However the same are not cast in stone but are to be determined by each jurisdiction depending on its unique circumstances. However it is expressly stipulated that such penalties are to be set at a level that encourages compliance and maximises their deterrent effect.

Conclusion

The Model Rules are a continuation of concerted international efforts to tighten the noose around tax cheats or dodgers seeking to exploit international borders. As Arthur Vanderbilt remarked “taxes are the lifeblood of government and no taxpayer should be permitted to escape the payment of his just share of the burden of contributing thereto.” While the problem of crossborder tax avoidance affects most countries, the less developed countries are, by a significant factor, the most affected and disproportionately so. It will therefore come as no surprise if Kenya adopts the Model Rules as part of its CRS regime.

Even as the Government moves to implement CRS, a national debate on our entire tax system may well be warranted. It is a recurring question on which no answers are available and, as far as we can tell, has never fully engaged us as citizens despite the constant complaint that we are being overtaxed. It may well be possible that our tax system is inhibiting economic activity and thus, ironically, undermining rather than boosting revenue collection.

 

“May as Well”: Additional Renewable Sector Updates for May 2016

Posted on September 12th, 2018

By Walter Amoko | Cindy Oraro

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May 2016 saw flurry of activity in Kenya’s renewable energy sector. We have set out below some of the industry’s key highlights:

• The Kenyan government signed a Memorandum of Understanding (MOU) with the government of the UK to bolster Kenya’s renewable energy sector. A press release disseminated from the British High Commission in Nairobi and published on 17th May 2016, stated that UK Export Finance has, as an integral part of the MOU, “affirmed its interest in considering requests for export financing or insurance for eligible renewable energy projects in Kenya, drawing on a risk appetite of up to at least GBP 250 million (USD 323.7 million)”. No information has been released as yet on what constitutes an eligible project.

• The African Development Bank indicated that the construction of the first phase of the Menengai Geothermal Power Plant will be complete by July 2016. The first phase of the project is expected to produce up to 400 MW. The overall project has a potential of producing 1600 MW once fully commissioned.

• The Cabinet Secretary for Energy, Charles Keter relayed the government’s enthusiasm for the participation of private investors in the geothermal space at a geothermal consultative forum held in Nairobi on 22nd May 2016. He emphasised the importance of fast-tracking the Energy Bill 2015, currently before the Senate. The proposed law includes enabling regulatory structures for the participation of independent power producers.

Summary

Kenya’s vast renewable energy resources remain largely untapped. One of the principal reasons for this is the financing gap in projects conceived by the government. To remedy this, the government has sought to both collaborate with friendly countries, such as the UK and the overhaul of the country’s energy regulatory structure to make it more attractive to investors. The Energy Bill will end Kenya Power and Lighting Company’s electricity distribution monopoly and create a leeway for independent power producers to participate in the sector.

References

Menengai geothermal power plant to be unveiled in July this year, The Standard

Solar firm seeks nod to challenge Kenya Power monopoly, Business Daily

State keen on ending KPLC’s monopoly, The Star

State moves to woo geothermal investors, Mediamax.

UK & Kenya Sign MoU For Renewable Energy Cooperation, Planetsave

UK and Kenya sign MoU for renewable energy cooperation, GOV.UK

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Redundancy Process: Getting it Right

Posted on September 12th, 2018

By Walter Amoko | Georgina Ogalo-Omondi

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Running a business is no easy task, running it profitably is even more difficult. Since the advent of liberalization in 2003, redundancy has become progressively more common in Kenya. Rapidly shifting markets driven mainly but not exclusively by technological innovation; uncertain economic times including cyclical downturns which in this age of globalization has world-wide effects, like the 2007-2008 economic melt-down; increased demand by shareholders for better  performance etc, make existing business models superfluous pretty quickly. An inevitable consequence of adjusting the business model every so often is a reduction on head-count as positions or on occasion departments that were once crucial require elimination. However, this must be done within the framework of existing laws.

Redundancy is defined under Section 2 of the Employment Act, 2007 as the loss of employment, occupation, job or career by involuntary means through no fault of an employee. It involves termination of employment at the initiative of the employer, where the services of an employee are superfluous. Redundancy may arise under various circumstances including but not limited to the practices commonly known as abolition of office, job or occupation and loss of employment. Examples of these circumstances are:

  1. the employer has ceased, or intends to cease continuing business;
  2. the requirement for employees to perform work of a specific type or to conduct it at the location in which they are employed has ceased or diminished; or
  3. re-organization of the workforce resulting in is less work and changes in conditions that result in the new job being quite different from the old

If the intended action of termination of employment arises from the above definition or examples of circumstances leading thereto, Section 40(1) of the Employment Act provides for the substantive and procedural legal requirements to be met by the employer to effect a termination of employment on account of redundancy as follows:-

“An employer shall not terminate a contract of service on account of redundancy unless the employer complies with the following  conditions:-

  1. where the employee is a member of a trade union, the employer notifies the union to which the employee is a member and the labour officer in charge of the area where the employee is employed of the reasons for, and the extent of, the intended redundancy not less than a month prior to the date of the intended date of termination on account of redundancy;
  2. where an employee is not a member of a trade union, the employer notifies the employee personally in writing and the labour officer;
  3. the employer has, in the selection of employees to be declared redundant had due regard to seniority in time and to the skill, ability and reliability of each employee of the particular class of employees affected by the redundancy;
  4. where there is in existence a collective agreement between an employer and a trade union setting out terminal benefits payable upon redundancy; the employer has not placed the employee at a disadvantage for being or not being a member of the trade union;
  5. the employer has where leave is due to an employee who is declared redundant, paid off the leave in cash;
  6. the employer has paid an employee declared redundant not less than one month’s notice or one month’s wages in lieu of notice; and
  7. the employer has paid to an employee declared redundant severance pay at the rate of not less than fifteen days pay for each completed year of service.”

In summary Section 40 (1) of the Employment Act prohibits an employer from terminating the services of an employee on account of redundancy unless the employee’s union is notified or in the case where the employee is not a member of a union then the employee is notified personally in writing and the local labour officer is also informed in both cases. The employer is also expected to consider seniority, skill, ability and reliability of each employee; pay off pending leave in cash, pay one months’ wages in lieu of notice and severance pay. For a termination on account of redundancy to be fair and lawful, an  employer must  adhere to  the requirements set out in Section 40(1) of the Employment Act, 2007, unless the parties have entered into an agreement to the contrary with terms greater than the minimum statutory requirements which may be through a contract of employment or Collective Bargaining Agreement (CBA).

Over the past couple of years there has been an increase in claims filed in the Employment and Labour Relations Court against termination on account of redundancy. One of the most notable of these claims was Industrial Cause No. 1661 of 2013 Aviation Allied Workers Union Kenya & 3 others v Kenya Airways Limited, wherein over 400 employees of the airline were rendered redundant following a restructuring exercise. The Union filed a claim seeking a declaration of unfair termination on account of redundancy claiming proper procedure was not followed in accordance with Section 40 of the Employment Act,  an  order  for  reinstatement  of the affected employees and in the alternative payment for pecuniary loss and maximum compensation of twelve (12) months for loss of employment. The trial court found in favour of the Union on grounds that the Respondent did not have valid reasons for the terminations as all the airline was facing was a cyclical crisis which did not affect its bottom line. The trial Court also found that procedure employed by the airline was flawed as there was no meaningful consultation and the process for selection of the affected employees was flawed reeking of pre-selection and bad faith. It ordered immediate reinstatement of employees and payment of salaries for the period that the employees were out of employment.

The airline which was represented by the firm of Oraro & Company Advocates both before the  Employment  and Labour Relations Court and the Court of Appeal successfully appealed – Civil Appeal No. 46 of 2013 Kenya Airways v Aviation Allied Workers Union Kenya & 3 others. There were three  separate judgments  basically upholding  the position of Kenya Airways in all matters except one in which two judges found the process fell short, that being the selection criteria. Thus while the judgment in the Industrial court was in most reversed, by a majority of two to one, the employees were awarded damages for a limited period rather than reinstatement. From this decision for any termination of employment under redundancy to be lawful, it must be both substantially justified and procedurally fair:

  1. To establish substantive justification the appellate court looked at the definition of  redundancy  under  Section  2 of  the Employment  The  employer  must prove  that the loss of employment in redundancy cases has to be by involuntary means and at the initiative of the employer, brought about by operational  requirements  of  the employer e.g. reduction of head count so as to respond to adverse market condition or improve efficiency. While the  Court should be eternally vigilant to ensure that the reasons given are not pre-textual, it is not for the Court to substitute its judgment for that of the employer. The Court found that Industrial Court had overstepped its limited role of review when it essentially trashed the reasons given by Kenya Airways and held that the Company facing a cyclical downturn which could address by being run more efficiently rather than laying off its staff.
  2. Procedural fairness is comprised two aspects:
    1. Firstly, the employer must strictly comply with the provisions of Section 40 (1) of the Employment Act for termination on account of redundancy to be lawful, which consist of issuance of notices in the prescribed manner and statutory period as detailed above, (unless the CBA or contract of employment stipulates a longer period). The purpose of the provision requiring notice to be given is to elicit consultation between the Kenya is a state party to the International Labour Organization (ILO) and is bound by the ILO conventions. Article 13 of Recommendation No. 166 of the ILO Convention No.158- Termination of Employment Convention, 1982 which requires consultation between the employers on the one hand and the employees or their representatives on the other before termination of employment under redundancy. The requirement of consultation is implicit in the principle of fair play under Section 40 (1) of the Employment Act. The purpose of the notice under Section 40 (1) (a) and (b) of the Employment Act is to give the parties an opportunity to consider “measures to be taken to avert or to minimize the terminations and measures to mitigate the adverse effects of any terminations on the workers concerned such as finding alternative employment”. Such consultations must be genuine rather than pre-textual- going through the motions merely to comply with the law
    2. Selection Criteria- The employer must develop and apply an objective process for identifying the employees who will be affected by the redundancy. This must, of necessity be related to the reasons of the redundancy. Selection must be not the basis of such invidious factors such as participation in protected union activities or race, gender etc

We are yet to see the effect of the decision of the Court of Appeal being adopted by the Employment and Labour Relations Court in similar matters. While this is based on casual empiricism, there seems to be some resistance to the lessons of the case. In the meantime, employers contemplating redundancy are well advised to ensure that every substantive and procedure ‘Ts’ and ‘Is’ are crossed and dotted.

Building a Strong “National” Foundation: Local Content in Kenya’s Construction Industry

Posted on September 12th, 2018

By Walter Amoko | Cindy Oraro

Co-authored by Loise Machira.

Background to the legislation

The construction industry in Kenya is regulated by the National Construction Authority Act (No. 14 of 2011) (the Act). Though the Act does not expressly make reference to the term “local content” it does have provisions that provide for both local and foreign contractors.

Categories of registration of contractors

National Construction Authority Regulations of 2011 (the Construction Regulations) provides for different categories of registration. Registration of contractors under NCA-1 category is open to both local and foreign contractors. On the other hand, any registrations that fall between NCA-2 to NCA-8 are restricted to local contractors only. This provision has the effect of restricting the type of work that a foreign contractor may undertake.

Registration of foreign contractors

The Construction Regulations define a “foreign contractor” as:

  • a firm incorporated outside Kenya; or
  • a firm incorporated in Kenya in which 51% of the shares are held by a non-Kenyan.

A foreign firm is required to make an application to the National Construction Authority before undertaking work under category NCA-1. The application must be accompanied by an undertaking in writing that the foreign contractor shall:

  • subcontract or enter into a joint venture with a local person or firm for not less than 30% of the value of the contract work for which temporary registration is sought; and
  • transfer technical skills not available locally to a local person or firm in such manner as the National Construction Authority may determine from time to time;

The National Construction Authority may register such joint ventures that a foreign contractor enters into with a local firm or person.  The Construction Regulations further require that the employees of such a joint venture be competitively recruited from the local labour market. Recruitment or employment of foreign technical or skilled workers on such contract shall only be done with the approval of the National Construction Authority where such skills are not available locally. It is important to note though that contractors may be exempted from this provision by the National Construction Authority.

Conclusion

Although the Act does not make express reference to “local content”, restrictions contained in the Act regarding local and foreign contractors could be argued to be an adaptation of local content policies because they give local contractors an opportunity to maximize on specific projects.

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Arbitration: A Time to Rethink?

Posted on September 12th, 2018

By Walter Amoko

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“See you in Court” is a common refrain of TV court dramas,  which  obscures an open secret. This formal method of dispute resolution, which is of ancient vintage and is adversarial in common law countries, does not enjoy universal acclaim. The process is often too complex, formal, expensive and fraught with antagonism and sometimes, negative publicity. More often than not, due to its winner-takes-all approach, parties who ‘see you in court’ come out of it so  bruised,  that  to  expect  them to be friendly  thereafter  is  a  product of fertile imagination, without any compensating social benefit.

The disadvantages of the Court processes have exacerbated over time and led to the clamour for a less formal, friendlier and conciliatory alternative process, whose outcome is still binding on disputants. Arbitration was seen as a God-sent alternative which accommodates these needs. Arbitration in Kenya is largely contractual and is governed by, among others, the Arbitration Act of 1995 (which is based on the UNICITRAL Model Law on Arbitration). This act was enacted in part, to reduce and limit Court interference with the arbitral process and enable it play a more supportive role.

Parties entering into any written contract have the liberty to include an arbitration clause in their contracts. Such a clause is helpful, as parties are then able to submit any dispute contemplated under the said clause for arbitration, instead of going through the court process.

There are a few pre-requisites that a party must consider before referring a dispute to arbitration. Key among these considerations are: the composition  of the arbitral tribunal, the powers of the arbitrator(s), the seat  of  the  arbitration, as well as the applicable law. All these considerations are best handled by a well- drafted and comprehensive arbitration clause. However, no matter how well drafted such a clause may be, a recalcitrant counter party may stymie the process, hence the continued role of the Court.

Once a dispute has been referred to arbitration and the preliminary issues sorted out, the process of  resolving the dispute commences and is finally concluded when the tribunal  delivers its award. Such award is binding and enforceable, just like any other decree of the Court.

It is often the case that a party for one reason or another, may be dissatisfied with an award and seek to challenge it. Consistent with the philosophy of party  autonomy  and   encouragement of arbitration, the grounds for such challenge are limited. These grounds include: incapacitation of a party  at the time of entering into an arbitration agreement; invalidity of an arbitration agreement; where an award goes beyond the scope of the arbitral reference; improper composition of the tribunal; where an award is tainted by fraud, bribery or undue influence; where an award is in conflict with public policy; among other grounds.

It has always been the case that where a party is aggrieved with the finding of the High Court, especially where such finding sets aside or varies the award delivered in its favour through arbitration, it has a limited avenue through which to appeal to the Court of Appeal. Though there have been conflicting decisions as to whether or not such decisions are appealable.

In a recent decision, a specially constituted five-judge panel of the Court of Appeal resolved  this  conflict by snuffing out that avenue. In Nyutu Agrovet Limited vs Airtel Networks Limited, Civil Appeal No. 61 of 2012, the Court of Appeal emphatically stated that no appeal lies to it from the High Court, where a party is appealing from a decision setting aside an arbitral award, or a decision affirming the award. As a decision of an intermediate appellate court, this decision has far reaching ramifications on  the  conduct of arbitration in Kenya. For one, it emphasises the finality with which arbitral awards are viewed. The decision effectively bars a party from appealing against a  High  Court  decision  setting aside or confirming an arbitral award.

The obvious danger of the foregoing is that a party has limited recourse against decisions of arbitral tribunals to the High Court and no recourse at all from the decision of the High Court, even in instances where these institutions have clearly misdirected themselves in law, or fact, or both. Once the High Court makes a determination, the matter is presumed to have been concluded.

The resultant effect of this is that parties now need to make a careful judgment and be guided by two fundamental questions, namely: ‘should we include an arbitration clause in our contracts or refer disputes to arbitration in the first place?’ and secondly, ‘are we ready to bear the brunt of the finality principle even where a tribunal and/or the High Court misdirects itself?’.

The above questions are difficult to answer, bearing in mind the policy considerations behind arbitration. However, parties certainly need to be more careful in drafting arbitration clauses. One factor  that  parties  need to seriously consider is the composition and size of the arbitral tribunal. Having a tribunal comprising more than one arbitrator, though costly, is a good suggestion, though the reality is that there is little assurance for a risk-averse party.

In the meantime, the effect of all this is that though arbitration now has a Constitutional anchor and Courts are empowered to compel arbitration (as well as mediation). Additionally, as arbitral awards are now increasingly impervious to challenge and in the absence of a credible process for error- correction, the Court process, warts- and-all, has seemingly become more attractive. The big question therefore is: has the time come to rethink whether we really need arbitration in Kenya? The jury is still out.

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On Matters, Technology: Some Recent Regulatory Updates

Posted on August 13th, 2018

By Walter Amoko

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In common Kenyan speak, the word “digital” is used humorously to mean a state of being modern and technologically apt.The phrase is further testament to the current pervasiveness of ICT technologies in Kenya; Kenyans have surprised many and arguably, themselves too, in their rapid uptake of technology, from the country’s increased mobile phone penetration rates to the much-hailed success of mobile money transfer services and the Kenyan public’s love for social media, the country has been on the spotlight as an ICT hub. It therefore comes as no surprise that the Government is trying to ensure that the regulatory environment in the sector also keeps in step with the rapid changes in the sector, which now has many significant global tech players such as Google, Microsoft and IBM. Just last week alone,Kenya has made significant steps to realizing this. First, the ICT Cabinet Secretary Joe Mucheru announced plans to develop regulations for global technology companies operating in the country. The formulation of these guidelines will start this week and stakeholders will be invited to contribute towards proper governance measures that don’t discourage foreign investment in the sector. On a related note, last week the country’s communications regulator – the Communications Authority of Kenya announced the launch of a new KES 900 million system aimed at reducing the time it takes to process radio spectrum licences and resolving radio interference complaints.

Sources:
The Star Newspaper
The Standard Newspaper

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Kenya’s Government-Led Banking Shake-Up: The Banking (Amendment) Act, 2016

Posted on August 13th, 2018

By Walter Amoko

 

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Apparently defying expectations of the experts (i.e. the banking industry, economists, the Central Bank of Kenya (CBK)  and the Treasury) all of whom poured scorn on the proposed intervention while acknowledging there was a problem that needed to be addressed, the President not only assented to the Banking (Amendment) Act, 2016 (the Act) but also assured the public of the Government’s commitment  saying,  “ We will implement the new law, noting the difficulties that it would present, which include credit becoming unavailable to some consumers and the possible emergence of unregulated informal and exploitative lending mechanisms. We will closely monitor these difficulties, particularly as they relate to the most vulnerable segments of our population. Whilst doing so, my Government will also accelerate other reform measures necessary to reduce the cost of credit and thereby create the opportunities that will move our economy to greater prosperity.”

While debate will continue to rage on over the propriety of the interest rate caps introduced by this legislation and the further identified reforms promised by the President, of immediate interest is what compliance with the law entails - what exactly would fulfilling the legislation’s object of regulating interest rates by capping interest charged on loans by banks and financial institutions and fixing the minimum rate to be paid on deposits require?

A recap of the legislation:

  1. A section has been introduced that requires prior disclosure to a borrower of all charges and terms relating to the loan - codifying what has now become standard practice.
  2. On the pain of criminal sanction, there is now a ceiling interest rate on loans and a floor on interest payable on deposits, both relative to CBK’s base rate:
    a) The maximum rate on interest on a “credit facility” (a term not defined) should not exceed 4% of that base rate and b) The minimum rate of interest on deposits should not go below 70%.

Commencement

Rather unusually the Act is silent as to when it is to come into force. This is not a problem though, as by dint of Article 116(1) and 116(2) of the Constitution of Kenya, the Act shall be published in Gazette as an Act of Parliament within seven (7) days of receiving Presidential assent and will thereafter come into force within fourteen (14) days of its publication unless the Act stipulates a different date or time on which it comes into force.

Scope of the Act

As previously noted above, the term “credit facility” is not defined. However, the credit facilities to which the amendments apply are those provided by banks or financial institutions. Banks and financial institutions as defined under the Banking Act (Cap. 488) are restricted to institutions which carry out banking or financial services and are licensed by the CBK under the Banking Act. It follows that those institutions which are licensed and/or operate under different statutory regimes such as say microfinance institutions - see the Microfinance Act (Cap. 493D), will not be caught by the Act.

If, however the institution is a bank or a financial institution, then all its lending will come within the ambit of the amendment e.g. credit cards, hire purchase etc.

Retrospectivity

One of the more puzzling aspects of the legislation is whether or not it potentially has any retrospective effect i.e. does it affect arrangements or agreements reached prior to its enactment? It seems plain that the newly introduced Section 31A, requiring prior disclosure of all charges and terms of a loan relates to the future.

Perhaps not so clear are the interest rate cap provisions - Section 33B. Sub-section 33B(1) - which cut the swathe rather widely and may potentially have a  retrospective effect in that banks and financial institutions are required when the Act comes into operation to set their interest rates in accordance with these sections, but this might be consistent with subsequent sections. Sub-section 33B(2) - states that, “a person shall not enter into an agreement or arrangement to borrow or lend directly or indirectly at an interest rate in excess of that prescribed by law,” while Sub-section 33B(3) imposes criminal penalties on banks or financial institutions which violate Sub-section 33B(2).

The canon against non-retroactive laws is a fundamental aspect of the Rule of Law, giving effect to the principle that liability or culpability should only be imposed on the basis of public laws to which subjects had prior notice. In addition, there is an express prohibition against retroactive laws in Article 50(2)(n) of the Constitution of Kenya, thus a retrospective reading of Sections 33(B)(2) & (3) would render them unconstitutional.

The Supreme Court has also held in the civil context, that a retroactive law is not unconstitutional unless it, " (i)    is in the nature of a bill of attainder; (ii)  impairs the obligation under contracts; (iii)   divests vested rights; or (iv)    is constitutionally forbidden. It seems, that any reading of Section 33(B)(1) which gives it retroactive effect would fall afoul of the second and third of these rules."

Also, it is a tenet of constitutional interpretation to avoid reading a statute in a manner that would give rise to constitutional infirmity. Thus, Section 33B should be read as non-retrospective.

Subsidiary Legislation

It has been suggested that the new provisions cannot come into force until subsidiary legislation is promulgated by the CBK giving effect to them; there is no legal basis for this suggestion. While the Cabinet Secretary for Finance is indeed empowered to make regulation, there is nothing in the Act which requires such regulation for it to be operationalised.

It is still too early to make a call on the effect of the Act going forward. As we noted the Executive has committed itself towards its full implementation as well as to further financial sector reforms, to avoid any possible deleterious effects as well as to increase access to credit. While maintaining its reservations as to its wisdom, the CBK stated, “We continue to express concern on the adverse consequences of capping interest rates. These would include, inefficiencies in the credit market, credit rationing, promotion of informal lending channels, and undermining the effectiveness of monetary policy transmission,”  however it has also been steadfast that reforms are required to increase access to credit at an affordable cost.

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