Kenya Revenue Authority recently issued a pivotal private ruling that clarifies the transitional application of the newly introduced five-year limitation on tax loss carry-forwards.
Contrary to a logical interpretation of the new law, KRA has taken a stringent position: all tax losses incurred prior to the year of income 2020 have effectively expired and are no longer deductible.
Background: The Finance Act 2025 Amendment
- The Finance Act 2025 amended Section 15(4) of the Income Tax Act by introducing a change to Kenya’s tax loss regime.
- Taxpayers could previously carry forward tax losses indefinitely to offset against future taxable profits.
- The amendment that took effect on 1st July 2025 now states: “A loss shall be carried forward for deduction under this section for a period not exceeding five years immediately following the year of income in which the loss was incurred.”
- The critical ambiguity was the lack of a transitional provision. How would losses accumulate in years prior to this effective date be treated? This lack of clarity created significant uncertainty for many businesses, especially those in long-gestation sectors like manufacturing, infrastructure, and agriculture.
The Argument
a) Taxpayers and Tax Advisors Position:
Pre-1st July 2025 Losses: Should continue to be carried forward under the old indefinite rule and remain allowable without being subjected to the five-year limitation.
Post-1st July 2025 Losses: Subject to the new five-year cap.
The argument is based on principles of legal certainty and fairness, avoiding the retrospective application of new limitations to already-incurred losses.
b) KRA’s Final Position (The Ruling):
- KRA unequivocally rejected the carrying forward argument.
- KRA’s guidance, is that: “any losses incurred prior to the year of income 2020 are not deductible going forward.”
- This means that for a loss to be deductible today, it must have been incurred in 2020 or later. Losses from and prior to 2019 are now deemed to have “expired” for tax purposes.
Implications to Taxpayers
This ruling has immediate and severe financial consequences to taxpayers:
Cash Tax Liability: Taxpayers that were expecting to utilize the old losses as shield in future profits from tax will now face an unanticipated cash tax liability.
This could severely impact cash flow projections and business valuations.
Strategic Planning: Business turnaround strategies for historically loss-making companies have been upended.
The path to profitability is now a longer and more arduous without the ability to recover past taxes through future loss utilisation.
Potential for Double Taxation: Economically, this represents a form of double taxation. Income that was taxed in profitable years pre-2019 cannot now be offset by subsequent losses, leading to a higher cumulative tax burden over the life of a business.
Recommendations to Taxpayers
- Immediate Loss Audit: Conduct a thorough review of your tax loss ledger. Precisely identify the year of income in which each loss was incurred.
- Re-forecast Tax Payments: Update your corporate tax forecasts and cash flow projections immediately to reflect the inability to use pre-2020 losses.
- Review Provisions: Assess the need to release any deferred tax assets previously recognized in your accounts related to pre-2020 losses.
- Engage with professional tax advisors: For large, material loss balances, consult with tax consultants to confirm the correct position specific to your business undertakings.
Conclusion
- KRA’s ruling demonstrates a clear and aggressive intent to broaden the tax base and accelerate revenue collection. It is a definitive move away from taxpayer-friendly interpretations and towards a literal, exchequer-focused application of the law.
- This development is not just a technical change; it is a strategic shift that requires a proactive and robust response from all tax stakeholders.