Three people have moved to court challenging the Special Operating Framework Agreement (Sofa), which was enacted six years ago, to provide tax relief to manufacturers in a bid to stimulate industrial growth.
Mr Elvis Kasena Charo, James Maina Magare and William Masengo moved to the High Court seeking temporary orders to suspend the framework, pending the determination of the case.
The three argue that the government will lose an estimated Sh200 million if Sofa is not suspended.
The case follows another one filed by city lawyer Apollo Mboya, who faulted the government for unfairly introducing the framework, without subjecting it to public participation.
In his suit papers, Mr Mboya faulted the 10-year exemption granted to Blue Nile Rolling Mills (BNRM) and 17 other firms, on import taxes, while giving the firms an unfair advantage over other industry players.
Mr Mboya argued that the exemptions, granted to BNRM, a steel manufacturer, create an uneven playing field in the steel industry and deprive the government of revenue.
“To the extent that the Special Agreement exempts the 5th Respondent (BNRM) from paying taxes but imposes similar taxes to other players in the industry and the larger population of Kenya, is in violation of article 201(b) of the Constitution,” Mr Charo said in an affidavit filed in court.
The petitioners stated that through the Finance Act 2018, Treasury CAbinmet Secretary and Parliament, introduced amendments to the Income Tax Act, Value Added Tax, Excise Duty Act and the Miscellaneous and Levies Act.
They said the amendments had the effect of allowing tax waivers or exemptions and tax reductions to special entities under the Sofa.
Mr Charo said the framework was to allow the Treasury the unilateral discretion to enter into agreements with “special” entities and grant them tax exemptions and tax reductions as would be agreed upon from time to time.
The Treasury later issued a circular on October 18, 2018 providing guidelines for requesting, processing and granting tax exemption, waiver or remission under the Sofas.
The petitioners, however, said the government did not subject the same to public participation as required by the Constitution and Section 207 of the Public Finance and Management Act.
“Contrary to the provisions of Article 201 that requires openness and accountability in public finance, the 2nd Respondent has, to date, failed to publish regulations providing the procedure, criteria and eligibility for the Sofa,” Mr Charo said.
The petitioners said in the absence of such regulations, local and foreign investors have been in the dark about the manner in which they can benefit from tax exemptions or reduction under the Sofa.
In response to an earlier case filed by Mr Mboya, BNRM said it applied for Sofa before it set up a galvanised iron wire (GI wire) manufacturing project, which had an initial investment estimated at $19 million (Sh2.4 billion) capital injection.
The firm said it had invested over $30 million (Sh3.86 billion) since it signed Sofa, being the first project of its kind in Kenya and the region.
The firm’s executive director Kotni Rao said he wrote to CS Finance on October 14, 2019 seeking exemptions under the agreement.
He said after intense negotiations, the government gave the firm 10 years of Sofa, which was to commence in January 2020.
The firm was granted amnesty on Import Declaration Form (IDF) and Road Development Levy (RDL), among others, in exchange for investments that would provide employment and cut imports while building Kenya’s export power for manufactured products.
The government charges at least 1.5 per cent IDF and 1.5 per cent RDL on raw materials for the manufacturers.
The firm was also granted 10 percent exemption from corporate tax but BNRM never utilised the exemptions as Covid-19 disrupted businesses.
Later, the government amended the Finance Act 2020 to allow existing Sofas by introduction of a transitional clause.
Mr Rao said the government had allowed it to import 1.5 million metric tonnes of raw material under Sofa.
He said the firm processed 532,000 tonnes of wire rod and grade billets to make GI wire, which was to be done in three phases.
The court documents indicated that by July 31, 2024, BNRM had only imported 87,583 tonnes, leaving 1.4 million tonnes unutilised.
Mr Rao said the firm imported a small amount of approved quantities owing to various reasons including Covid-19, and that it was not true as stated in the petitions that the company had imported all the quantities.
The Kenya Kwanza administration had sought to end the amnesty through the Finance Act 2023 but withdrew the move after former Attorney General Justin Muturi (now CS Public Service) wrote to then CSs Trade and Investments and Treasury, stating that the incentives were binding.
“It is our opinion that the Government is estopped from withdrawing the incentives under SOFA, which was the basis of the investment and the financing of the project. The Agreement and the subsequent amendment created a legitimate expectation upon the investor that they and their business would be protected from the whimsical taxation regime. Accordingly, any withdrawal of such incentives would attract disputes, which, if pursued, would likely expose the Government to liability,” said Muturi in the letter on November 17, 2023.
Mr Muturi pointed out that if the agreement ceased to be valid, both the government and manufacturers could continue to be mutually bound by actions previously taken but not completed.
“The agreement shall remain valid for a period of ten (10) years unless terminated. It is instructive to note that at the event of dispute arising out of the interpretation or the application of the SOFA, parties shall amicably seek to settle the differences but in the instances of such failure, the matter shall be submitted to arbitration under the Nairobi International Arbitration Centre,” Mr Muturi said.
Mr Mboya wants sections of law allowing exemptions to be declared null as they were allegedly enacted without public participation.
The manufacturer has urged the court to dismiss the case arguing that the issue of public participation was captured in a decision in 2020 through a finding that the Finance Act 2018 was adequately subjected to public participation.
