The High Court has sided with a German multinational engineering firm caught in a Sh1.9billion fight with Kenya Revenue Authority (KRA) over a delayed tax relief document.
The court said it was improper for the taxman to punish HP Gauff Ingenieure GmbH and Co. KG for administrative lapses in processing a tax exemption certificate.
While setting aside KRA’s decision to deny HP Gauff VAT relief of Sh526,022,967-a decision previously upheld by the Tax Appeals Tribunal-the High Court found that the Treasury Cabinet Secretary had failed to act on the firm’s request for a tax exemption certificate. It was, therefore, unjust to penalise the company for a government administrative omission.
‘It is my finding that the tribunal erred in allowing the administrative failure of the relevant ministries and the respondent (KRA) to prejudice the appellant’s (HP Gauff’s) established right to remission, effectively punishing the appellant for the government’s failure to finalise internal procedures,’ said the High Court in a ruling handed on October 23, 2025.
HP Gauff Ingenieure GmbH and Co. KG, which provides consultancy and engineering services mainly in the infrastructure sector, moved to the Tax Appeals Tribunal on August 21, 2020, after the KRA declined to grant it tax relief on projects funded by official donors.
The four main projects that are subject to the audit include the Kisumu-Kakamega Road, Merille-Marsabit Road, MRTS Jogoo corridor, and Nakuru Loruk-Marich road.
Under Kenya’s framework, Official Aid-Funded Programmes (OAFPs) may be approved by the Treasury Cabinet Secretary to exempt such projects from the 16 percent VAT, as a sweetener to attract cheaper loans from development finance institutions such as the World Bank and the African Development Bank.
Sufficient time
The KRA argued it rejected HP Gauff’s request for VAT relief-amounting to Sh526,022,967-because the firm failed to produce the requisite tax exemption certificates despite being given sufficient time.
The taxman also demanded corporate income tax of Sh1.24 billion, noting that the income earned from the projects was not exempt. It also demanded that the German firm pay-as-you-earn (PAYE) of Sh189,339,257, bringing the total tax claim to about Sh1.9 billion.
On corporate income tax and PAYE, the court faulted the tribunal for not addressing the issues that the German firm had raised, including challenging KRA’s decision to tax income from a water supply project located in South Sudan.
The firm also disputed KRA’s benchmarking of expatriate pay as well as its decision to reject its tax-free subsistence allowances.
The taxman said benchmarking was warranted because the reported salaries seemed low and the company failed to provide contracts for the foreign employees.
The taxman added that the firm did not qualify as a ‘regional office’ under the Income Tax Act, so the rule allowing regional directors and expatriates to exclude one-third of their pay from taxation did not apply.
However, the court noted that the tribunal ‘made no findings on these material questions’.
‘It did not refer to the evidence presented, such as the Shared Services Agreement or the Transfer Pricing Policy. It did not interpret the relevant sections of the Income Tax Act,’ the court said, while setting aside the decision to uphold the assessment on corporate income tax and Paye, sending it back for a fresh hearing.
‘Instead, it upheld the entirety of the Sh1.9 billion assessment based on a rationale that could, at best, only apply to the VAT portion of the dispute. This is a manifest error of law.’